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‘Housing sector’s contribution to GDP is minimal’
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Sola Olubode
The short supply of housing in Nigeria has impacted negatively on its contribution to national growth. Sola Oludode, managing director/CEO of Refuge Homes, Savings and Loans Limited (mortgage bankers), in this interview with CHUKA UROKO, examines the growth of the sector vis-a-viz its contribution to GDP. He also speaks on other issues. Excerpts
Housing sector contribution to national growth
Our national accounts system shows that between 2002 and 2006, the housing sector contributed an average of 1.38 percent to the nation’s Gross Domestic Product (GDP).
This grew at 6.98 percent each year compared to average GDP growth of 6.58 each year.
In 2004, housing grew at 11 percent compared to average GDP growth of 6.2 percent in that sector. Now, notwithstanding the growth, it can be seen that the contribution is minimal compared to most economies of the world.
What we are saying is that, the housing sector requires a lot of growth and so, we need to expand it because it is one sector that has the largest capacity to generate employment which is a problem we are trying to solve in Nigeria.
In fact, most government’s macro-economic indices, including employment, inflation and interest rate stability, are easily solved by the housing sector because once the sector starts to create mortgages to finance housing, automatically it creates extensions of industries. Credit creation theory states that once you lend credit to one person, it creates a spiral effect such that other credits will be created as a result of that.
So, financing the housing sector will lead to a boost in such other sectors as cement industry and other building materials industries; electricity, furniture, interior decoration industries; expansion of roads, infrastructure, energy, schools and other commercial activities will spring up. This will also affect interest rate because creation of credit will now be long term and with increased capacity for production, inflation will drop.
If you look at the various sectors of the economy, this is the only sector that government can tinker with and, by so doing, create general economic growth and development of the nation.
Expectations from housing sector
I see a lot of us moving forward. A lot of the agitations in the Niger Delta are housing-related. I envisage massive housing development in that area. I also expect state governments to be more responsive to housing in their respective states. For example, Lagos state government has gone into partnership with some banks for mortgage loans to its civil servants
I see a lot of consciousness in governance in creating more housing and structures.
The stock market which has become very active of late should be more responsive in creating Real Estate Investment Trusts (REITs) and mortgage instruments because these are also ways of sustaining instruments in the market. One of the banks (Skye Bank) floated REITs at the stock market last year.
In the new year, I expect that housing associations will be more active, collaborating in order to generate home models that can easily facilitate land acquisition and the development of such models that are cost effective.
I also expect the Federal Mortgage Bank of Nigeria (FMBN) to work together with primary mortgage institutions to facilitate developmental processes and, at the same time, I foresee a closer collaboration between FMBN and the Mortgage Bankers Association of Nigeria (MBAN) to ensure that mortgage finance for home ownership is softer and easily accessed.
Short term loans and high interest rates for housing
Interest rate from time has always been used to establish economic stability. Prior to the consolidation in the banking sector, interest rate was very high, but most consumer lendings are still double digits, whereas in most developed economies, interest rates are single digit but we are getting there.
What I think is going to happen is that interest rate, like any other economic instrument, will be driven by market mechanism, that is, the interplay of demand and supply.
Assuming there is more supply of funds than demand, interest rate will naturally come down.
So, I think government should look critically at the pension fund which is a lot of money and see how it can be applied to money creation. If we work very well on our land use act to ensure that title ownership and documentations are well done, we won’t have any problem in creating instruments that can convert mortgage into financial instruments.
Another thing I think government should do is to come up with National Housing Emergency Fund as it has done in the energy sector. This can be done with the excess revenue from crude oil. In this regard, I would advise government to use private equity managers to manage the fund. There are a lot of social equity funds which can be made accessible to primary mortgage institutions or private developers to provide housing for Nigerians.
REITs in Nigeria
The main problem of Real Estate Investment Trusts (REITs) in Nigeria is not much about land transfer as it is of tax structures. Government needs to encourage investments in that area because in REITs, you have options of investments.
A typical investor is always thinking of maximisation of returns. So, the way it is now, the tax structure needs to be addressed for it to be attractive. On the issue of land transfer, this concerns institutional framework. This is one of the things that call for economic review. I am challenging the various economic committees at the National Assembly to do something about such laws that are not favourable to housing.
The truth of the matter is that laws and bills, when well applied, create the capacity for economic participation. The National Assembly needs to be very active because there’s no way somebody will go into an economic transaction without a law governing the transaction.
Our national accounts system shows that between 2002 and 2006, the housing sector contributed an average of 1.38 percent to the nation’s Gross Domestic Product (GDP).
This grew at 6.98 percent each year compared to average GDP growth of 6.58 each year.
In 2004, housing grew at 11 percent compared to average GDP growth of 6.2 percent in that sector. Now, notwithstanding the growth, it can be seen that the contribution is minimal compared to most economies of the world.
What we are saying is that, the housing sector requires a lot of growth and so, we need to expand it because it is one sector that has the largest capacity to generate employment which is a problem we are trying to solve in Nigeria.
In fact, most government’s macro-economic indices, including employment, inflation and interest rate stability, are easily solved by the housing sector because once the sector starts to create mortgages to finance housing, automatically it creates extensions of industries. Credit creation theory states that once you lend credit to one person, it creates a spiral effect such that other credits will be created as a result of that.
So, financing the housing sector will lead to a boost in such other sectors as cement industry and other building materials industries; electricity, furniture, interior decoration industries; expansion of roads, infrastructure, energy, schools and other commercial activities will spring up. This will also affect interest rate because creation of credit will now be long term and with increased capacity for production, inflation will drop.
If you look at the various sectors of the economy, this is the only sector that government can tinker with and, by so doing, create general economic growth and development of the nation.
Expectations from housing sector
I see a lot of us moving forward. A lot of the agitations in the Niger Delta are housing-related. I envisage massive housing development in that area. I also expect state governments to be more responsive to housing in their respective states. For example, Lagos state government has gone into partnership with some banks for mortgage loans to its civil servants
I see a lot of consciousness in governance in creating more housing and structures.
The stock market which has become very active of late should be more responsive in creating Real Estate Investment Trusts (REITs) and mortgage instruments because these are also ways of sustaining instruments in the market. One of the banks (Skye Bank) floated REITs at the stock market last year.
In the new year, I expect that housing associations will be more active, collaborating in order to generate home models that can easily facilitate land acquisition and the development of such models that are cost effective.
I also expect the Federal Mortgage Bank of Nigeria (FMBN) to work together with primary mortgage institutions to facilitate developmental processes and, at the same time, I foresee a closer collaboration between FMBN and the Mortgage Bankers Association of Nigeria (MBAN) to ensure that mortgage finance for home ownership is softer and easily accessed.
Short term loans and high interest rates for housing
Interest rate from time has always been used to establish economic stability. Prior to the consolidation in the banking sector, interest rate was very high, but most consumer lendings are still double digits, whereas in most developed economies, interest rates are single digit but we are getting there.
What I think is going to happen is that interest rate, like any other economic instrument, will be driven by market mechanism, that is, the interplay of demand and supply.
Assuming there is more supply of funds than demand, interest rate will naturally come down.
So, I think government should look critically at the pension fund which is a lot of money and see how it can be applied to money creation. If we work very well on our land use act to ensure that title ownership and documentations are well done, we won’t have any problem in creating instruments that can convert mortgage into financial instruments.
Another thing I think government should do is to come up with National Housing Emergency Fund as it has done in the energy sector. This can be done with the excess revenue from crude oil. In this regard, I would advise government to use private equity managers to manage the fund. There are a lot of social equity funds which can be made accessible to primary mortgage institutions or private developers to provide housing for Nigerians.
REITs in Nigeria
The main problem of Real Estate Investment Trusts (REITs) in Nigeria is not much about land transfer as it is of tax structures. Government needs to encourage investments in that area because in REITs, you have options of investments.
A typical investor is always thinking of maximisation of returns. So, the way it is now, the tax structure needs to be addressed for it to be attractive. On the issue of land transfer, this concerns institutional framework. This is one of the things that call for economic review. I am challenging the various economic committees at the National Assembly to do something about such laws that are not favourable to housing.
The truth of the matter is that laws and bills, when well applied, create the capacity for economic participation. The National Assembly needs to be very active because there’s no way somebody will go into an economic transaction without a law governing the transaction.
Nigerians’ saving culture
It may surprise you to know that Nigerians are really saving but the saving culture as it is presently has to change. Let me ask you these questions: If somebody takes up to 2.5 percent of my income into savings in National Housing Fund (NHF) for the purpose of enabling me access loan to own a house, is that savings?
Also, if someone takes 13 percent of my income and puts same into pension fund, is that also savings?
You see, Nigerians are saving but it all depends on where. Saving is a national component; it is a prerequisite for investment. The problem is that our attitude and investment appetite is short term.
To answer the above question, I would say the money Nigerians are putting into NHF is saving. From the disposable income of an average Nigerian, he puts some into savings. There is no problem with that. But the truth of the matter is that the interest rate on such savings is lean and inflation eats it up.
For the unbanked population who constitute the largest part of the population, I think the micro-finance structure which the government has come up with is looking into various products to address their problem. And for the primary mortgage institutions too, it is very normal to advance housing loans to the unbanked population because they too have housing problems.
Owners of PMIs should begin to appreciate the needs of these people in order to develop products for them to access loans.
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