iv. Financing (investment, rental, taxation)

In the financing component, laws regulate both the demand side (buyer or renter) & supply side (property developers).

Financing is required at every stage of the housing value chain. The government has made significant efforts to stimulate housing with mandatory tax and demand-side and supply-side tax incentives. However, the mandatory tax has since been quashed, and the demand-side and supply-side tax incentives have been difficult to operationalize/scale. The main reason is the difficulty in coordination between different government entities and the conflicting objectives of short-term tax collection required to meet the government budget, vs long-term economic growth, which should result in a larger tax base in the medium to longer term.

For example, changes to the Retirement Benefits Act 1997 and related regulations to allow for the transfer of pension assets into housing seek to increase the scope of resources available to households to acquire housing. It is unclear, however, whether a pensioner can use their pension savings and simultaneously take a mortgage. Further, the lump sum withdrawal incurs high taxation which disincentivizes the use of the provision. (See Figure [2]).

The launch of KMRC has also been an important step in providing long-term finance (at concessional rates in the beginning) for banks to refinance their mortgage books. However, the uptake has been low largely due to a lack of attainment of the criteria set to qualify for such support.

Several building blocks need to be in place for mortgage markets to expand including[1]:

• Working property rights and property registration systems that are reliable, transparent and low-cost;

• Well-functioning land and housing markets;

• Competitive primary mortgage markets with standard long-term mortgage products whose contracts can be enforced;

• Access to longer-term funding sources to price and manage interest risk; and,

• Insurance or reinsurance entities that can manage default risk

Each of these building blocks is supported by targeted policy and a legislative and administrative framework. As illustrated in the other components, Kenya needs to enhance its regulatory framework and smoothen the operationalization of these building blocks for mortgage markets to expand.

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[1] See Acolin, A and M Hoek Smit (2020) Cornerstone of Recovery: How housing can help emerging market economies recover from Covid-19. Prepared for Terwilliger Centre for Innovation in Shelter, October 2020 https://habitat.sv/wp-content/uploads/2017/08/Cornerstone-of-Recovery_Oct.-2020.pdf