Financial Sector Development in Africa: Opportunities ... - World Bank

Housing Finance 123
borrowed by extending the maturity is very small. Figure 4.4 illustrates
this quite clearly. Assuming a constant mortgage payment of US$1,000,
there is very little benefit to be had from extending a mortgage loan past
12 years if the interest rate is 20 percent. The figure shows the line flattening
out at that point. Conversely, a 5 percent loan can be extended for
as much as 40 years, allowing a borrower to assume a loan of four times
the size with the same repayment amount as for a 20 percent loan over
the same period. Thus, for the affordability analysis, a range of loan maturities
will be used based on the level of interest rates in each country.
The last input needed for the affordability calculation is the price of a
typical affordable property. As with property markets anywhere, this will
be highly dependent on location, local demand, supply of new properties,
and all the other factors that go into determining the price of a property.
One striking fact that is relatively constant across Africa is the high cost of
a new build. This reflects many elements, among them the lack of scale of
many housing developers; the cost of raw materials; the cost of importing
many raw materials and transporting them; the difficulty encountered in
Figure 4.4 Size of Mortgage Loan Relative to Loan Maturity, Assuming a Constant
Monthly Repayment of US$1,000
250,000
200,000
Size of mortgage loan, US dollars
150,000
100,000
50,000
Source: Author’s calculations.
0
0 5 10 15 20 25 30 35 40
Years
20 percent rate 15 percent rate 10 percent rate 5 percent rate