The mortgage market in Ghana traces its roots to the First Ghana Building Society (FGBS) in 1956 under the Building Society Ordinance, 1955 (Act 30) and the Mortgages Decree, 1972 (NRCD 96). This coincides with the pre-financial liberalization era (1957-1987) and the 1959-1964 housing policy, during which period mortgage lending largely by the FGBS was financed heavily by short-term deposits and direct government soft loans. In line with the state’s new role as a facilitator and regulator under the 1970-1971 housing policy, the defunct Bank for Housing and Construction (BHC) was established to provide concessionary construction finance and credit to homebuyers.
By granting housing loans of ¢223,895,588 (US$994,075) to only 363 mortgagors between 1974 and 1988, the BHC failed to make the expected impact like the SSB (now SG-SSB), Ghana Commercial Bank, Barclays and Standard Chartered Banks; whose mortgage lending activities were also short-lived. The global economic decline in the 1970’s, characterized by high inflation levels, high default rates, and interest rate control policy of the state in the 1970s to1980s and the poor savings culture of Ghanaians constrained the ability of the FGBS and banks to raise funds for mortgage financing on a sustained basis.
The post-financial liberalization era from the 1987s and the World Bank Urban II project witnessed the first failed attempt to establish a two-tier integrated housing finance system. The World Bank and Social Security and National Investment Trust’s (SSNIT) contributed US$8.2 million and US$16.2 million respectively as start-up capital. The Home Finance Company, now HFC Bank was to operate as secondary lender but ended up us a primary lender; naturally monopolizing the market over a decade.
As the achilles heels of both the pre-liberalization and early post-liberalization periods, macroeconomic volatility as measured by large and erratic movements in inflation and real exchange rates has distorted price signals and has heightened the perceived risk of default and credit loss and increased risk premiums. This is evident by the wide disparity between the Bank of Ghana policy rate (16%) and average mortgage interest rate (30%) as at 2013. This is interlinked with the weak legal and regulatory environment, low income levels, the lack of refinancing opportunities and reliable credit rating activities.
This makes mortgage lending unattractive and expensive; only for the few rich to benefit in today’s market as well. Hedging against these risks however, the mortgage market is unofficially dollarized; altogether serving as a disincentive to long term investments. The mortgage market as a result is typically long-term capital scarce leading to most banks resorting to short-term cheaper deposits in funding long.
Mortgage market shares of major participants as at 2008 stood at 30.03% (HFC Bank), 27.02% (Ghana Home Loans), 24.96% (Barclays Banks), 11.81% (Fidelity Bank). With an average maximum term of 20 years, current mortgage rates of Ghana Cedi-denominated and US dollar-denominated mortgages have averaged astronomically at 30% and 13% (fixed) respectively. The mortgage portfolios of the two major players, Ghana Home Loans and HFC Bank stood US$65 million and US$ 7.57 million in 2011 respectively, contributing to mortgage-to-GDP ratio of about 0.5%. This is a significant underperformance compared with mortgage-to-GDP ratios of 85% and 77% in the UK and USA respectively.
The highest average annual household income in Ghana which tallies with the Greater Accra Region where the mortgage market is concentrated is GH¢335.60 or US$299.64 (GLSS 5). Lacking effective demand due to low income levels, affordability has suffered as about 90% of Ghanaians cannot afford a mortgage to purchase the least developer-built unit according to previous research. In detail, Asare Akuffo and HFC Bank further estimate that, only 5-8% of Ghanaians can afford a house from their own resource; about 60% need financial assistance; 35% are not capable of owning or building a house in their lifetime. Between 12% and 15% comprising mainly top civil servants and staff of financial institutions have access to mortgage loans. For this reason, about 60% of the market participants are resident non-Ghanaians or non-resident Ghanaians.
Housing finance systems are interdependently linked by property right, macroeconomic and policy transmission mechanisms that should reflect both improvements and deterioration of related variables. Hence, improvement in the property right regime evidenced by the Land Administration Project; the assurance of greater certainty of foreclosure and enforceability of defaulting mortgages by the Home Mortgage Finance Law, 2008 (Act, 770); and the relative stability of the macroeconomy should attract long-term funds at competitive pricing. However, the picture remains below expectation with only marginal reductions in interest rates.
The lack of or inadequacy of long-term funds and high financing costs appears to have caused a structural lag in the mortgage market. This may be attributed to the poor outlook of borrowers’ characteristics in relation to and summed up in the five Cs lending criteria: character, capacity, collateral, condition and capital. The dead weight and counterfactual is incremental housing; which accounts for nearly 80% of housing acquisition in Ghana, but inefficient and costly.
The possibilities of bending state’s roles in housing finance are many and are always associated with their setting in the wider finance capital markets, economic policies and institutions which can promote low and middle-income price-access to long-term sustainable housing finance. In this vein, primary lending of pension and insurance funds as practiced in Southern Africa, Singapore and Mexico is a potential. This is because of its common characteristics with the mortgage market: huge long-term assets and liabilities and pricing advantages.
The foregoing raises a number of points of interest, including how housing finance systems should be conceptualized in the wider economy; how they should incorporate processes which improve housing affordability, and how they might be adapted in evolutionary ways to improve low and middle-income access. Therefore, does the national pension fund possess this potential, now that section 103(2) of the National Pension Law (Act 766) allows a member to use that member’s 2nd tier benefits to secure a mortgage for the acquisition of a primary residence?
Kenneth A. Donkor-Hyiaman
University of Cambridge