Why mortgages are not the best option for first-time home buyers

African Union High Representative for Infrastructure Development in Africa Raila Odinga commented on how expensive it is to own a home in Kenya when breaking ground on a Sh3.5 billion housing project in Kisumu.

"Some of these houses are said to cost Sh1.5 million." "That's still too expensive; many people can't afford it," he remarked.

"We want it to reach hundreds of thousands of people." That is what the majority of our working poor people can easily afford."

For developers, the government, and home buyers, the issue of housing affordability has long been a grey area.

The gap between what a potential homeowner can afford and what is available on the market has always been the disconnect.

"The question of what is cheap is pervasive, yet we still don't know the answer. Housing affordability is a result of the purchase price, financing, and the cost of living, according to Muhammad Gambo, Shelter Afrique's Head of Policy, Research, and Partnerships.

"However, if public or private sector developers do not appropriately assess household affordability, there is a substantial risk that there will be inadequate effective demand by households to purchase or rent the houses created."

Shelter Afrique, a Pan-African housing firm with African countries as shareholders, and the Centre for Affordable Housing Finance in Africa developed the housing affordability calculator in response to this disparity.

The calculator informs you how much you can pay for a property mortgage after you enter your household wages, distance from Nairobi's Central Business District (CBD), and other variables such as interest rates.

According to the affordability calculator, if you earn Sh100,000 and want to live 50 kilometers from the CBD, the house you can afford will be priced at Sh2.04 million.

You have a mortgage of up to Sh2.27 million available to you. This is based on a ten percent deposit and a 25-year bond, assuming you only have Sh20,000 in your monthly budget for housing.

If the distance is reduced to 30 kilometers, the house price rises to Sh2.5 million, with a financing of Sh2.24 million available.

A 15-kilometer distance from the CBD raises the value of the house to Sh2.7 million and the mortgage to Sh2.45 million.

These calculations are based on an interest rate of 11% in 2021 and the assumption that you will spend no more than 20% of your monthly income on housing.

It is clear from the above figures that a mortgage is still not a particularly affordable option to own a home. You may end up with a home that does not meet your needs or be forced to relocate outside of Nairobi.

A three-bedroom property in Ruiru, which is 29 kilometers from Nairobi's CBD, costs Sh6.5 million, for example. This is Sh4 million more than the mortgage calculator suggests for places 30 kilometers from CBD.

A mortgage is still expensive in the long term, according to Nashon Okowa, a property manager and author of Don't Buy That House.

"If you're going to pay something for 20 or 25 years, it's expensive." It would undoubtedly drag you down financially," he stated in an interview with a local news outlet.

He claims that if you decide to build it yourself, you eliminate the developer's profit, lowering the cost of the house.

"As a couple or family, you're already aware of your cash flow. "Developers have made it simple to set up a payment plan," Mr Okowa explained.

"It makes sense unless you work in a bank where you can obtain it (mortgage) at four or three percent." But if you're not a bank employee, it's a lot of money at the end of the day."

Even if the distance is changed to 100 kilometers from the city center, the property price that can be afforded with the same wage of Sh100,000 is Sh2.27 million, according to the calculator. This is based on a ten percent deposit.

According to Dr. Gambo, the push for housing development in Africa has resulted in a surge in new homes, but the high costs of building, infrastructure, land, and compliance mean that the bulk of these homes are out of reach for those who need them the most.

"In most African countries, even the cheapest newly-built house is still out of reach for the majority of the urban population, resulting in significant vacancy rates," he said, citing Nigeria and Kenya as examples.

Developer-built housing, he explained, is usually aimed at the upper end of the market and is rarely provided in large quantities.

"However, even a Sh2.32 million house is out of reach for most people – and these are only accessible in a few projects," Dr Gambo said.

Poor affordability targeting, he said, might put pressure on governments to offer further subsidies, as in the case of Vision City in Kigali, Rwanda, or the Kilamba Development in Angola, while also imposing target prices that developers can't meet.

"Our goal is to increase the availability of affordable housing in Africa, and we hope that the affordability calculator will aid us in this effort by making such projects possible and sustainable on both the demand and supply sides," he said.

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