Why informal market holds key to closing Africa's housing gap

The Centre for Affordable Housing Finance (CAHF) has emphasised prioritising the informal market when determining financing models for the masses. 

Citing a challenge with mortgage structure that works more for the formally employed and in a stable market, the continental think tank on housing matters says the informal market is delivering more housing than the State and private sector. 

This includes self-construction. “There are more instances of lending and investment that happen informally – whether from hand to hand, through rotating schemes or cooperatives or in the form of remittances – than formally through regulated channels,” says CAHF in a recently published analysis titled Cities that Think, Fast and Slow. 

It adds that while informal processes are ultimately inefficient and expensive, opaque and exploitative, and often subject to fraud, they are also nimble and responsive.

“There are [also] few barriers to entry, and critically, in their functioning, they are expressive of the priorities, needs and capacities of the majority of people across the continent,” says the think tank.

“This is important market information and it suggests an important opportunity for well-designed and targeted investment.”

CAHF notes that a lot of efforts have been around formalising the informal sector to make them inclusive, which is a challenge since a majority of the labour market on the continent is informal.

In Kenya, this figure stands at more than 16 million, according to the Kenya National Bureau of Statistics (KNBS). 

“But while we consider ‘the inclusion of the informal’ or ‘the formalisation of the informal’ it is worth reminding ourselves - the informal sector is not secondary to the formal - it represents the majority,” says the think tank. 

CAHF notes that typically, it is presumed that in contexts where there is affordable and accessible mortgage finance and stable formal employment, a household should be able to afford a house that is between two and three times its gross annual income.

But there are a few countries where the house price-to-income ratio is less than two, including Seychelles, Egypt, Equatorial Guinea, Namibia, Kenya, Mauritania, the Republic of Congo, Nigeria and Angola. Additionally, only a few of these countries have a stable mortgage market. 

“For the remainder, the price of the cheapest newly-built house is far out of range for the average household by expenditure,” it says. 

One of the reasons behind this high cost of housing is the broader, macro-economic framework and the cost of construction. 

CAHF notes that inflation rates across the continent have been particularly hard this year, with rates exceeding 20 per cent in Angola, Burundi, Ghana, Ethiopia and Malawi, while they exceed 30 per cent in Egypt, Nigeria, and Sierra Leone and rising beyond comprehension in South Sudan, Sudan, and Zimbabwe.

“Kenya’s building materials cost inflation was about 19 per cent versus an overall inflation rate of about six per cent,” it says. 

The informal nature of African cities like Nairobi is a result of a rapid urban population associated with an influx of job seekers, migrants, and youth seeking opportunities, which brings about informal housing.

Governments, on the other hand, are not succeeding in the delivery of affordable and adequate housing that matches the scale of this population. 

“No matter the new initiatives – a housing development project of 1,000 units here, or a high-rise development of 2,000 units there – these are drops in the bucket of demand,” says CAHF. 

Kenya is referenced in this context, with the think tank noting that in the 10-year period between the two censuses of 2009 and 2019, the urban population grew by just under 200,000 households per annum. 

“Less than a quarter of these were new urban, owner-occupied households, while the majority, about 158,000, were new urban households who rented. Most of these tenant households (89 per cent) rented their home from a private individual,” it says. 

It adds: “The 89 per cent of tenant households renting from private individuals are participating in the informal housing market – driven by households and independent investors, identifying opportunities and realising a return – and at a scale four times that which is delivered in the formal market.”

This is on the backdrop of an annual housing deficit of 250,000 units, with the market only able to provide 50,000 units.

Of these, 50,000 units, which is about two per cent, fall into the affordable housing category, according to data from the State Department for Housing.

This further locks out the low-income market which is a majority of the informal sector. 

“There is a further dimension: tenant households pay rent! Returns are low; the quality of the urban environment is poor; but tenants pay rent and support a thriving, low margin-high volume economy that serves the breadth of the population, just not yet in the depth they require,” says CAHF. 

Household savings, mostly held by informal savings groups and cooperatives when they extend the funds as small loans to members, are the most common ways of financing housing on the continent. 

In some countries, CAHF adds, housing investment is substantially financed by remittances from the diaspora.

“Remittances are also described as a substantial source of housing finance in Cape Verde and Burundi, Nigeria, Kenya, Senegal, Ghana and Zimbabwe, where analysts estimate up to 40 per cent of the remittances inflow is invested in housing,” the think tank says.