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

124 Walley
obtaining developer financing; the cost of land, which can be high; and the
cost of providing utility connections, access roads, and other services that
typically end up being provided by the developer. This means that the
cheapest property available in the formal sector, with access to electricity
and water, is rarely lower than US$30,000 and in many cases will be much
higher. In some urban centers it is virtually impossible to find a property
that has full title and can be mortgaged for less than US$50,000. Again,
lack of data is a big constraint here, so for the purposes of the calculation,
an assumption will be made of a typical property of US$30,000.
It is worth noting that this does not compare well to other markets,
such as India, where properties are available for prices as low as US$8,000
(see box 4.1).
Based on the parameters set out above and also based on safe lending
standards, which would require a 20 percent deposit and a maximum
payment-to-income ratio of 40 percent, a minimum income level can be
calculated that shows at what point in the income distribution a mortgage
loan becomes affordable. The mortgage payment would be US$468 per
month, which means a minimum annual income of US$14,034. Using
the income distribution pyramid in figure 4.3, this shows that the cut-off
point for mortgage affordability is at the 2.9 percent population level.
Potential Size of Mortgage Market
The findings of this analysis have important implications for the formulation
of housing policy. There is often a belief that, first, a bustling middle
class has a vast pent-up demand that is not fulfilled because of a lack of
housing supply; and, second, that developing a mortgage market alone
represents a crucial missing link to unleash private capital into the housing
market. From the analysis above, it is clear that mortgages alone cannot
hope to meet even a fraction of the required housing investment.
However, a final step in the calculation shows that developing a mortgage
market is a worthwhile and necessary activity to pursue from the
perspective of financial sector development. Based on the 2.9 percent
of the income distribution pyramid where mortgages are affordable and
prudent, and ignoring the fact that those at the very top of the pyramid
are unlikely to need mortgage loans, the potential market size for mortgage
loans in Africa can be estimated at around 6 million loans. Assuming
an average loan size of US$50,000, this represents US$300 billion of
mortgage loans, or 18 percent of Africa’s total GDP. Excluding South
Africa, this would mean a debt-to-GDP ratio of around 12 percent for
the continent.