Thursday, 11 August 2016

Mythbuster: Land registration has nothing to do with why Egypt doesn’t have a large-scale mortgage system

We said earlier in this series that offering a path to legal, affordable home ownership is among the keys to saving today’s Cairo and laying the groundwork for its future. But walk into any bank branch in Egypt and inquire about a 20- or 30-year mortgage and you’ll be met with some combination of raised eyebrows, confusion and general grumpiness.

Ask any expert in the field why you — or a member of your staff or the most humble of skilled tradesmen, for that matter — can’t find a mortgage product and you’ll be told it is not a regulatory issue. The legislation passed parliament, the executive regulations have been published in the Official Gazette. The problem, common wisdom has it, is a direct outgrowth of the state of our nation’s land- and property-registration system: Too many homes are unregistered, too many buildings the subject of ownership disputes to make it safe for banks to write mortgages.

As a player in the real estate industry and with direct access to the nation’s banking professionals, what we’re about to say may surprise you: The problem is not the registration system. True, banks aren’t very likely to loan you money to buy a flat or a villa to which the seller doesn’t have clear title. But registration issues are fundamentally soluble — and there’s a massive stock of housing out there (new construction and existing units alike) where ownership is clearly documented.

Need proof? Not terribly long ago, the Central Bank of Egypt (CBE) released EGP 10 bn into the banking system to promote home ownership. The money was earmarked for mortgages on low-income housing. Qualified applicants were allowed household incomes of no more than EGP 8,000; the maximum mortgage was for EGP 300,000. How long do you think it took before the entire pool of funding was taken up and moved into the market? Two years? One year? Six months?

Try less than a week.

As that EGP 10 bn experiment proved, the issue isn’t that there’s a shortage of properties that can be mortgaged — it’s that the funding available is both too little and vastly too expensive. What was different with the CBE’s experiment was the money was made available to banks at a long tenor and with a subsidized interest rate of just 4%, allowing the banks to lend it out at 8-9%.

We’re all price-sensitive after a certain point, aren’t we? These two realities — coupled with Egypt’s macro realities — mean mortgages are vastly too expensive a product today for most people. Consider the math of home-ownership today: if you wanted to buy a starter apartment for your child in, say, El Shorouk, EGP 1 mn would be a bargain, right? Now let’s say you buy that on a 20-year mortgage. At today’s rates, it’s going to cost you a monthly payment of around EGP 10,000, which adds up to a total of EGP 2.4 mn by the time you make your last payment — not that much of a bargain after all.

Banks are fundamentally businesses, making them no less cost-sensitive than us developers or even home buyers. They take in deposits then make their money back by lending with a built-in margin. The problem for mortgages is the cost of funding, or how much the bank has to pay to get the deposits in the door, which it then lends back out to the market in the form of mortgages, capex loans or car loans — you name it.

With inflation persistently in the double-digit range, there’s no way a depositor will park excess liquidity in a bank unless they’re getting 10-11% interest. That’s the starting point for your discussion of the cost of funds: The bank then needs to add a risk premium and its margin, meaning your mortgage is going to be priced at 15% — at a minimum. That’s ridiculously expensive. You’re paying 2.5x the value of the property over 20 years. How do we fix that? Simple: Who’s going to fund 20-year money at 3-4% so that mortgage finance is made available at 7-8%?

Common wisdom is that a 30-year bond could be part of the solution: After all, banks need inflows with tenors equal to those on which they’re lending. Unfortunately, a 30-year bond is a non-starter in the current macro climate. After all: Who would buy a bond at 3-4% interest over 30 years when inflation is in the double digits? A five-year revolving bond — one that is re-priced every half decade — transfers the risk of imported inflation to buyers who could suddenly find the cost of their mortgage doubling. As matters stand: The last time the government issued a five-year bond, it was priced at 15%. That implies extending mortgage finance at 22% by the time you add in the bank’s margin and its risk premium — that’s credit-card-level interest — on a home loan.

Could you source funding with municipal bonds? Not a chance: All budget funds in Egypt are derived from the central government, so New Cairo or Six October have no stand-alone means of raising finance.

No, the answer is the government needs to make it affordable for banks to lend for a greater social and economic good: As the CBE’s EGP 10 bn experiment showed, mortgages will literally sell out if they’re offered at a reasonable rate — 8-9% over 20 years, for example. And to do that, the banks need their funding at a matching tenor and at a cost of about 4%.

Until we see inflation below 7% and interest rates sustainably at 5-6%, that’s not going to happen. Instead, the government needs to consider earmarking part of its savings from the cutback of the subsidy program — which as recently as last year accounted for about a quarter of all state spending — for special funds that will encourage home ownership. And this shouldn’t be viewed as a sort of charity or alternative subsidy program; on the contrary, the government stands to win in the short and long term. Just as allocating funding to infrastructure development unlocks growth by facilitating the movement of goods and people, housing funds would similarly drive growth in the financial, real estate, construction and building materials sectors, all of which are key pillars of our national economy.

And that funding needs to come with strings: Banks should have regulatory and economic incentives to lend to buyers in communities that are properly planned and that fit into a shared national vision for what will make the Cairo of tomorrow habitable

More on that last point in a future installment of this series.

** This is part four of a five-part series by SODIC, a leading real estate developer and proud sponsor of Enterprise. Here, SODIC shares its view on how business and government can work together to save Cairo — doing good for more than 20 mn people and making a reasonable profit at the same time. Subsequent instalments will appear each Thursday morning, exclusively in Enterprise.


** Did you miss parts one and two in this series? Read them today.

Part 1: Why is your day in Cairo so hard — and what can we do about it?

Part 2: Egypt’s real housing sector: Market-based informality

Part 3: There’s a reason middle-income housing doesn’t exist — here’s how the government can fix it

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