When one considers Ghana’s housing market, one thing is clichéd; affordable housing. Both government and real estate developers purport to be delivering affordable housing. The newspaper headlines evidently show this.
Notwithstanding the affordable housing projects across the country, many people express disappointment when the prices of these so-called affordable housing units are disclosed. The disappointment demonstrates that many households have expectations different from that of the government and private developers. But what do public agencies mean when they talk about affordable housing in Ghana? In this post, you’ll learn not just about affordability but also the available opportunities — either to own or invest in affordable housing for rental income.
The Meaning of Affordable Housing
The 2015 National Housing Policy defines affordable housing using a ratio method; the ratio between total household expenditure on housing (rents, mortgage payments, etc.) and total annual income.
The ability of a household to spend up to thirty per cent (30%) of its yearly gross income on the rent or purchase price of housing where the rent or purchase price includes applicable taxes and insurances and utilities. When the annual carrying cost of a home exceeds thirty per cent (30%) of household income, then it is considered unaffordable for that household. page (v).
While this approach recognises that a household’s expenditure on housing should not compromise its ability to meet other needs such as food, health and education, it does not focus on any housing market segment. Thirty per cent of 100,000 Ghana Cedis is not comparable with 30% of 5,000 Ghana Cedis. For some families, even 100% of their annual income cannot afford them a decent shelter. From the perspective of the housing policy, however, as long a household’s housing expenditure is less than 30% of its total spending, their home is affordable. For critic of the ratio income method see Li, J. (2015). Recent trends on housing affordability research: where are we up to?. for a review.
A Snippet of the Asokore-Mampong Affordable Housing Project (Kumasi)
The project started in 2006 by the then Kuffour’s government. It aimed to help address Ghana’s growing housing deficit by providing affordable housing for low- and middle-income households. The project occupies a 50-acre parcel of land and is located within the Asokore-Mampong Municipality in the Ashanti region. It was initially expected to deliver about 1,200 housing units on completion on but suffered several years of delays. In 2015, it was handed over to the Social Security and National Insurance Trust (SSNIT) for completion.
Twumasi-Ampofo et al (2014) report that the project was started with a 30-million-dollar loan from SSNIT. In February 2020, after nearly 14 years, the project was announced completed and named after the Asantehene, Otumfuo Osei Tutu II. The resulting gated community is comprised of 91 blocks and about 1,024 housing units consisting of one-, two- and three-bedroom apartments. The gated community also has complimentary onsite infrastructure and facilities.
The prices of the units as disclosed by the Deputy Minister for Works and Housing are as follows;
- 1-Bedroom Standard – GHȻ 99,000.00
- 1-Bedroom Special – GHȻ 142,500.00
- 2-bedroom – GHȻ 182,500.00
- 3-bedroom – GHȻ 335,000.00
How Affordable is “Affordable”?
One must first recognise that banks offering mortgages with the debt to service ratios exceeding the 30% household expenditure ratio are not affordable per definition of the National Housing Policy. Any expenditure above 30% will imply that the household is housing stressed.
In determining the level of affordability of publicly provided housing units, it is imperative to use government’s benchmarks. The National Planning Guidelines recommend a maximum room occupancy of 2 adults per room or 2 adults and a child. Given that the average household size in Ghana is 4.4 according to the 2020 Population and Housing Census, a 2-bedroom is suitable for our analysis.
There are several measures of housing affordability and include house price to income ratio, rent to income ratio, repayment affordability, the residual income approach, purchase affordability, affordability index, among others. When comparing housing affordability across different markets, the often-used approach is the “median multiples.”
Using mortgage
A simple rule of thumb of determining if you can afford any particular house is to divide the price of the house by your total annual disposable income. This is known as the house price to income ratio. A result of 3 or less is generally deemed affordable to you.
The 2bedroom apartment priced at GHC 182,500, for example, will require a net annual income of at least a net 60,833.00 Ghana Cedis (or 5,069.00 cedis monthly). Whether that is achieved as an individual applicant or as a couple, that income will however, be insufficient if the house is bought using a mortgage facility without being housing stressed. At a typical interest rate of 24% per annum, a net monthly income of about 7,500.00 cedis (either alone or as a couple) is required to obtain a mortgage loan of about 185,800.00 cedis, repayable in 20 years. Monthly loan repayments over the period will be about 3,750.00 cedis.
How many Ghanaian couples make 7,500 cedis monthly?
One can see this as rents but this time you own the house. But the monthly repayments exceed the 30% threshold of the National Housing Policy. If the bank reduces the monthly repayments, the repayment period will be extended. The cost of finance is a crucial determiner of affordability. At least we say that the government’s affordable housing is affordable some households in Ghana.
Let’s also not forget that there are other fees/charges aside from interest rates.
Using the government’s public sector home scheme which has an interest of about 12% per annum, a household that uses a 100% mortgage to buy the 2bedroom apartment need to make monthly payments of about 2,009.00 cedis. This is affordable to upper-middle and high-income households. The total interest payments alone over a 20-year loan repayment period will however, amount to about 300,000 cedis. The question is whether, in 20 years, the value of the property will appreciate more than total mortgage repaid. Hard to tell! More data is required.
Should you buy Instead as an Investment Property?
Let’s see if one should consider buying one of the units and subsequently sublet for rental income.
This is probably the easiest to determine using the expected rental yield of the property. Rental yield is the total weekly rental income per year (52 weeks) divided by the value of the property and expressed as a percentage. There are 2 types of rental yield; gross and net rental yield.
How to calculate rental yield
Let’s still maintain the 182,500 Ghana Cedis as the price at which you bought the property (one can also use the current market value of the property). And assume that it will be rented out at 350 cedis per week (approx. 1,400 cedis per month).
Gross rental yield
(350*52/182,500)*100 = 10%
Gross rental yield is 10%. The higher one can rent out the property, the better.
But gross rental yield does not account for your expenses which may include;
- Maintenance/repair costs
- Legal fees
- Strata fees
- Vacancy costs
- Management fees
- Etc.
Global property guide reports that gross rental yields for apartments range from 8%-11% in Accra.
Net rental yield
Net rental yield = ((Annual rental income – annual expenses) / total property value)) *100.
Let’s assume the annual expenses are about 5,000 cedis. Your net rental income becomes 7%.
Since mortgage interest rates are significantly high, one must also consider the rate of capital appreciation of the property when buying with a mortgage for investment purposes .
In Accra, Cytonnn Investments report that capital appreciation for apartments average 7.6% per annum. But the rate ranges between 6.7%-10% for different apartment types. The sum of rental yield and capital growth rate gives a general indication of the potential financial performance of the property. In the case of Ghana, the high mortgage rates requires commensurately high capital growth and rental yields to be profitable.
Other Factors to Consider
- One should realise that in our scenario, the net rental yield is less than the current treasury bill rate of about 14% per annum. Choosing to invest in a property with lower returns and hoping to profit from capital gains when the property is subsequently sold is a personal investment decision.
- Will a negatively geared property be meaningful? If using a mortgage to buy the property, it is more financially prudent that your rental income at least matches your monthly mortgage repayments. Negative gearing means that your monthly rental income is less than the sum of your loan repayments, and the maintenance cost of the property. In simple terms, your investment property is generating losses instead of income. Negative gearing is not necessarily a bad thing. in some countries, the expenses incurred are tax deductible. One can incur losses temporally hoping to gain from long-term capital growth when the property is later sold. But negative gearing is not for everyone, the reason to talk to a professional financial adviser.
- All analyses in this post are in Ghana Cedis and will be significantly different if in USD.
- Disclaimer: Analysis are only for illustrative purposes
Who was meant to buy these Affordable Housing Units?
This is an open question, given that the mean annual household income in urban areas in Ghana is 46,902.00 Ghana Cedis, according to the GLSS 7 report. Admittedly, the use of averages in housing analysis is problematic, medians are preferred. Perhaps the houses are for civil servants. But the mean annual household income for waged families observed by the GLSS 7 survey is 12,399 Ghana Cedis. It is difficult to say if these units are the average Ghanaian family. A household that earns the size of income needed to afford these units is more likely to buy either in the private housing market or self-build than to live in apartment blocks. Indeed, private developers provide housing units at similar prices as these affordable housing units. Thus, affordable government housing may be competing with the private sector. So the question remains, who is the government actually building the affordable housing for in Ghana?
Questions? Comments? What are your thoughts about affordable housing? Do share in the comments section below.
