the effects of mortgage funding sources on housing ...

Supreme Journal of Business Management SUPREME JOURNALS

ISSN 2617-7730 (ONLINE) https://supremejournals.com VOL 1 ISSUE 2 2018 PP. 19-33

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https://supremejournals.com

THE EFFECTS OF MORTGAGE FUNDING SOURCES ON HOUSING

AFFORDABILITY AMONG THE LOW INCOME EARNERS IN KENYA

1Dr Patrick Kibati and 2Dr Irene Wambui Kibati 1Kabarak University, Kenya, [email protected]

2Nyandarua Institute of Science and Technology, Kenya, [email protected]

ABSTRACT Kenya has a housing shortage of approximately 156,000 housing units annually. The houses

offered for sale are too expensive for the affordability of low income earners in the country. This

has contributed to shortage of housing. Due to this shortage of housing, Kenya is facing an

increasing growth of informal settlements in her urban centers. Of the country’s total population

that lives in urban areas, a large proportion is confined in informal settlements. This research was

intended to assess the effect of mortgage funding sources on housing affordability among low

income earners. Analytical research design was used in the study. The target population was

300.The sample size was 249.Stratified random sampling method was used. Primary data was

used and questionnaires were used to collect the data. The questionnaires were pretested before

launching the main study. Drop and pick method was used. The data was processed using

various processes which included; validation, sorting, summarization and aggregation. The data

collected was analyzed using inferential statistics and descriptive statistics using the IBM SPSS

Statistics 20.0.1(March, 2012).The descriptive statistics that were used was the frequencies and

mean. The inferential statistics involved the use of Pearson’s correlation and regression analysis.

The study established that there exists a significant positive relationship between the effect of

mortgage funding sources and housing affordability among the low income earners in Kenya.

Key Words: Mortgage Funding Sources, Housing Affordability, Low Income Earners

Date of Submission: 05-10-2018 Date of acceptance: 25-10-2018

1. INTRODUCTION

Background of the Study

Kenya has a housing shortage of approximately 156,000 housing units annually. Due to this

shortage of housing, Kenya is facing an increasing growth of informal settlements in her urban

centers. Of the country’s total population that lives in urban areas, a large proportion is confined

in informal settlements. The effects of sources of mortgage funds on housing affordability has

been acknowledged in Australia where up until the 1990s the banks, and to some extent building

societies and credit unions, were the main source of mortgage finance in the country (Berry,

2010). Being authorized and regulated deposit-taking institutions (ADIs) meant they were able to

source their funds for lending purposes through their customer deposits. A review of the

financial system in the early 1980s resulted in a sweeping away of regulations which resulted in

among other things introduction of securitization which increased the sources of funds for the

Australian mortgage market. This led to a growth in lending and outside investors became a

mailto:[email protected]



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major source of funding for Australia mortgage market. This led to a reduction of interest rates

(Tomlinson, 2012).

Statement of the Problem

The housing affordability problem in Kenya for the low income earner is twofold. The houses

built are too expensive for their affordability with the average mortgage loan of Ksh. 6.2 M in

2012 and two, the mortgage payment rates are too high for their affordability. Recent statistics

released by the World Bank (World Bank, 2011) estimates that approximately 92% of Kenya’s

urban population is incapable of affording a mortgage loan while rural incomes are too low to

even consider. That is equivalent to about 96% to 97% of the total population of Kenya. This is

in agreement with the Hass Property Index which indicated that 62% of the stock of new houses

which were built in the country in 2011 and 64% of the stock of new houses which were built in

the country in 2012 were unaffordable by the mortgage borrowers. This unaffordability of houses

and high interest on mortgage loans is happening when the country has an annual deficit of

156,000 housing units (World Bank, 2011).

In an attempt to address the housing deficit, the Kenyan government increased the proportion of

core capital that commercial banks can invest in mortgage loans to 70% up from 25%. However

the commercial banks’ lending to the mortgage sector is currently far below this provision with

the commercial banks having lent only 26.9% of their core capital to the sector in 2011 and

30.2% in 2012 (World Bank, 2011). This can be explained by the unaffordability of mortgage

loans to Kenyans as 96% to 97% of the total population of Kenya cannot afford mortgage loans.

Due to this shortage of housing, Kenya is facing an increasing growth of informal settlements in

her urban centers (UN-Habitat, 2009). Of Kenya’s total population that lives in urban areas,

more than 71% is confined in informal settlements (UN Habitat, 2009). Kenya’s annual informal

settlements growth rate of 5%, is the highest in the world and it is likely to double in the next 30

years if positive intervention measures are not put in place (UNDP, 2007).

Researchers have expressed concern about the orientation in housing affordability policy towards

demand-side rather than supply-side measures (Katz, Turner, Brown, Cunningham & Sawyer,

2003; Pomeroy, 2004). Reflecting on housing affordability policy in Canada, Pomeroy (2004)

concludes that although there is merit in providing income assistance to private tenants, ‘tackling

the demand side of the equation alone would not address the lack of new supply that is the cause

of rising rents and worsening affordability’, and that used in isolation this measure could

potentially lead to cost inflation. Therefore, the main purpose of this study is to evaluate the

effects of supply determinants on housing affordability among the low income earners in Kenya.

Research Objective To analyze the effects of mortgage funding sources on housing affordability among the low

income earners in Kenya

Hypothesis H01: There is no relationship between effects of mortgage funding sources and housing

affordability among the low income earners in Kenya



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2. LITERATURE REVIEW

Theoretical Review

Shiftability Theory

The shiftability theory of liquidity was developed by Harold Moulton in 1915.The theory holds

that banks could most effectively protect themselves against massive deposit withdrawals by

holding as a form of liquidity reserve, credit instruments for which there existed a ready

secondary market. This theory posits that a bank’s liquidity is maintained if it holds assets that

could be shifted or sold to other lenders or investors for cash. This point of view contends that a

bank’s liquidity could be enhanced if it always has assets to sell and provided the Central Bank

and the discount market stands ready to purchase the asset offered for discount. Thus this theory

recognizes and contends that shiftability, marketability or transferability of a bank's assets is a

basis for ensuring liquidity. Included in this liquidity reserve are commercial paper, prime

bankers’ acceptances and Treasury bills. Under normal conditions all these instruments meet the

tests of marketability because of their short terms to maturity and capital certainty. In the context

of mortgage lending this theory explains why commercial banks depending on customers’

deposits may face limitations on the amount of mortgage loans they can offer to the borrowers

due to the illiquid nature of mortgage loans.

Empirical Review

The traditional banking business has been to make long-term loans and fund them by issuing

short dated deposits, a process that is commonly described as “borrowing short and lending

long.”Ojo (1999), in a study on ‘roles and failure of financial intermediation by banks in Nigeria’

revealed that, “commercial banks can lend on medium and short term basis without necessarily

jeopardizing their liquidity. If they must contribute meaningfully to the economic development,

the maturity pattern of their loans should be on a long term nature rather than of short term

period”. However, Oloyede (1999) in his work titled ‘principles of money and banking’ claimed

that “it is generally acknowledged that commercial banking by its nature is highly prone to

volatility and fragility – whether arising from exogenous shocks or endogenous policy measures.

Favero, Francesco and Flabbi (1999) uses individual bank balance sheet data to investigate the

response of banks in France, Germany, Italy and Spain to monetary tightening during 1992.They

find no evidence of the bank lending channel in any country although they do find that banks in

different countries respond in different ways to protect the supply of loans from the liquidity

squeeze. Small banks in Germany, Italy and (to a lesser extent) Spain maintain (or even increase)

loan supply by raising new deposits, whereas banks in France use their excess capital to maintain

lending levels.

One important trend that has been emerging in the banking sector is the increased reliance by

banks on non-core deposits as their main source of funding (Feldman & Schmidt, 2001; Gatev &

Philip, 2006). These wholesale funds are typically raised on short-term rollover basis. While

wholesale market funding offers more flexibility for banks in financing projects it increases their

vulnerability to market-wide liquidity shocks. This simply is a result of wholesale financiers

being uninsured creditors, and thus, more at risk of realizing losses.



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In comparison, retail deposits are a more stable source of funding as shown in Gatev and Philip

(2006).For banks about to exhaust their core lending capacity, ongoing mortgage lending may

require the payment of an external finance premium. Deposits are limited, which means that

banks may have to switch from insured deposits to managed liabilities if they want to continue

funding new mortgages (Jayaratne & Morgan, 2000).For these banks, shifting from insured retail

deposits to managed liabilities creates an external finance premium. Therefore, when banks that

lend in subprime communities need to switch from insured retail deposits to managed liabilities,

their cost of funding can quickly increase (Passmore, Lamont & Diana, 2010).

Conceptual Framework Kombo and Tromp (2006), have defined a conceptual framework as a set of broad ideas and

principles taken from relevant fields of enquiry and used to structure a subsequent presentation.

Independent Variable Dependent Variable

Figure 2.1: Conceptual Framework

3. METHODOLOGY

Research Design

In this study, analytical research design was adopted. Analytical research was chosen because it

is normally used when there is already a hypothesis as to why something is happening. Questions

and tests are designed to support that hypotheses, and prove if it is correct or not. The purpose of

analytical research is to explain or answer the question of why something occurs. The target

population in the study are the entities that influence the supply of low cost housing which are

the Ministry of Lands, Housing and Urban Development, the Ministry of Finance, Central Bank

and CMA, the Ministry of Lands, Housing and Urban Development of the Nairobi County

Government and Commercial Banks, Microfinance Organizations, Housing Cooperatives, and

National HC. Housing Corporation.

Target Population

The population was 300 respondents. Stratified random sampling was used. Strata’s were formed

based on the characteristics of the population, then simple random sampling was used to select

respondents in each strata.

Effects of Mortgage Funding

Sources

Depending on long term

sources of capital by

mortgage lenders

Housing Affordability

Lowering prices of houses for low income

earners/ Low house values for low income

earners

Increase in the number of housing units for

low income housing

Increase in those capable of qualifying for a

mortgage loan

Increase in the number of people able to

spend less than 30 % of their income on

housing



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Sampling Technique

Stratified random sampling was used. Strata’s were formed based on the characteristics of the

population, then simple random sampling was used to select respondents in each strata.

Stratified random sampling is a useful method when the population is heterogeneous and it is

possible to establish strata which are reasonably homogeneous (Kothari, 2004).

Sample Size

To select the appropriate sample size, the study used the Godden (2004) formula. The Godden

(2004) formula has two steps. In step one, the sample size should be calculated using the infinite

population formula first and in step two, one should then use the sample size derived from that

calculation to calculate a sample size for a finite population.

Step 1

Sample Size - Infinite Population (where the population is greater than 50,000)

………………………………………………………………………….…………..….. 3.1

Where

SS = Sample Size

Z = Z-value (e.g., 1.96 for a 95 percent confidence level)

P = Percentage of population picking a choice, expressed as decimal

C = Confidence interval, expressed as decimal (e.g., .05 = +/- 5 percentage points)

Step 2

Sample Size – Finite Population (where the population is less than 50,000)

Pop = Population

Based on the above formulae, the researcher selected a sample of 249 respondents from the

target population of the 300.



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Pilot Test of the Questionnaire

The researcher pretested the questionnaires before launching the main study. Pretesting helped to

determine the strengths and weaknesses of the survey concerning question format, wording and

order. The researcher pretested the questionnaire among ten of the unselected population which

were picked proportionately among Commercial Banks, Microfinance Organizations, Housing

Cooperatives. The researcher also pretested the reliability and validity of the survey questions

Data Processing and Analysis

To address the research objective, the study checked whether the regression coefficient of

County Government (X1) was positive (+) and significant (p value of < .05) in line with theory

and study expectations. The relationship in the research questions was determined using the

following regression model.

Y=β0+ β1X1+ μ

Where Y, the dependent variable, is low income housing affordability, β is the regression

coefficient, β0 is the intercept- the value of Y when X values are zero and X1, is the role of

County Government while μ is the error term normally distributed about the mean of zero.

4. RESULTS, INTERPRETATIONS AND DISCUSSIONS

Using Cronbach’s Coefficient Alpha test on County Government, a coefficient of 0.756 was

found as shown on Table 4.1 below. These results corroborates findings by Sekaran (2003),

Saunders Lewis and Thornhill (2009) and Christensen, Johnson and Turner (2011) who stated

that scales of 0.7 and above, indicate satisfactory reliability.

Table 4.1: Reliability Test on Effects of Mortgage Funding Sources on housing

affordability among Low Income Earners

Description Indicator

Cronbach's Alpha 0.713

No of Items 10

Factor Analysis was carried out to describe variability among the observed variables and check

for any correlated variables with the aim of reducing data that was found redundant.

Conventionally, statements scoring more than 30% which is the minimum requirement for

inclusion of variables into the final model (Hair, Black, Babin, & Anderson, 2010; Kothari,

2004) were included. Table 4.2 indicates that all the ten statements attracted a coefficient of

more than 0.3 (30%) hence were retained for further analysis.

Findings and Discussion

The study sought to evaluate the effect of mortgage funding sources on housing affordability

among the low income earners in Kenya.



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Descriptive Statistics

Table 4.2: Factor Analysis on Effects of Mortgage Funding Sources on Housing

Affordability among Low Income Earners

Statements

Factor

Component

Lending mortgage loans funded by savings to low income earners increases

liquidity risk of the lenders 0.461

Use of real estate investment trusts should lower mortgage rate of interest 0.501

Mortgage lenders relying on deposits for house lending would lend more

to the low income earners for housing if they would receive government

guarantee on those loans

0.485

Funding housing mortgage loans from deposits causes the lenders to

demand high mortgage interest rates on the loans 0.461

Reduction of non-performing loan portfolios by mortgage lenders who

depend on deposits for house lending would increase the supply of

mortgage loans.

0.48

Securitization of mortgage loans would reduce mortgage interest rates 0.591

Total exemption of stamp duty for mortgage backed securities would

reduce mortgage interest rates 0.555

Most mortgage lenders who depend on deposits for house finance lending

demand high amounts of initial down payments 0.612

Funding mortgage loans from deposits causes the lenders to demand short

repayment periods for the loans 0.641

Raising mortgage funds from long term sources would increase the periods

for loan repayment offered to the borrowers 0.491

Regarding the statement that lending mortgage loans funded by savings to low income earners

increases liquidity risk of the lenders, a majority (65.7%) of the respondents agreed and strongly

agreed. Twenty three point seven percent of the respondents disagreed while 7.7% strongly

disagreed and 3% of the respondents were neutral. These findings are consistent with those ones

of Ituwe (1985) who in a study titled “elements of practical banking” asserted that, “a bank’s

ability to grant further advances is checked by the available cash in its vault. He argued that

customers’ drawings are paid either in cash or through bank accounts and since cheques have to

be met in cash, commercial banks, have to stock reasonable quantity of cash to meet customers’

demands”. Where a bank grants advances in excess of its cashing ability, the bank soon runs into

difficulty in meeting its customers’ cash drawings. By the mortgage lenders depending on the

deposits for lending, it limits the amount of mortgage loans they are able to advance.

The respondents were asked to indicate whether use of real estate investment trusts should lower

mortgage rate of interest. Thirty three point seven percent of the respondents strongly agreed and

another 30.8% agreed while 17.8% strongly disagreed and 14.2% disagreed with the statement.

Thirty five point five percent of the respondents agreed that mortgage lenders relying on deposits



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for house lending would lend more to the low income earners for housing if they would receive

government guarantee on those loans and another 20.1% strongly agreed.

The study findings agree with those of Chambers, Garriga and Schlagenhauf (2006) who in their

article titled “the loan structure and housing tenure decisions in an equilibrium model of

mortgage choice” notes that the previous large increase in the homeownership rate in USA

occurred after World War II and the Korean War when the government guaranteed the payments

of principal and interest so that returning war veterans did not have to make a down payment.

Relaxing this constraint was the major incentive which helped veterans become homeowners.

Regarding the statement that funding housing mortgage loans from deposits causes the lenders to

demand high mortgage interest rates on the loans, 39.1% of the respondents agreed, 16%

strongly agreed and 23.1% disagreed with the statement. Only 21.9% of the respondents were

neutral about the statement. These findings are inconsistent with previous studies done by IUHF

(2000) who in their article titled “source book, facts and figures” argued that the UK system is

funded almost exclusively through deposits to banks. The mortgage interest rate in UK is far

much lower than the mortgage interest rate in Kenya.

On the statement that reduction of non-performing loan portfolios by mortgage lenders who

depend on deposits for house lending would increase the supply of mortgage loans, 45.6%

agreed, 26.6% strongly agreed, 18.9% disagreed while 5.3% strongly disagreed and 3.6% of the

respondents were neutral. The study findings agree with earlier findings of Agung (2001) who in

his study titled “credit crunch in Indonesia in the aftermath of the crisis, facts, causes and policy

implications”, investigates the relationship between the loan supply and real lending capacity,

lending rates, real output, bank’s capital ratio, and non-performing loan. The results show that

the coefficients on NPLs are negative and significant, which indicate that bank credit supply

declines with the worsening of the NPLs problem.

The study findings also concur with those of Djiogap and Ngomsi (2012) who in their study on

“determinants of bank long-term lending behavior in the central African economic and monetary

community” assert that while provisions for loan losses are not important for determining a

bank’s propensity to lend to business, they become very important in determining a bank’s long-

term lending. Mortgage lending is normally long term and therefore a decline in the amounts of

NPLs would increase the supply of mortgage loans.

Regarding the statement that supply securitization of mortgage loans would reduce mortgage

interest rates, a majority (70.4%) of the respondents agreed, 20.1% disagreed and 4.1% strongly

disagreed. These findings are consistent with those ones of Tomlinson (2012) who in his article

titled ‘managing risk’ in the delivery of housing finance: Australia’s mortgage lenders’ asserts

that introduction of securitization increased the sources of funds for the Australian mortgage

market. It led to a growth in lending and outside investors became a major source of funding for

Australia mortgage market. This led to a reduction of interest rates.



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The study findings also agree with those of Iacobucci and Winter, 2005 who in their journal

article “Asset securitization and asymmetric information “indicate that securitization’s purpose is

to lower funding costs for the firm by separating the originator’s receivables via securitization

from its associated risks. This view is also supported by Gorton and Souleles (2005) in their

paper titled “special purpose vehicle and securitization”. On whether total exemption of stamp

duty for mortgage backed securities would reduce mortgage interest rates, 52.7% agreed, 22.5%

disagreed and 18.3% strongly disagreed

Regarding the statement that most mortgage lenders who depend on deposits for house finance

lending demand high amounts of initial down payments, 42.6% of the respondents strongly

agreed and 27.2% agreed. Similar findings were shown in a study by Kalema and Kayiira (2012)

who in their article titled “overview of the housing industry and housing finance sector in

Uganda” cites lack of sufficient long-term liabilities, owing to an undeveloped pension industry

and limited life insurance funds as one of the barriers to housing development and affordability.

They asserts that the commercial banks, which play the dominant role in housing finance, have

mostly short-term deposits and are therefore inclined to provide loans only for periods not

exceeding two years. This causes the banks to demand high amounts of initial down payments

making houses unaffordable to low income earners.

Sixty four point five percent of the respondents agreed, 31.4% disagreed and 4.1% were neutral

on the statement that funding mortgage loans from deposits causes the lenders to demand short

repayment periods for the loans. These findings are consistent with those ones of Ojo (1999),

who in a study on ‘roles and failure of financial intermediation by banks in Nigeria’ revealed

that, “commercial banks can lend on medium and short term basis without necessarily

jeopardizing their liquidity. This he argues is because the traditional banking business has been

to make long-term loans and fund them by issuing short dated deposits, a process that is

commonly described as “borrowing short and lending long.

Similar findings were shown in a study by Drummond, Chongo, and Mususa, (2013) ,who in

their article titled “scoping study: overview of the housing finance sector in Zambia” states that

limited access to long term credit also means that retail finance institutions tend to focus on short

term products such as consumer finance. Regarding the statement whether raising mortgage

funds from long term sources would increase the periods for loan repayment offered to the

borrowers, 72.8% of the respondents agreed while 21.9% disagreed and 5.3% were indifferent.

These findings corroborate those ones of Djiogap and Ngomsi (2012) who in their study titled

“determinants of bank long-term lending behavior in the Central African economic and

monetary community” asserts that bank lending decisions reveals that smaller banks with low

levels of long term funding sources, banks with higher nonperforming loans and operate

in recession environment are more averse to lend long term loans.

The study findings also agree with those of Drummond et al (2013), who in their article titled

“scoping study: overview of the housing finance sector in Zambia” states that increasing

intermediation and the direction of funds towards housing finance by improving accessibility for

commercial lenders to long-term funds is necessary to increase housing affordability. This could



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be achieved by promoting the development of secondary markets. The mean score of responses

regarding the role of mortgage funding sources on housing affordability among the low income

earners in Kenya are as follow: 27.3% strongly agreed, 37% agreed while 6.6% were neutral,

18.8% disagreed and 10.2% strongly disagreed as shown in table 4.3.

Table 4.3: Mortgage Funding Sources and Housing Affordability among Low Income

Earners

Statement

Strongly

disagree

Disagre

e

Neutr

al Agree

Strongl

y agree

Mea

n

Lending mortgage loans funded

by savings to low income

earners increases liquidity risk

of the lenders

7.7% 23.7% 3.0% 34.9% 30.8% 3.57

Use of real estate investment

trusts should lower mortgage

rate of interest

17.8% 14.2% 3.6% 30.8% 33.7% 3.49

Mortgage lenders relying on

deposits for house lending

would lend more to the low

income earners if they would

receive government guarantee

on those loans

12.4% 24.3% 7.7% 35.5% 20.1% 3.27

Funding housing mortgage

loans from deposits causes the

lenders to demand high

mortgage interest rates on the

loans

12.4% 10.7% 21.9% 39.1% 16.0% 3.36

Reduction of non-performing

loan by mortgage lenders would

increase the supply of mortgage

loans.

5.3% 18.9% 3.6% 45.6% 26.6% 3.69

Securitization of mortgage

loans would reduce mortgage

interest rates

4.1% 20.1% 5.3% 49.1% 21.3% 3.63

Total exemption of stamp duty

for mortgage backed securities

would reduce mortgage interest

rates

18.3% 22.5% 6.5% 37.3% 15.4% 3.09

Most mortgage lenders who

depend on deposits for house

finance lending demand high

amounts of initial down

payments

7.7% 17.2% 5.3% 27.2% 42.6% 3.80



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Statement

Strongly

disagree

Disagre

e

Neutr

al Agree

Strongl

y agree

Mea

n

mortgage lenders who depend

on deposits demands short

repayment periods for the loans

8.9% 22.5% 4.1% 34.9% 29.6% 3.54

Raising mortgage funds from

long term sources would

increase the periods for loan

repayment offered to the

borrowers

7.7% 14.2% 5.3% 35.5% 37.3% 3.80

Average 10.2% 18.8% 6.6% 37.0% 27.3% 3.52

The study findings agree with those of Ojo (1999), who in a study on ‘roles and failure of

financial intermediation by banks in Nigeria’ revealed that, if commercial banks must contribute

meaningfully to the economic development, the maturity pattern of their loans should be on a

long term nature rather than of short term period. This can be achieved by raising their funds

from long term sources. However, Oloyede (1999) in his work titled ‘principles of money and

banking’ claimed that “it is generally acknowledged that commercial banking by its nature is

highly prone to volatility and fragility whether arising from exogenous shocks or endogenous

policy measures.

Inferential Statistics

Pearson Correlation Coefficient between Effects of Mortgage Funding Sources and

Housing Affordability among Low Income Earners

The Pearson correlation results from this study revealed that there is a 0.627 positive correlation

between the role of mortgage funding sources and housing affordability among low income

earners as shown in Table 4.4.

Table 4.4: Pearson Correlation Coefficient between Effects of Mortgage Funding Sources

and Housing Affordability among Low Income Earners

Variable

Housing

Affordability

Mortgage Funding

Sources

Housing Affordability

Pearson

Correlation 1 0.627

Sig. (2-tailed) 0.000

Mortgage Funding

sources

Pearson

Correlation 0.627 1

Sig. (2-tailed) 0.000

Linear Regression between Effects of Mortgage Funding Sources and Housing


In this section, the research hypothesis was tested and results presented. Reference was made to

the proposed hypothesis (H01). The ordinary least square (OLS) method of estimation was



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adopted in examining the relationship between the predictors and the dependent variable. OLS

allowed for derivation of a regression line of best fit while keeping the errors at minimum.

Regression analysis was conducted to empirically determine whether mortgage funding sources

was a significant determinant of housing affordability among the low income earners. Regression

results in Table 4.5 indicate the goodness of fit for the regression between mortgage funding

sources and housing affordability was satisfactory. An R squared of 0.393 indicates that 39.3%

of the variances in the housing affordability among the low income earners are explained by the

variances in the roles played by the mortgage funding sources.

Table 4.5: Model Summary for Effects of Mortgage Funding Sources on Housing


Indicator Coefficient

R 0.627

R Squared 0.393

Std. Error of the Estimate 0.55178

The model significance is presented in Table 4.6. An F statistic of 114.42 indicated that the

model is significant. This is supported by a probability value of 0.000. The reported probability

(0.000) is less than the conventional probability of 0.05. The model applied can significantly

predict the change in the housing affordability among the low income earners in Kenya. The

study, therefore, fails to accept the null hypothesis, H01 at 95% confidence interval and concludes

that there is a significant relationship between the mortgage funding sources and housing

affordability among the low income earners in Kenya.

Table 4.6: ANOVA for Effects of Mortgage Funding Sources on Housing Affordability

among Low Income Earners

Indicator Sum of Squares df Mean Square F Sig.

Regression 34.837 1 34.837 114.42 0.000

Residual 53.89 177 0.304

Total 88.727 178

The mortgage funding sources coefficients are presented in Table 4.7. The results show that

interest rate spread contributes significantly to the model since the p-value is 0.000. This implies

that mortgage funding sources is statistically significant in explaining housing affordability

among the low income earners in Kenya.



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Table 4.7: Coefficients of Effects of Mortgage Funding Sources on Housing Affordability

among Low Income Earners

Variable Beta Std. Error t Sig.

Constant 1.586 0.195 8.126 0.000

Mortgage Funding 0.59 0.055 10.697 0.000

5. SUMMARY, CONCLUSIONS AND RECOMMENDATIONS

Summary

Results indicated that mortgage funding sources was a key determinant of housing affordability

among low income earners in Kenya. This was supported by the responses from the respondents

who indicated that lending mortgage loans funded by savings to low income earners increases

liquidity risk of the lenders, use of real estate investment trusts would lower mortgage rate of

interest, mortgage lenders relying on deposits for house lending would lend more to the low

income earners for housing if they would receive government guarantee on those loans and

funding housing mortgage loans from deposits causes the lenders to demand high mortgage

interest rates on the loans. The respondents also indicated that securitization of mortgage loans

and total exemption of stamp duty for mortgage backed securities would reduce mortgage

interest rates.

In addition most respondents also agreed that mortgage lenders who depend on deposits for

house finance lending demand high amounts of initial down payments and also demands short

repayment periods for the loans. They also indicated that raising mortgage funds from long term

sources would increase the periods for loan repayment offered to the borrowers. These findings

were also supported by the regression results that indicated that there was a strong positive and

significant relationship between mortgage funding sources and housing affordability among low

income earners. The correlation between mortgage funding sources and housing affordability

among low income earners was found to be statistically significant and positive.

Conclusions

Mortgage funding sources has a positive effect on housing affordability among low income

earners in Kenya. It can be concluded that raising mortgage funds from long term sources, use of

real estate investment trusts and securitization of mortgage loans would increase the periods for

loan repayment offered to the borrowers. It can also be concluded that mortgage lenders who

depend on deposits for house finance lending demand high amounts of initial down payments

and short repayment periods for the loans which reduces affordability of housing for low income

earners. It was also possible to conclude that there exists a positive and significant relationship

between mortgage funding sources and housing affordability among the low income earners.

Recommendations

To address the effects of mortgage funding sources, it is recommended that long term funding of

mortgage lenders be immediately addressed. This would address the constraints faced by the

mortgage lenders who normally depend on short term sources like the deposits while lending



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long term mortgage loans. To address this, greater focus should be given to lengthening the term

of deposits by introducing term savings products. Fixed deposits with a long maturity profile

should also be encouraged. The mortgage lenders should also be encouraged to tap into the

capital market for provision of long term finance. Raising funds through corporate bonds should

be encouraged among the mortgage lenders and use of real estate investment trusts should be

strengthened. It is also recommended that a mortgage liquidity facility be established as this

provides lenders with lower cost funding than they would be able to access individually.

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