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BNA HOUSING FINANCE WORKSHOP

4 Nov 2005

DEVELOPING HOUSING FINANCE:

BUILDING BLOCKS, CHALLENGES & POLICY OPTIONS

World Bank

Olivier Hassler ohassler@worldbank.org

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Presentation Overview

The need for housing finance

The building blocks of a system

Selected challenges and policy options

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The Need for Housing Finance

Urbanization:● A strong trend – the urban population rate is still low in Africa (37%)

● Requires huge investments● “Cities are built the way they are financed”

Building an asset = wealth ladderPromotion of housing supplyAlleviation of government finance burdenSynergies with the development of financial market:

● Long term income source for intermediaries● Diversification of investment opportunities

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Housing Finance is difficult to develop

Long maturities: Housing Finance makes a large investment affordable by spreading its cost over a long period of time

Necessity of efficient collateralization: a condition of long term lending, but also of a wide access to finance

Neither characteristics are easy to achieve in a nascent market

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A Nascent Market in Most Sub-Saharan Africa

DEPTH OF HOUSING FINANCE MARKETS (% GDP)

0.0%

2.5%

5.0%

7.5%

10.0%

12.5%

15.0%

17.5%

20.0%

22.5%

NA

MIB

IA

SO

UT

H A

FR

.

MO

RR

OC

O

TU

NIS

IA

SE

NE

GA

L

RW

AN

DA

MA

LI

AL

GE

RIA

UG

AN

DA

GH

AN

A

TA

NZ

AN

IA

MA

LA

YS

IA

TH

AIL

AN

D

CH

ILE

JOR

DA

N

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THE BUILDING BLOCKS

1. MACROECONOMIC CONDITIONS

2. PROPERTY RIGHTS

3. PROPERTY MARKET

4. MORTGAGE MARKET INFRASTRUCTURE

5. FUNDING

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Building Block 1 : Macro-economic Stability

Long term finance requires confidence in the value of money

High interest rates make finance unaffordable

Unemployment and volatile interest rates create credit risk

Angola on the right track

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Building Block 2 : Legal Framework of Property Rights

Sound and conducive property rights regime requires:● Clear individual right to sell and pledge land

● Clear procedures to regularize informal tenure, including litigation resolution

In addition, specific legal schemes are necessary: Property subdivision, & condominium law

Developer finance A strong impact on the supply of new housing

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Building Block 3 : Property MarketAn efficient housing supply chain Frequent obstacles:

● Release of land, especially by government

● Infrastructure (sewages, roads, water &electricity transportation..) lack of proper municipal services, cost often incorporated in new units prices

● Construction bottlenecks (weak construction industry, high import content)

● A synthetic indicator of supply constraints: Price-to-Income Ratio (PIR)

If PIR > 5 = housing little affordable

A minimal number of property transactionsOtherwise, property pledging of little use

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Building Block 4 : Mortgage market infrastructure (I)

Title and collateral registration systems● Objectives: enforcing rights, encouraging formal tenure, checking

chain of titles, fighting corruption● Characteristics:

Validity of inputs Security of information Consistency of data bases ( properties, persons, transfers) Adequate cost –not to encourage informalities or restrict transactions

Foreclosure process● Objective: ensuring lenders’ security● If judicial procedure, must be expedient● If courts clogged or ill-prepared: out-of-court process

(numerous ex. in Africa: Ghana, Ethiopia , Rwanda)● Adequate Balance of rights/power Potential best practice: Chile,

Recovery Officers in India

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Building Block 4 : Mortgage market infrastructure (II)

Risk assessment & management tools● Borrower:

Credit information Income verification / Proxy for informal sector

borrowers● Property: Need of credible appraisal capacities

Adequate Payment System (numerous little payments)

Angola in the process of completing equipment

Payroll deduction can help in both cases

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Building Block 5 : Funding(I) Bank Deposits

In most countries, housing finance is largely funded by deposits (although sight or very short term)

70% in Europe, even 50% in he US. Rare exceptions: Chile, Denmark

To do so implies an ability to manage financial risks ● Reasonably stable deposit basesSee Latin America- Importance of: political stability, currency stability,

banking sector soundness

● No fixed interest rates unless hedging available● Liquidity management tools (asset pledging, repos,…)Critical role for the Central Bank to play

● Access to capital market when needed

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Building Block 5 : Funding (II)Decentralized Capital Market instruments

Mortgages appropriate to back long term secured financial instruments● Securitization- Huge market in the USA, growing in Europe.,

Recent take off in Latin America, Asia, RSA Benefits: bankruptcy remoteness, transfer of financial risk, possible

reduction of capital requirement Challenges: transfer of credit risk (credit enhancement), pricing

● Mortgage bonds- Strong in continental Europe, well known in some LA countries, new in UK/NL Benefits: two level of security (general debt obligation + collateral),

prone to liquidity (simple pricing and trading) Challenge: only partial transfer of financial risk

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Building Block 5 : Funding (III)Centralized institutional options

Second tier liquidity facility Pool small funding requirements, enhance lenders' credit , help

manage liquidityEx.: Malaysia (Cagamas), Jordan (JMRC), Algeria (SRH),RSA (NHFC).

Projects in Egypt, WAEMU

State lending: a generally inefficient solution● Direct: Generally ends up being very costly and inefficient (Chile,

Brazil, Venezuela..): low recovery & moral hazard consume budgets● Indirect : Better credit risk management, but still limited capacity

Better is to use public finance for direct , explicit subsidies and seek leverage of private resources

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Selected Challenges and options

1. Property rights

2. Inflation

3. Individual Savings mobilization

4. Channeling institutional savings

5. Market strategies and access to HF

6. Housing assistance policy

7. Development strategy

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Issue : Property rightsLegal insecurity of property rights in urban

expansion areas is a common and acute problem in Africa

For anti-speculative purposes, conditionalities are often set that limit ownership rights on previously informal, or government owned land . Examples: ● Delivery of title withheld until near building completion● Short term or withdrawable lease hold rights subject

to compliance with land use regulation● Temporary Certificates of Occupancy● Unclear leases renewal conditions

These uncertainties affect transferability and the capacity to raise funds. Fighting land price inflation must take other routes

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Issue: Inflation

May hinder long term investment , or make it unaffordable through a high risk premium

Indexation can be an answer, but raises difficult issues● CPI indexation can make borrowers insolvent if wages do

not follow (Ghana)

● Protecting borrowers can make lenders insolvent (if bear the discrepancy CPI/wages)

Basic conditions for successful indexation:● Inflation within certain limits (Chile)● Need of objective and well accepted index

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Issue: Individual Savings Mobilization (I)

Domestic savings often scarce, or outside banks A counterproductive option: compulsory savings funds

– Numerous experiences• in Latin America (Mexico Infonavit, Venezuela Fundo Mutual

Habitacional, Jamaica..),• In Asia (Philippines Pag-IBIG, Malaysia, China)• also in Africa (Nigeria National Housing Trust Fund)

– Numerous shortcomings:• Implicit taxation of individual savings• Non-transparent management of borrowers' waiting lines or even of

funds• Below-market return self depletion• Exclusion of informal sector

– Similar negative results with directed allocation of Social Security Fund

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Issue: Individual Savings Mobilization (II) Better options:

– Voluntary Contractual Savings for Housing Schemes:• Compatible with the market development• Can include informal sector borrowers

Ex. Rwandan Banques Populaires : • Phase I savings amounts = phase II mortgage payments• Market rates• Inducement to build downpayment, not a commitment to lend

– Grass root networks : credit unions, savings groups, can be mobilized to build up downpayment

– If subsidies, prior savings important as an eligibility criteria

– Careful mobilization of expatriates savings - may distort housing

prices

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Issue: Channeling institutional savings towards investment needs

“Reverse term transformation”: a common phenomenon in Africa

Some institutional savings exists, but stays in deposits (besides T. or Central Bank Bills and Real Estate) due to underdeveloped capital market

Option: Introduce “pre-capital market” financial instruments to bridge long term savings and investment. Examples:● collateralized, tradable promissory notes (FR)● Transferable mortgage loans (Chile) ● Sale of mortgage portfolios (Mali)

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Issue: Financial Institutions Willingness to lend

The lack of long term funding can be perceived as an absolute deterrent

Possible option: Central liquidity facility. ● Experiences of catalytic impact: Malaysia, Jordan● Can be funded by WB or other IFIs (Paraguay, Tanzania)

Specific obstacles to serving moderate income groups ● Credit risk Default insurance?

Ex.: Mali, RSA (HLGC). Adequacy to market needs is key, several failed attempts

● Commercial strategy Promote lending by alternative FIs Often have a wider outreach than banks (Rwanda Banques

Populaires, Mali Nyesigiso) May require a “plug” to external funding source and credit

enhancement ( Ex: Mex SHF for SOFOLES, IFI support)

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A costly temptation: State Housing Banks

Many governments , especially in Africa, seek to overcome market failures by creating a state-controlled retail lender

This route is not recommended:● Generally an obstacle to the global l housing finance

supply because of their privileges

● A factor of mis-allocation of subsidized resources and poor recovery performance because of governance problems

● They mostly end up insolvent, and often are bailed out at a high cost for tax payers. Ex.:

Pakistan, Bangladesh, Indonesia, Argentina, Brazil, Colombia, Uruguay, Algeria

Ivory Coast, Tanzania, Rwanda, Niger

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Issue: Social Housing Policy

A Housing Policy is necessary:● Explicit social objectives● Measure of opportunity costs● Consistency of actions

Conditions for an efficient assistance policy● Avoid interest rate subsidies (affect the supply of finance)● Avoid subsidizing institutions (high risk of capture by the entity)● Promote leverage by private resources (avoid direct lending)

Incentive for more savings Combination with lending – for bankable households- = multiplier

effect Subsidies via guarantee schemes: link accessing favorable funding

conditions with serving low-income groups (US FHA, RSA HLGC, Mexico SHF)

● Precise targeting , transparent eligibility and priority criteria

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Development Strategy

A favorable macro economic background can spark the growth of the market

Recent examples: Algeria, Pakistan (bank liquidity, fall of interest rates)

Develop building blocks early in the process - but not all the components have to be in place before take-off

Carry out catalytic actions and support “ market makers”, often necessary

Examples: Specialized lenders (India: HDFC, Mexico: SOFOLES, Bangladesh), Second tier institutions (Jordan: JMRC)

Develop first a large enough, well tested primary mortgage market before organizing a secondary market

World Bank can support GoA and the Central Bank in creating market foundations, designing a roadmap, building capacities and initiating catalytic actions