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Housing Finance Market Overview
Although Nigeria has experienced strong economic growth in recent years, the Nigerian mortgage market has remained limited. This is primarily due to a lack of long-term financing, as well as high transaction costs in land registration and foreclosure. Despite an increase in mortgage lending since 2006, housing finance still represents only 0.30 per cent of Nigeria’s GDP, extremely low by international standards. Along with other factors such as high inflation and construction costs, these conditions have led to a housing shortfall estimated at 17 million units in 2013. The World Bank reports that more than 700,000 housing units must be constructed annually at a cost of US$350 billion in order to plug this deficit.
Mortgage lenders in Nigeria include mortgage banks and deposit money banks (DMBs) with mortgage banks accounting for about 57 per cent of the mortgage market share.
The Nigerian mortgage market has recently undergone significant reforms following revised guidelines issued by the Central Bank of Nigeria (CBN) and the implementation of the Nigeria Housing Finance Programme (NHFP). The NHFP is expected to address long-term funding constraints through the Nigeria Mortgage Refinance Company (NMRC), a public-private partnership mortgage liquidity facility launched in January 2014. Further reforms aim at making mortgage lending procedures more effective, improving portfolio risk management, easing mortgage securitization, and streamlining foreclosure procedures.
The Market from the Perspective of the Demand Side
In Nigeria, the average loan-to-value (LTV) ratio of conventional mortgages is about 82 per cent. Conventional interest rates have historically been high and extremely variable from lender to lender with prime mortgage rates reaching 25 per cent at some financial institutions in 2013. Borrowers can also apply through an accredited credit institution for a loan from the National Housing Fund (NHF), if they previously paid contributions to it for at least 6 months. NHF loans range from 70 to 90 per cent LTV depending on the loan amount. NHF loans typically have a 6 per cent interest rate, fixed for up to 30 years.
The introduction of the NMRC is expected to result in lower conventional rates.
House Price Development
Prospective home buyers have been discouraged by high house prices in Nigeria. Although there is currently no reliable price index, given the burgeoning housing construction costs driven by rising cement and labour costs, prices have witnessed an upward trend in recent times. The World Bank estimates that the construction of an average 3-bedroom house in Nigeria costs approximately US$50,000 (compared to US$36,000 in South Africa).
Mortgage banks primarily use savings and deposits to finance long-term lending, thus creating a maturity mismatch. Historically, the Federal Mortgage Bank of Nigeria has played a major role in the country’s housing finance system by raising capital through the National Housing Fund (NHF) and allocating it to private mortgage banks to offer low interest, fixed rate loans. However, the NHF has proven to be an insufficient financing mechanism in practice.
The NMRC was created mainly to address the long-term funding constraints hindering the growth of the primary mortgage market by raising long-term funds from domestic and international capital markets. It is expected to commence refinancing activities by Q1 2015.