A solution or a grasp at straws? Assessing the Feasibility of the Proposed National Housing Development Fund

  • 15 May 2023
  • 6 Mins Read
  • 〜 by Brian Otieno

As per the last census, conducted in 2019, the total population of Kenya was 47,564 million people. 31% of this total population resides and lives in cities and urban areas, with most of the country’s population still residing in rural settings. Despite that being the case, the projection is that the country’s trend of increased urbanisation is bound to continue further, with indicators that by 2050, 50% of the country’s population is likely to be living in urban areas.

In the face of the ever-stretching population, the demand for housing also increases. As of 2022, the demand for housing, according to Habitat Kenya, stood at 250,000 houses per annum. Comparing this with the current supply of about 50,000, the implication is that the country has an 80% annual housing deficit.

The overall picture is that the housing supply in Kenya is largely dominated by private market providers on both large and small scales and individual house owners. The main challenge to the country’s housing production and development has always been the high costs of construction as well as the high costs of land, especially land classified as that for development. It is important to point out that the entire process of acquiring permits to aid construction in itself is a tedious one, and is approximated to take about 159 days and costs 2.8% of the property value.

Moreover, the incentives around the Affordable Housing Programme (AHP) have fallen short. Despite the allocation of Kshs. 27.7 billion to the programme in FY 2022/2023, it fell short of delivering the intended 500,000 units, with less than 10% of the intended units delivered in 2022.

The housing issue draws back to the colonial period when the Colonial Government of Kenya, in 1953, created a Central Housing Board vide the Housing Ordinance. The Board served as the medium through which the colonial government could promote and support the development of houses for Africans. Later, in 1959, the Board expanded its scope to cater for Europeans and Asians as well. Moreover, where local authorities were unable or unwilling to develop dwellings, the Board stepped in in 1965.

Consequently, through an amendment in the same year, there was an amendment to the Housing Ordinance of 1953 which saw the establishment of the National Housing Corporation (NHC) to replace the Central Housing Board. The Corporation picked up on the functions of the Board and even got an expanded mandate to promote low-cost houses, stimulate the building industry and encourage and assist housing research. It then became the primary agency through which the government coordinated and furthered the national Housing agenda.

Kenya made its first attempt at a national housing policy after an investigation by the United Nations made recommendations on how to improve the nation’s social and economic development. There was a conviction on the part of the government that housing remains an economic growth driver. If properly handled, it would greatly contribute to the nation’s economic and social development and its effects have a bearing on the morale and stability of Kenya. As a result, the first policy on housing in the country, the Urban and Rural Housing Policy was formulated in the early 90s. The policy was premised on the pillars of Finance for Housing, Administrative Organisation, Housing Programme and Research and Education.

Fast forward, and as a result of the increased population growth putting pressure on the available resources, there was a need to review the approach to housing. Building on the recommendations of the UN again, the government revised the policy naming it the National Housing Policy through Sessional Paper No. 3 of 2004. The government was of the view that there was a need to have a national body to prosecute the national housing policy. The aim of the review was to find a way to address the deteriorating housing standards and conditions countrywide and help bridge the shortfall of housing stocks in the face of ever-rising demand, more so in urban areas.

This policy also informed the passage of the Housing Act in 1990. The object of this law was to provide for loans and grants of public monies for the construction of dwellings and establish a housing fund and a housing board for these purposes and for such connected purposes. One key establishment of the Act was the National Housing Corporation (NHC) which was established as a body corporate tasked to oversee the administration of the Housing Fund and offer policy direction in finding solutions to the housing issue in the country.

Over time, there were more issues that needed to be addressed in the housing sector. This was a revelation by the Economic Recovery Strategy for Wealth and Employment creation launched by the government in June 2003. The aim of this initiative was to introduce a National Housing Policy that comprehensively addressed the shelter problem, including informal settlements. The Policy targeted and highlighted urban housing, rural housing, slum upgrading and vulnerable groups; and proposed solutions, which include poverty alleviation. This informed the revision of the Housing Act, Cap 117 in 2012.

As evinced above, the country has made numerous attempts at addressing the housing problem. The efforts have come in the form of policy, legislative, and institutional frameworks. And now, the Finance Bill 2023 seeks to stretch it further and create a fiscal approach to finding a solution to this problem.

In one of its proposals that has elicited varied reactions, the recently published Finance Bill, 2023 makes the proposal of a mandatory National Housing Development Fund under the Employment Act, 2007. In this proposal, the Finance Bill seeks to introduce mandatory contributions to be shouldered by both the employer and employee to a kitty under the National Housing Development Fund at a rate of 3% of the employees’ basic salary provided that the sum of the employer and employee contributions do not exceed five thousand shillings a month.

The upshot of this proposal is that the monies raised by the fund will be used to finance the purchase of a home for those who qualify for the affordable housing scheme and for those not eligible may after seven years, or upon attaining retirement age whichever is earlier transfer the contributions to a pension scheme, their staff or dependent children or receive in cash. Moreover, the contributions paid in cash shall be factored as taxable income and will be taxed at prevailing rates.

How feasible is this proposal? Is it a durable solution to the housing problem in the country, or is it another grasp at straws in the journey towards a solution to the existential housing problem in the country? The nobility of the idea cannot be faulted, but it does not fully address the problem. The housing issue is an entire cauldron riddled with numerous bottlenecks and not entirely a financing problem.

Fundamentally, the idea that the performance of a public sector can be improved or remedied from a financial perspective, either in the form of new or increased allocations is demonstrably false. The unending circuses at the National Hospital Insurance Fund (NHIF) have proven this beyond any flailing doubt.  From a historical perspective, Kenyans from all walks of life will definitely cringe at the idea of a national fund. Kenya has attempted a similar approach with the NHIF and the National Social Security Fund (NSSF). Despite the glitz and glamour during their inception, as well as the nobility in these ideas, their impact is yet to be felt by the common man.

The housing issue is an evolving and dynamic problem which must not be approached from one angle only. It mirrors both the aspects of demand and supply, accessibility, affordability and comfortability. Population is bound to increase and other market factors will affect the cost of construction, but the government needs to take the most radical steps to protect one of the basic needs of human life-shelter.

As a result of rapid urbanisation coupled with unsound urban planning schemes, the housing deficit is bound to spike. Not unless a holistic approach is taken towards a solution, house ownership remains a pipedream for many Kenyans.  Core among the factors that contribute to the housing problem includes unaffordable housing finance, prohibitive urban land costs, insecurity of tenure, and high costs of construction.

Now that the conversation is hot, the government needs to take seize of the situation and borrow from the approach in the Kingdom of Netherlands as below:

(a)Classification of rental dwellings: The Netherlands has in place an elaborate points system that ranks properties according to their market value alongside other characteristics like size, amenities or energy efficiency.

(b)Rent controls premised on parameters that support access to all persons regardless of earnings. This is also subject to periodic review and modification based on the distortion of prices brought about by market factors;

(c)Generous tax subsidies and borrower-friendly mortgage market characteristics favour owner-occupied dwellings. Although the taxation of owner-occupied housing has been tightened in recent years, its tax status remains favourable. Housing continues to be subject to taxation in Box 1 of the Dutch Income Tax Code where taxes paid on a comparatively low level of imputed rent are more than compensated for by tax expenses claimed for mortgage interest, leaving housing (wealth) much more advantageously taxed than other forms of savings or investment that are subject to taxation in Box 3 of the Code.

(d)Sound engagement channels between the government and housing associations to continuously review the housing agenda and build on ways of improving the sector.