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Finance of local housing low by regional standards

Finance of local housing low by regional standards
ON THE DECLINE: House financing is low

The Financial Stability Report has found the size of housing finance, as estimated by mortgages, to be substantially lower than regional standards.

By September this year, residential real estate sector mortgage loans stood at P14.2 billion, an increase of 1.8 percent from the P13.9 billion recorded in the same period last year.

However, the report states that as a ratio of household credit, mortgage loans constituted 30.2 percent of total loans, compared to 32.0 percent in September 2019.

The recently released development report, compiled by the Bank of Botswana (BoB), suggests housing finance is not proportionate with the needed development to fill the apparent need for housing, as well as the financing gap.

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Putting this into perspective, the report notes, “Thus, the size of housing finance, as estimated by mortgages, is low by regional standards, for example in Namibia, where the ratio was 66 percent in April 2020.”

It is thought the stagnant local ratios are reflective of the restrained growth in incomes relative to the increase in residential house prices over the years.

Mortgage lending is, however, expected to rise in the medium term with the amendments of Deeds Registry and Tribal Land Acts in 2017 as well as the introduction of sectoral deeds.

These developments, according to the Financial Stability Report, are expected to facilitate the acquisition of mortgage loans countrywide and transferability of property rights in tribal land areas.

Meanwhile, credit risk in the mortgage sub-sector is said to be low, with commercial banks maintaining a Loan-to-Value (LTV) ratio ranging between 45 percent and 85 percent.

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The low-to-medium LTV ratios are said to limit the exposure of banks to a mortgage credit default.

The report says trends and developments in the property market are important to financial stability as they reflect the public’s perception of the state of the economy.

In addition, it is reported that the banking sector may have large exposures to this sector that could be affected by movement in house prices.

Most importantly, it is stated that real estate assets represent household and private sector wealth, which often serves as collateral for bank loans.

Credit to the commercial real estate sector grew, on average, by 22.7 percent over the five-year period from September 2015 to September 2020 according to the latest report.

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However, it is noted that the proportion of commercial real estate loans to total loans has remained relatively low over the years, averaging 7 percent between 2015 and 2020.

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