Rising mortgage costs threaten affordability amid housing push

Houses being constructed under the affordable housing project in Homa Bay town. [James Omoro, Standard]

The size of an average mortgage loan has grown by 25 per cent over the last decade, raising concerns about affordability for low- and middle-income earners amid the affordable housing push spearheaded by the presidency.

Data from the latest Bank Supervision Annual Report by the Central Bank of Kenya (CBK) and research from the Kenya Mortgage Refinance Company (KMRC) highlight this issue, indicating that the increased interest rates in 2023 have exacerbated the situation.

KMRC's research, which draws heavily from the CBK report, nonetheless notes significant growth in mortgage values and anticipates a stable market in 2024. This is despite a Sh3 billion increase in non-performing loans (NPLs), as detailed in the CBK report, and the high cost of borrowing due to prevailing domestic and macroeconomic conditions.

“However, the sector must balance immediate challenges with long-term growth strategies,” says KMRC in its research titled The State of Banking Mortgage Sector 2023. “Elevated interest rates and economic uncertainties pose risks, but ongoing government focus on affordable housing and strategic lending approaches to non-shareholders could drive increased mortgage uptake.”

The size of an average mortgage loan has increased by Sh2 million since 2014, reaching Sh9.4 million in 2023. In 2011, this figure was Sh5.7 million. The Sh9.4 million is, however, a stabilised figure, remaining the same as in 2022 and close to Sh9.2 million in 2021. Nevertheless, as the size of an average home loan increases, the percentage of fixed-rate mortgage loans in the market is also dropping. This trend suggests that home ownership is becoming increasingly out of reach for those targeted by the government's housing program.

KMRC's research shows that in 2023, only 11.6 per cent of mortgages in the market were on a fixed rate. A decade ago, in 2014, this was 7.5 percent, indicating some improvement. However, the 11.6 per cent figure is a significant drop from 2016 when it was 37.9 percent. Variable interest rates, unlike fixed rates, subject homeowners to fluctuations in the financial market, which have recently been driven by global phenomena such as the Russia-Ukraine war, the COVID-19 pandemic, and rising interest rates in the US, prompting CBK's Monetary Policy Committee (MPC) to also raise rates.

According to the research, almost nine out of every ten mortgage loans in the market (88.4 per cent) are subject to fluctuating interest rates. KMRC, a state organ, was established to facilitate single-digit fixed-rate home loans as a way to boost mortgage uptake in the country. 

KMRC states that mortgage interest rates continued to rise in 2023, with the average interest rate increasing to 14.3 per cent from 12.3 per cent in 2022, reflecting changes in the cost of borrowing.

“The minimum mortgage interest rates rose to 8.7 percent in 2023 compared to 8.2 per cent in 2022, while the maximum rates hit 18.7 per cent in 2023 compared to 17.0 percent in 2022,” says KMRC in the research. It adds: “These trends reveal a persistently high cost of mortgage borrowing. Moreover, the double-digit rates effectively constrain mortgage affordability, and their reversal is essential for the accessibility of mortgages.”

According to the CBK report, even as the number of mortgages in the market increased to surpass 30,000 for the first time, the sustained loan size at Sh9.4 million and rising interest rates in 2023 caused NPLs to surge to Sh40.8 billion, raising the ratio to 14.4 percent.

However, the number of mortgage NPLs slightly decreased to 2,929 in 2023 from 3,666 in 2022, indicating that the mortgage market's asset quality has stabilized. During this period, the overall industry loan book's asset quality deteriorated to 15.6 per cent from 13.8 per cent in 2022.

“The comparative analysis of asset quality indicators highlights the credit risk challenges that are significantly higher in the banking sector, reflecting broader economic fragilities in 2023, especially elevated inflation and interest rates,” says KMRC.

Shiv Arora, Chief Executive of Superior Homes, explained that while economic conditions in the country are tough, he expects the numbers to stabilize within a year or so.

“We will continue to see pressure on NPLs, but I think we will ride this out in 12 to 18 months,” he said.

Mr Arora noted that the increase in mortgages in 2023 to 30,015 was a result of a surge in the number of financial institutions offering home loans, KMRC’s single-digit product, and the government’s push on affordable housing.