This post is also available in: Français (French)

My business partners and I started American Homebuilders of West Africa in 2014 based on our shared love for the region and its people, and our cumulative 100+ years of observing the challenges in the housing sector there. After going through a major Ebola epidemic in Guinea, multiple elections, selling out two developments, negotiating a $207MM public-private partnership agreement with the Guinea government, navigating partnerships (and turning a few down), and expanding to neighboring countries, we have learned a few things about what works and what doesn’t in the region.

The Problem(s)

There is a massive housing deficit in West Africa. Estimates of the magnitude vary, but there is no question that the current deficit is in the hundreds of thousands of units in each of the smallest countries in the region, and more than 15 million units in Nigeria. With young and growing populations, the region is staring into a long period of rapidly expanding demand for housing, without sufficient capacity to supply even a fraction of the current needs.

Governments, NGOs, DFIs and private sector actors who are serious about addressing the housing deficit would do well to approach the problem with Buckminster Fuller‘s trim tab metaphor in mind. As he put it in a Playboy magazine interview in 1972,

Something hit me very hard once, thinking about what one little man could do. Think of the Queen Elizabeth — the whole ship goes by and then comes the rudder. And there’s a tiny thing at the edge of the rudder called a trim tab. It’s a miniature rudder. Just moving the little trim tab builds a low pressure that pulls the rudder around. Takes almost no effort at all … you get the low pressure to do things, rather than getting on the other side and trying to push the bow of the ship around. And you build that low pressure by getting rid of a little nonsense, getting rid of things that don’t work and aren’t true … That’s the grand strategy you’re going for.

Does your national or state housing strategy create big movement with little effort by creating a low pressure zone into which solutions naturally flow? Or are you expending massive amounts of effort and resources pushing on the bow of the housing sector ship to try to turn it? Are you generating results with efficient, strategic, targeted action or, as the saying goes, proving your insanity by repeating the same failed strategies and expecting different results? Solving the housing deficit first requires addressing the key components of the housing market failure in West Africa: land title, buyer financing, and infrastructure.*

Land title is a complex issue for which there will never be a one-size-fits-all solution on the African continent. Setting aside for a moment the question of whether or not foreign entities and individuals can own land in a given country (in itself a significant determinant of whether foreign investment can be a meaningful part of the solution), the land title system is broken almost everywhere on the continent. As the World Bank’s Klaus Deininger wrote last year,

Despite improvements over the last few decades, land registries in many developing countries remain siloed and incomplete. Fewer than half of the world’s countries (and just 13 percent in Africa) have registered or mapped the private land in their capital city, let alone beyond its borders … only two in Africa (Rwanda and South Africa) maintain records digitally so that land can be effectively managed in the face of unprecedented levels of urbanization and other environmental challenges. Widespread informality also leaves women and other vulnerable groups particularly susceptible to insecurity and loss of rights.

There is an interplay, of course, between land title and buyer financing. Where vibrant mortgage markets exist, the lending institutions have the confidence to invest in the housing sector because they have an actionable claim on a real asset in the event that the borrower defaults on their payments. When title is unclear or unenforceable, and there is no other asset security that a lender can access for collateral, housing ministers can lay out plans and programs till the cows come home, but there will be little incentive for private capital to take long risk on unsecured loans.

Lack of title clarity is not the only problem in the mortgage markets in West Africa; there is also a general lack of underwriting capacity among bank employees in the region, a lack of sufficient reserves to engage in lending activity at scale, and a lack of incentive to make funds available (particularly when private banks can leave funds at the central bank collecting double-digit interest rates).

Buyer Financing

When I spoke at the Abuja International Housing Show in July, I laid out an argument that there are lessons to be learned from history about high-impact, low cost steps that governments can take to spur activity in the mortgage lending sector. When one looks at poverty and home ownership rates in Nigeria today, they are not unlike the poverty and home ownership rates in the United States during and following the Great Depression. As the chart heading this article shows, by 1960 the poverty rate had been cut by two-thirds, and the home ownership rate had tripled. There were many factors that went into changing the trajectory of poverty and home ownership in the US in that period, but one significant lever – or trim tab, as some might say – was the commitment made by the US Government to provide incentives for banks to lend to home buyers.

Recent analysis by Deborah Lucas at MIT suggests that federal credit guarantee programs (such as those introduced in the US with the launch FannieMae and FreddieMac) can generate a 4X – 5X multiplier effect – that is to say, an investment of $1 in such programs (which reduce the risk of mortgage lending for financial institutions) can generate $4 to $5 of stimulus activity in the economy. Given that fiscal multipliers for many other commonly-used stimulus programs typically range between 0 and 1, even if Prof. Lucas is only half-right, such credit guarantee programs are remarkably efficient. By reducing risk for lenders, they create an enabling environment – a low pressure zone, if you will – that pulls the mortgage market into alignment and stimulates lending, construction, job creation, infrastructure development, wealth creation, and more.

Land Title

One place where financing and land title meet is in the arena of title insurance. When a home buyer in the US takes out a mortgage to buy a home, the question of title insurance is a relatively minor part of the process. In Pennsylvania it costs 0.5% – 1.5% of the insured value, just one of many seemingly minor elements that make up the reams of paperwork in a typical mortgage lending transaction. Title insurance is mostly a money-printing business in the United States: claims paid are 4% – 6% of revenue collected on average. Forbes has called it America’s Richest Insurance Racket, and many have argued that private title insurance has outlived its purpose in a market where title information is easily available and rarely disputed. Some go so far as to call title insurance in the US a scam, and argue that it could be run by the state for a much lower cost to consumers – as is done in Iowa.

But in the countries of West Africa, there is a role for title insurance to play – just as there was in the United States in the mid-19th century, when land ownership records were poorly maintained, few centralized title records existed, and errors in those records were common. In 21st-century West Africa, resource-strapped governments who want to pull small levers to make big changes in the housing market would do well to study the example of Iowa Title Guaranty** and other state-run title insurance programs. Markets fail when information does not flow freely and when trust breaks down; states who control title administration and record-keeping should be able to find a way to provide title insurance that will support development of mortgage lending markets, and should be able to do so at a breakeven at worst, if not at a profit.

Infrastructure

Inadequate infrastructure is another major roadblock to resolving the housing deficit in the region. Often governments will tender projects for low-cost housing developments in areas not currently served by paved roads, potable water, or electricity – all key infrastructure elements both for efficient completion of construction, and for delivering a home that is actually reachable and livable. And often those same governments will expect private developers to shoulder the burden of improving the roads, pulling power lines, installing transformers, and providing water hookups.

In our experience in Guinea, these requirements can add more than $5000 to the cost of a home – sometimes much more – for the end-user buyer. In a region where truly affordable low-cost housing should be priced at $10,000 or less, burdening developers with infrastructure delivery is asking the impossible. States can access DFI and bond market funds at lower rates than private sector developers, and can realize efficiencies of scale in infrastructure delivery that are not possible for private developers … in short, states have access to the trim tab for infrastructure delivery, and should make use of it if they are serious about creating an enabling environment for housing delivery.

In Conclusion …

Will building infrastructure and creating an enabling environment for title security and mortgage lending completely solve the housing deficit in West Africa? Not right away. There is still a need for improvements in materials and construction technologies; better training and support of artisans; better zoning and job site safety; lower tax burdens on real estate transfers; and more. But work on these second-tier issues without addressing title, buyer financing and infrastructure constraints is like pushing on the bow of the Queen Elizabeth to try to turn it: expensive, difficult, inefficient, and unlikely to work.

Robert Hornsby, CFO

American Homebuilders of West Africa

October, 2019

(Originally published on Linkedin)

* Note that construction materials, and construction technologies, are not listed among the key components of the market failure here. While there are many interesting solutions on offer in this arena, from factory-built container housing to panelized construction and 3D printing to more local solutions like enhanced earth bricks, none of them can be viable at any meaningful scale until the land title, buyer financing and infrastructure problems are addressed.

** The economics of state-run title insurance programs is my focus here, but Iowa Title Guaranty also provides a cautionary tale about sexual harassment in the workplace. Study the economics as an example of what is possible; study the harassment as an example of what NOT to do.