FUNCIÓN ECONÓMICA

3.2.1.1 Income, Affordability, and Demand Issues

Mortgage finance markets are likely to grow in environments where prospective borrowers have stable streams of adequate income and secured jobs (Nyasulu and Cloete, 2007). Some scholars therefore consider affordability problems7 _{caused by low-income levels as the primary constraint to} mortgage demand and hence, mortgage finance development in developing countries. About a decade ago, less than a quarter of households could afford a mortgage to purchase the cheapest developer-built housing units (Porteous, 2006). The mortgage market in many developing countries thus appeared to be a private club of the rich (Walley, 2013; De Soto, 2000).

In Africa for instance, low, uncertain and irregular incomes are associated with the high levels of informal employment (Chimutsa, 2013). This situation makes the lender's task of verifying incomes

7 _{Various reports suggested that daily minimum wage has been below US$2.00 for most part of post-} independence Africa (CAHF, 2012; UN-Habitat, 2005; World Bank, 2000; United Nations Development Programme, 2006:269; International Labour Organization, 2007; Handley et al 2009: 1).

and assets difficult with ramification for default tendencies (Haughwout et al., 2008). Therefore, financial institutions prefer to avoid default to foreclosure upon default (Giliberto and Houston, 1989), due to the high cost involved (Riddiough and Wyatt, 1994). As a result, access to long-term housing finance is usually restricted by lenders (Beltas, 2008). They do this by imposing stringent underwriting criteria to reduce foreclosure risk (Nang et al., 2003) or charging borrowers with high- interest rates commensurately for posing a higher risk.

Melzer (2005) shows that the majority of households in South Africa (often inhabitants of the townships) for instance are priced out of the mortgage market, as they are charged rates between 40% and 67% per annum by Specialist Housing Lenders. Like many developing countries, high inflation rates partly account for these high mortgage rates (Tomlinson, 2007). Moss and Pillay (2000) also suggest that among households unable to access institutional finance, 41% could not obtain mortgage loans mainly because of their low-incomes. Low-income households were as a result redlined as posing a higher commercial lending risk (Tomlinson, 1997). Hence, banks have had little to do with the low-income segments of the population (Tomlinson, 2007; Rust, 2002).

However, developing countries are often thought of as poor countries. De Soto (2000) for example has been criticised for categorization and stereotyping of concepts and what terms represent. He seems to consider the poor as an undifferentiated class (Fernandes, 2002; Benda-Beckmann, 2003; Bromley, 2004; Cousins et al., 2005; Sjaastad and Cousins, 2008; Obeng-Odoom, 2013). This classification would have been true about three decades ago and beyond. However, in recent times, increasing economic growth is spurring a burgeoning middle class with higher spending power as indicated earlier. Affordability is improving and yet mortgage market development has been slow, even in many prosperous countries in the Middle East (Hassler, 2011). This suggest that higher incomes although necessary, is not sufficient for mortgage demand or result in a broader mortgage market. There is, therefore, more to mortgage finance development than just income – institutional factors for example may be relevant as found in Europe (Kutlukaya and Erol, 2015).

3.2.1.2 Price Stability, Savings and Long-Term Fund Mobilization

Price instability is believed to be a persistent challenge to mortgage finance development in many developing countries (Butler et al., 2009; Akuffo, 2009; Walley, 2009; Warnock and Warnock, 2008; Tomlinson, 2007; Sanders, 2005; Renaud, 2004; Agénor, et al., 2000; Pugh, 1994a; 1994b; 1994c; 1991). The volatility of macroeconomic indicators like inflation rates, interest rates and exchange rates distort price signals, heighten the perceived default risk, and increase risk premium on borrowing rates for private firms and individuals (Adjasi et al., 2008; Benita and Lauterbach, 2004; Agénor and Aizenman, 1998). Higher borrowing rates decrease affordability level with negative ramifications for housing finance and housing markets consequently (Boamah, 2011; 2010; Renaud, 2009; Richupan, 1999).

Many scholars have documented the debilitating effects of high and volatile interest rates, resulting inter alia from high inflation rates and financial intermediation inefficiencies (Diamond and Lea, 1993; 1992) on ability of banks to engage in mortgage finance delivery in Ghana, Nigeria, Kenya, Tanzania, Uganda, South Africa and Zambia (Afrane, et al., 2014; Bank of Ghana, 2010; Gardner, 2007; Asare and Whitehead, 2006; Tomlinson, 2006; Merrill and Tomlinson, 2006; Merrill, et al., 2005; Nabutola, 2004; Porteous and Naicker, 2003; Ajanlekoko, 2001). Boamah (2011) and Asare and Whitehead (2006) have also shown how constant exchange rate fluctuations have limited affordability and mortgage originations in Ghana consequently, as a result of the ‘dollarization' of the mortgage and property market.

Price instability also limits long-term investment and the propensity to save, which is considered as the stimulus of most formal housing finance systems, even in developed economies8 _(Chiquier, Hassler and Lea, 2004). A lack of savings constrains the ability of prospective borrowers to afford mortgage down payments9 _{(Warnock and Warnock, 2008; Chimutsa, 2013; Martin, 2008; Mathema,} 2006a; 2006b; Pugh, 1994a; 1994b; 1992; 1991). Coupled with crowding out effects of government borrowings (Laubach, 2009; Friedman, 1978), the ability of banks to mobilize long-term domestic funds for mortgage finance has been severely limited (Boko, 2011; Nubi 2010; Butler et al. 2009; Akuffo, 2009; Walley, 2009; Mutero, 2008; Kalema and Kayiira, 2008; Okoroafor, 2007; Tomlinson, 2007; Erbas and Nothaft 2005; Chiqiuer et al., 2004; Pugh, 1991; Robinson, 1976). As a result, many banks (usually relying on short-term demand deposit) have become portfolio lenders, supplying mortgage finance only when it fits very well in their portfolios (Karley, 2003), which limits scaling (Walley, 2013).