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

Housing Finance 145
of the impact of extending the terms of mortgage loans and the impact
on affordability. By reducing inflation expectations, the implied discount
rate falls. This drop has the double benefit of reducing the rate of interest
and making it economically viable to discount a loan over a longer
period.
Across much of Africa, interest rates are often in the range of 10 to 15
percent; at these levels, there is little benefit in extending mortgage terms
beyond 10 years. This automatically puts a severe constraint on
affordability.
It is no coincidence that the two most successful housing finance markets
in Africa are Morocco and South Africa, both of which have benefited
from strong macroeconomic indicators that make long-term finance
favorable.
Another key macro variable that should be subject to much greater
scrutiny in the countries of Africa is the price of real estate. Real estate
price bubbles can destroy mortgage markets and set back efforts to
develop housing finance. The bubbles may be caused by speculation on
land or real estate and may be fueled by a credit expansion. Whatever the
causes, the monetary authorities need access to the data and information
as early as possible so they can take corrective action. In African countries
where the supply of housing may be limited, together with limited price
elasticity of supply, any increase in credit can rapidly result in house price
inflation.
Key macroeconomic management recommendations (to the extent
that they directly impact housing finance) are as follows:
• Manage inflation and inflation expectations. Inflation increases the cost
of long-term money and does more to constrain affordability than
almost any other single factor.
• Develop fixed income markets. Consider the role of government in fostering
the development of fixed income markets through its debt management
policy. A yield curve can be constructed through the strategic
issuance of benchmark bonds at different maturities. A regular debt
issuance program is needed to maintain liquidity and secondary trading.
The yield curve allows for improved pricing and transparency in longterm
financing.
• Actively monitor real estate prices for residential and commercial property.
Together with bank exposures to real estate, such monitoring can