IMPACT OF HOUSING FINANCE MARKET ON GROWTHOF SELECTED AFRICAN ECONOMIES

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ABSTRACT

The motivation for this study arose from the need to place the African Continent on the part of sustainable economic development. Most Countries in Africa have been adjudged to be among the poorest nations, in sharp contrast with the abundant resources in the housing sector. The study adopted the ex-post facto research design. Annual longitudinal data from 1997 to 2014, a period of 18 years were collected from various data banks. The classical linear regression model was used in testing the seven hypotheses formulated from the sampled economies of Kenya, Nigeria, Burundi, Morocco and Namibia. Real Gross Domestic Product (RGDP) constituted the dependent variable, which is proxy for economic growth while outstanding mortgage loans by mortgage banks (MBOHL) and Commercial banks (CBOHL) constituted the independent variable. While interest lending rate (LINT), Total housing loan as a percentage of total loans (THLPTL) and total housing loans as a percentage of GDP (THLPGDP) were proxied for control variables. The findings revealed that housing finance is positive and statistically significant for some African nations, it is positive and none statistically significant for some other African nations. The study recommends a holistic approach to housing finance through Government policy direction, market based economy and introduction of Mortgage Backed Securities (MBS) in the capital markets across the African continent.

CHAPTER ONE

INTRODUCTION

1.1       BACKGROUND TO THE STUDY

Researchers in the fields of Finance, Economics and Urban Development have revealed that the term housing goes beyond the provisions of a place of residence, it includes the available social services such as pipe-borne water, electricity and sanitary condition of the environment among others. Hence  decent housing is said to have a positive  effect on  the lives of the residence in terms of being more productive, improved health, self-confidence and dignified personality. Conversely, a robust housing finance market is  a catalyst for economic growth through the creation of employment in other sectors of the economy, assisting household in asset acquisition  and improvement  in living  condition  of societies(Bank  of Ghana, 2007; Rahman, 2009: Doling, Vandenberg & Tolentino, 2013). Likewise Hassler (2011), affirm that real estate investment is a key contributor to economic growth, household welfare and urban development.  Construction  is one of the sectors with the most impact on the economy.  It deepens  and  makes  the  financial  system  more  efficient  by helping  to  mobilize  savings, expand access and reduce informal sources of finance.

Conversely,  Ade  (1983)  posits  that  financing  of  real  estate,  which  includes  our  homes, shopping centres, office buildings, firms and factories, is one of the major responsibilities of our financial system. Housing is considered as a basic necessity for man. According to Hanif and Hajazi (2010), Housing is a basic need and the major problem is the shortage of housing units, especially in less developed economies, Pakistan inclusive. This view was supported by Coskun  (2011),  he  argued  that  the  housing  problem  is  an  unresolved  issue  in  Turkey. Housing was made a constitutional issue due to the importance attached to housing by the Turkish government. The Turkish Republic Constitution of 1982, article 57,specifically states that  the  government  will take steps  to meet  the  demand  for housing  delivery within  the context  of  a  policy  which  will  consider  the  peculiaritiesof   towns  and  environmental conditions and supports community housing projects. The place of housing in the economic development of nations is so important that government all over the world, including Nigeria makes provision for decent and affordable housing for her citizens. Onuigbo (1999), opined that housing is a very important facility in the scheme of economic production. All the above authors  argued  that  a  well  housed  workforce  enjoy  good  health,  physical  comfort  and composure  of mind, which impact positively on economic  production.  Similarly,  Olaniran

(2003);  argued  that  housing  transcends  mere  provision  of shelter.  Rather  it includes  the provision  of  utilities  and  community  services  which  enhances  human  dignity,  creates conducive social climate, facilitate  orderly development  of society and improve  the health and sanitary conditions of the people. From the above context three (3) conclusions could be drawn; first is that housing is a fundamental human need. Secondly, that those who live in decent houses are more likely to make positive  contributions  to the economic  growth and development of society. Thirdly, that the  term housing includes the environment and social amenities available for the consumption of its occupants. Obadian (2007); puts its thus: “the demand created by housing needs of modern man transcend the provision of mere shelter as it embraces all  other social services and utilities that enhances  the dignity of a man living a decent life”.

Olayiwola, Adeleye & Ogunshakin (2005), posits that housing is one of the three basic needs of mankind and it is the most important for the physical survival of man after the provision of food. Adequate housing contributes to the attainment of physical and moral health of a nation and  stimulates   the  social  stability,   the  work  efficiency  and  the   development   of  the individuals.

Since housing enhances production, it then means it is a tool for rapid economic growth of a nation. The housing sector has a multiplier effect. In most developed economies, the housing sector  is  seen  as  an  important  sector  for  stimulating  economic  growth  (Okonjo-Iweala

2014;Isa, Jimoh & Achuuenu,  2013; NHBI 2012). Also Igbinoba  (2011) asserted that  the housing sector has the ability to stimulate economic growth and development in a depressed or stagnant economy and raising the standard of living of the people. It could be argued that there  is a strong correlation  between  housing contributions  to a  nation’s  Gross Domestic Product (GDP) and the people’s ability to own their own houses.

Similarly, it has been argued that Mortgage lending is the primary mechanism used in many countries to finance private ownership of residential property. It is normal for home purchase to be funded by mortgage  loan. Few individuals  have enough savings  or  liquid funds  to enable  them  to  purchase  property  outright.  In  countries  where  the  demand  for  home ownership  is highest,  strong domestic  markets  have  developed  (Andrew,  2010; Haurin & Munasib, 2006; Wilcox, 2005). Giving special attention  to  the housing finance  market  in Africa is important  for the following reasons: It will  enable the low and medium  income

earners who cannot ordinarily build or buy a house out of their small earning to own a house.

These  workers  will  in turn  pay property  rent  to the  government,  thereby  expanding  the government revenue base. This point is crucial when viewed against the background that 70 percent of all tax revenues raised by local municipalities  in the United States, comes from property taxes (Igbinoba, 2011). Also a well-developed housing finance market will provide paid employmentand stimulate economic development in the other sectors of the economy. It has  been  argued  that  the  US  real  estate  industry  is  a  major contributor  to  the  national economy.  In 2001 it provided  job for 1.7 million Americans  and it generate hundreds  of billions of dollars every year as an economic output. (Igbinoba, 2011). Aside from enabling the  low  income  group  to  own  a  house,  tax  revenue  to  governments  and  generation  of employment,  the  desire  to  build  or  purchase  a  house  is  a  primary  motivation  for  the generation of household savings in the financial system.

Housing finance market is a segment of the capital market.  It has been argued that housing finance  refers  to  the  activities  of both  private  and  public  sectors  in  providing  financial resources with or without financial agents and intermediaries for the purchase, construction, improvement   or  renovation  of  a  housing  unit  including  the   immediate   infrastructure (Onuigbo, 1999).  Also Boleat (1985), observed that the purpose of a housing finance system is to provide the funds which home-buyers  need to purchase their homes.   However, there may  be  differences   and  complexities     from   country  to  country  due  to  government intervention, but the essential feature of any system, that is, the ability to channel the funds of investors to those purchasing their homes, must remain.

There  is  a  strong  correlation  between  the  housing  finance  market  and  development  as evidently  demonstrated  in the  US economy  before  and after  the economic  meltdown  of

2008.It is as a result of the positive relationship  between the housing sector and economic development  that the US economy experienced  a fast growth between  2001  and 2007, a period referred  to as housing bubble. However,  with a crash in the  housing sector which occurred between 2008 and 2010 as a result of the subprime lending crises, (bubble burst) the US economy also declined within the period.

The purpose of this study is to ascertain  the effect of the housing finance  market  on  the economy of African’s States. Activities in housing fiancé market were examined in Kenya, Nigeria,  Burundi,  Morocco  and  Namibia  due  to the relative  availability  of  data  in these markets. There is dearth of data in housing finance in most African countries,  consequentupon the under development  of the market in the continent.  Similarly,  it has been noted:

when it comes to African economies, and that of many other developing countries, I think this conventional wisdom on the importance of the housing sector seem to be forgotten. The housing sector is almost a big elephant in the room which seems to have escaped the attention of policy- makers, multilateral institutions and the private sector.  At present, housing finance remains  under  developed  in  most  emerging  markets.  The  lack  of  financial  services  in developing countries has a significant negative impact on the efficiency of urban investments, of which housing constitutes probably form about 60 percent if the  experience of advanced economies in any guide (Okonjo-Iweala, 2014; Renand, 2004).

Among  the  countries  of  North  Africa  region,  Morocco  has  the  most  advanced  housing finance market while the Egyptian mortgage market is the least developed. Egypt housing finance market is relatively young, although the country has a long history of provision for housing. In the 60s and 70s the policy was provision of mass housing by the state. The policy was later considered to be inadequate as the burden of provision of houses especially for the poor was becoming  unbearable  for government.  The government  has since charted a new course,  the provision  of enabling  environment for private sector  to thrive. Hassan  (2014) posits  that with the  establishment  of Egyptian  Mortgage  Refinance  Company  (EMRC)  in

2006 with the objective of providing long-term finance to the mortgage finance companies, the  housing  finance  market  has witness  a tremendous  growth. EMRC  issues  bonds  duly collateralized by real estate loan portfolio, which help enhance the bond market and provide long-term finance resources.

On the contrary, growth in the Nigerian housing finance market has been slow. It accounts for only 4 percent of Gross Domestic Product (GDP) at its Peak. At a time it was as low as 1 percent (Kolawole, 2015). According to Kolawole (2015) the sector  has  in recent time out grown the GDP at 8.7 percent. On the other hand Namibia has a strong and efficient finance market. It is estimated that about 52.8 percent of the total credit in 2012 were mortgage loans. Comparatively,  the  Namibian  financial  sector  is  second  only to South Africa  within  the African  continent.  Thus  South  African  has   a  history  of  sound  financial  system.  The government  introduced  several  measures  to  induce  financial  institutions  to invest  in the housing   sector.   Part  of  the   measure  was   the  establishment   of  the  National   Urban Reconstruction and Housing Agency (NURCHA). It was established to provide guarantees to both bank and non-bank lenders as a mean of lowering the risk of operating in this segmentof the market (Moss 2009).

1.2       STATEMENT OFTHE PROBLEM

The African continent has been adjudged to be one of the poorest region in the world. This is in sharp contrast with the huge abundant resources in the housing and housing finance sectors waiting  to  be  taped.  Several  studies  have  been  carried  out  on  housing  finance  market. However  none seem to have addressed  collectively  the  problem of the impact of housing finance market on the economies of Kenya, Nigeria, Burundi, Morocco and Namibia. It has been argued that housing and housing finance has the potential of re-positioning the economy of nations. On the other hand, international experience in high income economies shows that a well-functioning mortgage market will provide very larger external benefits to the national economy.  Efficient  real estate  development,  construction  sector  employment,  easy labour mobility,   capital  market   development,   more  efficient  resources   allocation,   and  lower macroeconomic volatility (Renaud 2004).

This study is shaped around Oyalowo (2012). The research conducted by Oyalowo in (2012) examined the constraints limiting lending institutions’ participation in housing finance supply in the West Africa region. It also examines how governments across West Africa can tackle these constraints.  It was based on regression  analysis  of secondary  data related to factors necessary for lending institutions’ participation in formal housing finance supply. The ratio of the private credit to GDP of West African  countries between 2008 and 2010 is regressed against  the  independent  variables  inflation  rate,  procedures  to register  property,  time  to register property, cost to register property, strength of legal right index and depth of credit information  system.  Similarly,  Chen et al (2006)  focuses  on economic  development  and housing affordability in China. It argued that the importance of housing finance industry in the  Shanghai economy increased significantly since 2000. Its share in Shanghai GDP was

5.5% in 2000 but has risen to 8.4% in 2004, it is now the third largest industry sector  in Shanghai and ranks behind only the IT and finance industry sector. Other studies asserted that the housing sector is an important segment in any economy. As such housing policy must be seen as one of managing an important economy sector, with crucial links to overall economic performance, rather than, as is a common view, simply producing dwellings as a component of the social welfare system. These links, through the real, fiscal, and financial circuits of the economy are becoming increasingly well understood. As these become more transparent, the

stakes  of good housing policy become  more and more  evident.  Furthermore  the  housing



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