Missing link between affordable housing, economic growth and financial inclusion

Currently, seven million people live in Kampala and its suburbs, about 17 per cent of the national population. The urban population is expected to increase to more than 33 million people by 2050.
Urbanisation is increasing at a rate of six per cent, meaning that each year, an additional half a million people migrate to the city.

According to the latest Uganda National Household Survey, 70 per cent of households in Kampala rent their dwellings compared to one fifth of all households at the national level. The challenges of access are compounded by the quality of housing available, with more than a half of urban renters living in conditions that are characterised as over-crowded.

As a sector, housing has strong backwards and forwards linkages in the economy; it provides opportunities to build social and economic capital for households and helps stimulate the creation of quality jobs in construction and manufacturing.
Owning a house enables a household to save income, which could have been used to pay rent, and it can also earn income through rent.

As a financial asset, a house can be traded for money and is often one of the securities that banks ask for when an individual or a household would like to borrow. Investing in the sector can support the growth witnessed in Uganda’s economy in recent years. Research from the Centre for Affordable Housing in Africa (CAHF) conducted in Rwanda, Kenya, South Africa and Nigeria demonstrated the instrumental role that the housing sector can play in driving growth.

A study on asset ownership conducted by the Uganda Bureau of Statistics, Economic Policy Research Centre (EPRC) and UN Women found that ownership of housing remained the same between 2012 and 2017.

The study also found gender disparities in home ownership - three out of 10 men owned a house compared to two out of 10 women. A systematic, well targeted approach to promote affordable housing has the potential to reduce the gender gap in housing.

Although the importance of housing to the economy, society and individuals is clear, there are multiple challenges that hamper households from affording and acquiring it. The housing challenges in Kampala and most towns in Uganda, range from poor metropolitan planning, the high cost of construction and the high cost of finance.

The CAHF study benchmarked construction costs in African cities and found that it costs $20,000 and $25,000 less to construct the same house in Kigali and in Dar es Salaam respectively than to construct the same house in Kampala. Land costs are the biggest cost driver in Kampala, and among the highest in Africa, constituting about a third of the total cost for a standard house.

Lack of appropriate sources of finance and products is another main challenge. Households resort to home and short-term loans from commercial banks, borrowing from their networks and private moneylenders, personal savings, remittances from relatives abroad and gifts to finance construction.

And although there are mortgages, uptake remains extremely poor among low- and middle-income residents. Loan approval rates for small-scale landlords are lower than those for developer finance. All these factors contribute to the inadequate supply of housing units and drive up rental prices, making decent housing exclusive.
Urgent interventions are required to make housing affordable and to enable the sector to drive economic growth, create livelihood opportunities and improve the wellbeing of households.

Housing can be described as affordable if a section of society whose income is below the median household income can afford it. Policy reforms targeting access to finance for housing, formal systems for land access, and alignment of existing regulations will play a key role in this.

Financial service providers should also develop alternative financing products that meet the needs of low-income urban households which are predominantly young, and female headed.
Such reforms call for close collaboration between the public and private sectors. Only then will we truly unlock the potential of the housing sector.

Mr Ebong is the research specialist for Financial Sector Deepening Uganda.