Affordable Housing in Kenya: A Critical Analysis Of the Housing Fund Levy

The Kenyan government has proposed a new tax scheme to finance its ambitious affordable housing agenda, which aims to provide 500,000 low-cost homes by 2027.

The scheme, known as the Housing Fund Levy, would require employers and employees to each contribute 3% of their monthly income to a fund that would be used to subsidize mortgages and construction costs for eligible households.

However, the levy has faced strong opposition from various stakeholders, including trade unions, civil society groups, and the public, who have raised concerns about its legality, feasibility, and impact on the economy and the housing sector.

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While the levy has some potential benefits, such as increasing the supply and demand of affordable housing and creating a pool of long-term savings for development, it also has significant drawbacks, such as imposing an additional tax burden on low-income earners, creating opportunities for corruption and mismanagement, and failing to address the root causes of the housing crisis in Kenya.

Benefits of the Housing Fund Levy

One of the main arguments in favor of the levy is that it would generate a substantial amount of revenue for the government to finance its affordable housing program. According to President William Ruto, the levy would raise about KSh 57 billion ($513 million) annually, which would be used to subsidize mortgages for low- and middle-income households at an interest rate of 7%, compared to the market rate of 12-14%. The levy would also be used to support developers and contractors who build affordable housing units that meet the standards and specifications set by the government4.

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Another argument in favor of the levy is that it would increase both the supply and demand of affordable housing in Kenya. On the supply side, the levy would create incentives for private developers to participate in the affordable housing market, as they would benefit from lower land and construction costs, tax exemptions, and guaranteed off-take agreements with the government. On the demand side, the levy would enable more households to access affordable mortgages and rent-to-own schemes, as they would benefit from lower interest rates, longer repayment periods, and flexible eligibility criteria.

A third argument in favor of the levy is that it would create a pool of long-term savings for development. The levy would essentially function as a mandatory pension scheme for workers, as they would be able to withdraw their contributions after 7 years or upon retirement or whichever would come first. The fund would also invest part of its assets in capital markets, infrastructure projects, and other productive sectors, generating returns for its contributors and stimulating economic growth.

Drawbacks of the Housing Fund Levy

One of the main arguments against the levy is that it would impose an additional tax burden on low-income earners, who are already struggling to meet their basic needs. The levy would effectively reduce the disposable income of workers by 10%, which could have negative effects on their consumption, savings, and investment decisions. Moreover, the levy would be regressive, as it would apply uniformly across all income levels, regardless of one’s ability to pay or benefit from the scheme.

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Another argument against the levy is that it would create opportunities for corruption and mismanagement. The fund would be administered by a board appointed by the Cabinet Secretary for Transport, Infrastructure, Housing, and Urban Development, with little oversight or accountability from other institutions. The fund would also lack transparency and efficiency in its operations, as it would rely on a complex system of collection, allocation, and disbursement of funds that could be prone to errors, delays, and fraud.

A third argument against the levy is that it would fail to address the root causes of the housing crisis in Kenya. The fund would focus mainly on financing mortgages and construction costs, without tackling other factors that affect the affordability and availability of housing, such as land tenure, planning regulations, infrastructure provision, and urban governance. The fund would also ignore other aspects of housing quality and sustainability, such as design standards, environmental impact, and social inclusion.

While the levy has some potential benefits for increasing revenue, supply, and demand for affordable housing and creating long-term savings for development, it also has significant drawbacks for imposing an extra tax burden on low-income earners across the earning spectrum with many arguing that why not focusing on the NSSF fund which has done well in the housing sector and makes it the central aspect of the housing issue and brings in the private sector.

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