The housing gap in Kenya, which currently stands at 2.0 million units, continues to grow due to rapidly increasing demand driven by population and urbanization pressures against short supply in the low-income markets.
Financing for end-buyers, even towards purchasing affordable housing, remains a challenge in Kenya, both on the absolute value of the unit, and the financing structures available for a first-time buyer to access capital to purchase a unit.
As a result, the government introduced the Big Four Agenda in 2018 with Affordable Housing as one of the four pillars.
Through the initiative, the government promised to deliver 500,000 units, whose costing of 0.6million – 3.0million shillings is affordable to the median household income in Kenya of 50,000 shillings per month.
According to Kenya National Bureau of Statistics (KNBS), 74.5 percent of the working population earns Kshs 50,000 and below and only 2.9 percent earns above 100,000 shillings.
This means the majority of the population cannot service a mortgage, and this is exacerbated by other factors such as:
As a result, homeownership rates in Kenya remain relatively low at 26.5 percent in urban areas in comparison to countries such as South Africa and the United States at 53.5 percent and 64.5 percent, respectively.
To alleviate the housing issue, the government has been implementing various policy and fiscal reforms for the past three decades such as the Home Ownership Savings Plan (HOSP), which has been in effect since 1996, yet has not had the desired impact.
The plan was introduced to increase homeownership and encourage a savings culture among Kenyans.
According to the 2018 Income Tax Act, depositors are allowed tax rebates of 8,000 shillings per month maximum or 96,000 shillings per annum (effectively reducing an individual’s taxable income by the amount of their monthly contribution), for a maximum of ten years.
Upon withdrawal, interest income of up to 3.0 million shillings is tax-exempted, with the condition that it is with a Registered Home Ownership Savings Plan through either a bank, insurance company or building society.
Ideally, a HOSP should significantly enable a first-time homebuyer to purchase or build a home. However, the inability to pay up the initial deposit when taking out a mortgage or a home loan (usually 15 percent of the unit’s value) has been cited as one of the contributing factors to the low mortgage uptake and homeownership rates.
Therefore, there is a need for channels through which individuals in the low and middle-income bracket can save for purchasing a home.
For instance, Collective Investment Schemes (CIS) are appropriate for this population, as individuals are required to make relatively low contributions (most in Kenya require monthly top-ups of at least 1,000 shillings).
However, under the current law, these schemes are not considered under the Home Ownership Savings Plans (HOSP) in spite of their potential to revolutionize housing finance due to their attractive risk-adjusted returns.
For instance, money market funds in Kenya offer yields of up to 11.0 percent per annum. Assuming a unit costing 3.0million shillings under the affordable housing scheme where a 12.5 percent deposit is required, a depositor with a bank-based HOSP is required to make monthly deposits of at least 5,874 shillings while an individual saving with a money market fund with a 10.0 percent yield, needs monthly deposits of 4,843 shillings.
Unfortunately, only one institution, Housing Finance Company (HFC), offers Home Ownership Savings Plans in Kenya, and thus, it is barely known by the public despite its tax advantages.
The lack of competitive offerings of the product means it is currently being issued at low yields in comparison to other savings vehicles such as money market funds and investment banks.
The underdeveloped mortgage market also poses many challenges for the home savings plans as individuals are likely to demand a loan to top up with their savings after the ten-year period, and thus, many financial institutions have shied away from the product as this could create a liquidity risk for them.
Therefore, to boost this very commendable and important initiative, it is necessary to expand approved savings vehicles, which can be achieved by amending the Income Tax Act provisions and also educating the public on its benefits to create demand.
Additionally, Home Ownership Savings Plans complement other government initiatives such as mortgage tax relief, scrapping off stamp duty for first-time homebuyers, and the 15.0 percent affordable housing tax relief. Its development would, thus, boost the effectiveness and sustainability of the housing finance system.
By Cytonn Investments