The Problem
The population of Zimbabwe has been exploding and a growing population means that there is a growing need for housing and infrastructure.
Without citing any statistics to confirm this, a person only needs to look at the number of informal settlements sprouting in and around Harare as well as major towns and cities of Zimbabwe. This, coupled with the fact that the older housing settlements and infrastructure are in a serious state of disrepair, it is not uncommon to find overcrowding in areas like Mbare and Makokoba.
There is also the emergence of settlements in areas that are either poorly serviced or not serviced at all. All these phenomena are symptomatic of one primary thing: little to no supply of housing units over a very long period firstly, and supply that is insufficient when compared to levels and rates of population growth, secondly.
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As far back as 2011 the Financial Gazette reported that Zimbabwe had a housing backlog of at least one million housing units. This statistic was attributed to information provided by the Real Estate Institute of Zimbabwe (REIZ).
More than anything this statistic not only highlights the very real need for housing but also that there is a gap in terms of available funding for this need.
Housing as it stands remains out of reach of many people and those who can afford to acquire decent shelter for themselves do so by literally boot strapping building their homes little by little.
There are essentially two problems with the housing sector in the country:
- Growing demand coupled with minimal supply.
- No substantive mechanism for the financing of real estate assets.
It is important to note in this discourse that solving the second problem will automatically solve the first problem.
The Possible Solution
Zimbabwe needs an active, vibrant and thriving mortgage market. Mortgages are not a novel concept to Zimbabwe; in fact, just about all the financial institutions during the full dollarization period were starting to engage in some form of housing finance or other even presently albeit in a limited manner.
The slowdown in mortgage lending especially in local currency has been attributed to inflation and uncertainty.
There has been resurgence somewhat with banks starting to extend mortgage credit in hard currency lately; however, the banks are very cautious about it and have not rolled out this service as aggressively as they would have in a normal environment.
The mammoth backlog in housing stock begs the question of why providers of finance to this market are not coming to the proverbial table. Is it a question of viability? Or is it a question of potential borrowers not being eligible for credit? Or is it a question of the requisite funding to satisfy the housing shortage not being available? This is especially important assuming that the figure given by REIZ is still the same and that the average price per unit of a residential property is US$60,000.00 (which is a conservative estimate by Harare standards) it would stand to reason that Zimbabwe’s mortgage market requires no less than US$60 billion in order to finance the backlog!
To put this in perspective would require one to consider Zimbabwe’s GDP figures. According to the World Bank Zimbabwe’s GDP is about US$20 billion. This means that funding the housing market requires an amount of money equivalent to at least three times the gross domestic product of the country!
On the surface, the banking sector alone even when you include the rest of the financial system cannot provide all of the money needed to finance the housing sector. The remainder of the funding needed calls for innovation and a different kind of thinking.
The question to ask is how then can a market for mortgage finance or the mechanism for funding real estate assets develop?
There is without doubt a very serious case and value proposition for a vibrant mortgage market to the wider economy given the present circumstances. It needs no mention to state what benefits would accrue to a country like Zimbabwe of having a mortgage market worth at least US$60 billion.
The multiplier effect alone of such a quantum of money passing through the economy would change the fortunes of the country. If the value chain of the housing market is to be considered even in isolation it is not difficult to see how the wider economy would benefit from the emergence and development of a vibrant mortgage market.
To develop a single residential property requires large amounts of building materials from various suppliers. The bricks, mortar, electricals, timber, tiles, paving, finishing and related will all benefit from increased business and productivity. These suppliers themselves have value chains that would also enjoy the benefits of a thriving housing sector backed and funded by an active mortgage market. Banks and the financial sector will earn more fees and interest from mortgage lending leading to greater profitability. Increased business activity will lead to a reduction in unemployment as more and more people join the workforce. Therefore, an amount like that required to clear the shortage of housing stock would easily clear the external debt Zimbabwe has struggled to service and repay. The same amount would easily result in a fiscal and trade surplus in real terms.
Money passing through the mortgage market will not dissipate into thin air. It will find its way into other downstream parts of the economy aside from financial services and housing. The mortgage market will therefore give impetus to other industries and stimulate growth and development.
How should this market develop in a sustainable manner so that whoever desires a decent home should have access to one in line with the resources they have at their disposal?
Contrary to what is commonly believed, a vibrant mortgage market has more participants than just the borrower and the lender. A well-developed mortgage market consists of two submarkets, the primary and secondary markets and there are various participants whose continuous interactions give depth and scope to housing finance.
This kind of housing finance market should consist of not only borrowers and commercial banks but also government, pension funds, mutual funds, insurance companies and other financial institutions.
What has also been traditionally held as true is that banks originate and underwrite mortgage loans to the clients and carry these in their books right up to the point where the client settles the mortgage loan in full. This period is usually anywhere between 25-30 years.
The kind of mortgage market Zimbabwe needs to develop must have both the primary and secondary markets.
The primary market is what most people are accustomed to. It is where individuals save a certain amount of money as down payment for a house and then apply to the bank for a mortgage loan in order to purchase a home or any other kind of property for that matter. The bank then receives the client’s application, reviews it and screens the client assessing their credit-worthiness after which it extends the loan that the client qualifies for. The bank will then carry this and other similar loans to clients in its books for the duration of the loans.
The secondary market is where the loans originated and underwritten in the primary market are collated and sold to other investors in the form of tradable securities on the markets. This critical component of the mortgage market does not exist in Zimbabwe. The development of the secondary component of the mortgage market is what invariably sustains the primary component of the same market by providing liquidity to otherwise illiquid loans in the books of the commercial banks.
Because the Zimbabwean mortgage market consists only of the primary market, it is piecemeal in terms of its effectiveness in dealing with the housing backlog. Commercial banks have been reliant on depositor funds and capital to finance the mortgage market. This source of funding is woefully insufficient and often means that mortgages are out of reach of many.
The secondary market will eliminate this problem since after making mortgage loans, commercial banks will not need to hold them to maturity but would be perfectly able to sell them in the capital markets, replenishing their funds which would enable them to make further mortgage loans not to mention the fees they would earn in arranging these loans and selling them on. A secondary market would be profitable for the banks and benefit society at large.
What it will take to develop the secondary market?
For this to happen will require the coming together of various participants acting in their different roles.
Government buy-in
The government must take a more active role beyond merely setting policy on housing. It should come to the table willing and prepared to stand behind the mortgage market with real money. There is a very strong precedent for this in the United States where the government has gone so far as to set up agencies like the Federal National Mortgage Association (FNMA), the Federal Home Loan Mortgage Corporation (FHLMC) and the Government National Mortgage Association (GNMA). All these agencies are affectionately known by their colloquial names Fannie Mae, Freddie Mac and Ginnie Mae.
The purpose of these agencies is to provide liquidity to the housing finance or mortgage market. The mechanics of their activities work this way: these agencies issue bonds which the government purchases in whole or in part with the difference taken up by investors in the capital markets. This money is then lent to commercial banks and used to make mortgage loans.
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Government in this way would ultimately be a source of funding and liquidity to the mortgage market, giving it much-needed sustainability. The participation of the government should also extend to providing guarantees to financial institutions who lend to borrowers by providing assurances to the banks in question on the performance of clients who would have taken mortgage loans.
This can be done through the parastatals, state owned enterprises and agencies that the government operates. Again, this is not without precedent; throughout the 1980s and 1990s the National Railways of Zimbabwe was able to provide guarantees and assurances to banks so that their staff could access mortgage loans which in many instances were up to 100% of the property value. In other words, they would not need to provide a down payment. Government needs to reinstate this initiative among the many others prescribed.
A parting shot with respect to government would be to initiate policies that introduce uniform underwriting standards. These, as will be seen later, will go a long way in ensuring the quality of the mortgages that are sold on the secondary markets.
Commercial Banks
Their role must extend beyond only originating this kind of credit. In addition to this traditional role, they must as a matter of urgency develop structured finance capabilities which will enable them to securitize the mortgages they would have underwritten and sell them on the secondary market.
Structured finance and securitisation call for banks to engage in responsible lending practices and principles. Commercial banks must take special care to ensure that the quality of the loan books they underwrite is well managed in addition to the government instituted underwriting standards. The perils of reckless lending are all too familiar and clear from the global financial crisis that emanated from the US housing market back in 2008. The responsibility to ensure mortgage loan book quality falls squarely in the purview of banks and their management since they are the primary interface with clients seeking mortgage loans.
Insurance companies and pension funds
These financial institutions specifically are repositories of long dated capital. Funds of this nature are best suited and most appropriate for lending to the mortgage market whose loans match them in terms of tenure and duration. These institutions are also mandated by law to place funds received in the form of premiums and pension fund contributions in long term assets like long term securities, equities and real estate. They will provide a rich source of liquidity to the mortgage market especially after the said mortgages have been securitized.
In contrast, funds from the commercial banking sector tend to be short term in nature and are for that reason not the best source of liquidity for the mortgage market although they may participate in that market at the secondary level through trading and holding mortgage backed securities and on the primary market through originating the loans.
Foreign Investors
This is where the beauty of a fully integrated mortgage market comes in. This kind of market once developed can help Zimbabwe attract and retain a large amount of foreign direct investment which is desperately needed. This will occur because funding for a fully integrated market does not have to be sourced locally. The money can come from offshore.
In the opening statements of this article it was found that the prevailing backlog and shortage of housing stock cannot be financed from local funds because the money just is not there.
The local pool of capital is just too little; however, the global pool of investible capital is much larger, and it is looking for potential investments and securities that can provide a decent level of return.
Foreign investors to the local mortgage market in Zimbabwe comprise among others: sovereign funds, hedge funds, foreign banks, pension funds, endowment funds and insurance companies.
Zimbabwe has for the longest time had problems with foreign currency shortages. The most sustainable solution to this could very well be the development of a fully integrated mortgage market that has both depth and scope.
Ratings Agencies
Whenever a borrower applies for credit of any kind from the bank, the credit process that ensues involves screening the prospective borrower’s ability to repay the loan given their means and the risk associated with lending to them.
The risk that a borrower may default or fail to honour the terms of the loan as agreed is always present.
This risk of default then affects the quality of the loan and must be compensated for by charging a higher rate of interest. Borrowers with a lower likelihood of default will enjoy much lower rates of interest on their borrowings.
How will investors and participants in the secondary mortgage market know and appreciate the risks inherent in the mortgage backed securities they will hold?
This is where ratings agencies come in. They assess the likelihood of mortgage loans that comprise mortgage backed securities going bad and then they assign a certain risk grade on that basis. The highest quality graded loans and securities will attract an AAA rating whereas the lowest quality loans and securities will attract a BB- rating.
This information is important because with it investors can make deductions for themselves about the risk/reward combinations they are happy to hold. In short and much simpler terms, the ratings agencies and the risk grading they attach to securities will give investors an indication and assurance as to the risk inherent in any issue of mortgage backed securities. The agencies will also go a long way in providing credibility to issues of mortgage-backed security if they are rated by internationally acclaimed rating agencies like Standard & Poor, Moody’s and Fitch.
Conclusion: Key Success Factors
It must be borne in mind constantly that the need to meet demand for housing and to clear the backlog is very urgent. It requires immediate attention and substantive action to prevent it from worsening which can lead to social problems and a humanitarian crisis.
The backlog itself is huge. The exact extent of it varies depending on which publication is read. Government tabloids place the figure at 1.25 million units; other publications put it at two million and the Construction Review, a property development journal has placed the figure at 1.4 million units. Whatever the true figure the challenge is a daunting one.
The creation and development of an integrated mortgage market is critical. It will be an efficient mechanism to provide financing for all types of real estate as well as the infrastructure needed to clear the backlog.
This will not happen however without the buy-in and firm commitment from government. Regulators from the ministries of finance, local government and public works must be unequivocally committed to developing the market.
Government needs to lead the way in getting the process off the ground by bringing together the key market players to build the necessary systems. This is important because the level and extent to which the government is committed will determine how fast the market grows. Government is therefore a key stakeholder in growing the mortgage market.
Secondly, the mortgage market needs to have active participants who—should the circumstances occasion it—be mandated by law to participate. This market will need participants in the form of issuers and investors as well as other intermediaries. An active primary and secondary market needs a diverse issuer base with varied credit risk. Only in this way can the market be fully integrated. Potential issuers can include corporations, financial institutions, infrastructure projects and municipalities.
Investors in this market should be diverse as well, comprising pension funds, insurance companies, commercial banks, mutual funds and other financial institutions.
The role of intermediaries will be to bring issuers and investors together. They will need to be able to make money from this activity, manage the risks and have the skills capability to do the business. Commercial banks are the key stakeholders in this instance and the banking sector is reasonably competitive.
The most critical and final condition precedent for the development of a vibrant mortgage market is macroeconomic stability and credibility. This is imperative because there can be no bond/mortgage market without these. Zimbabwe’s economic growth going forward needs to be strong enough to generate appropriate issuers and investors. Inflation and interest rates cannot be too high or too volatile and without enough GDP and GNP growth, savings and investment rates, the economy might not provide the issuers and investors needed to sustain the mortgage market.
Once all of these are in place and in concert, Zimbabwe and its citizens can then expect to have a vibrant market for financing housing and to look forward excitedly to clearing the housing backlog on the way to becoming a middle income economy by 2030!
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By Laurence I. Sithole
