While the price of the house is critical, it is not the only variable that impacts on affordability. To assess affordability, we need to have a moderately accurate sense of household income distribution. We also need to have some sense of the capacity of households to divert expenditure towards housing, and we need to understand available financing options.
Figure 2: Assessing affordability – key factors
We are often at a loss when it comes to household income and expenditure patterns in many African countries. Where data exists, it is often out-dated. It is also prone to a host of errors which reflect the socio-economic context (informal employment dominates and incomes are unstable) rather than the capabilities of enumerators or statistical bureaus.
That said, we must work with best available, albeit not always excellent, data. Figure 3 provides estimated household income distributions in urban areas for three countries: Kenya, Nigeria and Uganda. In all cases, income is proxied by consumption expenditure which tends to be more stable and better reported. Data is old and has, in the case of Kenya, been inflated using various measures of CPI, again a simplification.
Figure 3: Monthly income pyramids of urban households
In line with this data, the Bottom 40 per cent of households (B40) in urban areas of Kenya earn less than KSH 27 500 per month (USD 205). In Uganda, the corresponding threshold is UGX 535 000 (USD 146) and in Nigeria it is NGN 64 000 (USD 177). If affordable housing targets this segment of the population, the constraint is immediately apparent.
The same data source that is used to determine incomes (proxied by consumption expenditure) can shed light on the percentage of income that households allocate to housing. The standard assumption is that households can allocate 30% of income to housing. The source of this rule of thumb is somewhat mysterious but it appears to have originated in the USA in the 1960’s or possibly the 1930’s, which should immediately sound alarm bells for anyone working in Africa in the 2020’s. Available data for the three countries under review indicates that very few households allocate 30% of expenditure to housing. This is particularly the case for B40 households that allocate a significant share of expenditure to food. The chart below provides a breakdown of expenditure by income group for renter households in urban areas in Kenya. We use renter households to avoid the tricky problem of imputing rentals for owner occupiers.
Figure 4: Urban renter monthly household expenditure breakdown (Kenya)
This chart warrants its own blog, but absent that, transport costs are worthy of comment. Housing and transport are inversely related; housing costs can be lower in peripheral areas where land values are low, but the downside is higher costs of, and time spent on, transport. Taken together, housing and transport account for around 20% of total expenditure except in higher income segments where the purchase of vehicles pushes up transport costs significantly. The data sends a clear message: 30% on housing is optimistic. A more realistic assumption would be that lower earning households can allocate 15% of expenditure to housing.
And now to the tricky question of finance that supports the housing purchase. In most countries on the continent, mortgage markets are nascent and serve only higher earning, already well-housed segments of the population. For instance, in Kenya, a country with just under five million urban households, there are 26 723 outstanding residential mortgages in the country. Likewise in Nigeria where there are 16.4 million households, there are 32 260 outstanding residential mortgages (CAHF Yearbook 2022).
That said, we will assume that households can access mortgages at prevailing interest rates. These are often high – 22% in Uganda compared to 11% in Kenya and 11.5% in Nigeria – and do not weigh in in favour of affordability.
The table below brings all these assumptions together to determine the minimum income required to afford a USD 10 000 mortgage.
Table 1: Mortgage assumptions
We can overlay this income on our pyramids. Lo and behold, in the three countries under review, only the highest earning 18% of urban households in Kenya can afford a mortgage of USD 10 000. The corresponding percentages in Uganda and Nigeria are 3% and 1% respectively.
Figure 5: Affordability of a USD 10,000 housing unit
It is just as well that the supply of affordable housing is so constrained as demand is even more so. Arguably, worse than no affordable houses would be ghost developments with no households.
The gaping chasm between what the formal, developer-led housing sub-market can deliver and what lower earning (or Bottom 40) or even middle-income households can afford is unlikely to be closed by optimising supply.
Even if we were to reduce the spec and bring in new materials and technologies, we would not come close to creating housing that is affordable to newly urbanising, relatively unskilled workers who seek opportunities in African cities.
Admittedly, this is a bit disheartening for affordable housing practitioners, particularly those who focus on increasing affordable, developer-led, mortgage financed housing for the B40. But all is not lost; endeavours to create more formally developed, albeit totally unaffordable housing, have valuable spin-offs. Better functioning supply chains and deeper capital markets will provide a solid foundation and an aspirational vision for the future.
However, this should not come at the cost of laying other critical foundations now. Beautiful, planned developments might signal prosperity but they serve high-earning, well-housed segments of the market. They are also often heavily subsidised – absorbing scarce resources better directed at infrastructure. That is a great pity.
Note: Cover image by Sébastien Thibault