By Abdul Haleem
About the author: Abdul Haleem is the former CFO at National pension fund. He has extensive experience in accounting systems, controls, investments and financial reporting. He is a chartered management accountant with membership with CIMA (UK). He held the position of Head of Department of Accounting and Finance at Faculty of Management and computing of Maldives national university. After working for the banking sector, he is currently the Deputy CEO at Sollarelle Insurance. He engages in private consulting and teaching.
Residential housing is one of the most talked-about issues in the Maldives. Residential housing is a subcategory of the real-estate market; the other two important categories are commercial and industrial real estate.
The most advanced real estate market in the United States, partly because of the American government’s role in encouraging homeownership and strong institutional arrangements.
In this article, I will be looking at some of the developments that took place in United States for us to think about possible institutional arrangements that can be put in place to address potential issues with regard to our residential housing market.
All governments subsequent to the constitutional reform of 2008 made housing as an important political promise. As a consequence, several housing projects were undertaken during the last 10 years.
As of 2018, the banking sector exposure to the real estate sector (incl. construction) is MVR 6.5 billion against aggregate private sector lending of MVR 22.8 Billion, repressing 29%. The same figure stood at 14% in 2012. The growth in lending to the real-estate sector grew 28% during the period 2012 to 2018, whereas the aggregate private sector leaning grew at 8% during the same period.
The surge in banking sector lending to the real-estate sector has somewhat subdued due to uncertainty over mortgage affordability and rental prices. The relative size of the real estate sector, market uncertainly and sector concentration require forward-thinking to keep the momentum in this lucrative and important sector. Proactive policy direction is important to address the current apprehension among the market participants; suppliers, financiers and buyers.
What happened in the American real estate market in interesting. The Great Depression of 1929 leads to the first housing market crisis in America. Back then, housing finance is based on short-term (three to five years, balloon payment) instruments. During the Great Depression, many homeowners became unemployed and found it impossible to repay the large balloon payments or get their existing mortgages refinanced as the housing prices declined. This led to the first housing crisis in America. Many found it impossible to afford the then financing arrangement for homeownership.
To address the housing crisis, the United States government created an agency called the Federal Housing Administration (FHA)through the National Housing Act of 1934. Important outcomes of this reform were;
• the emergence of 15-year (30 years later on) mortgage loans which are repaid in equal instalments;
• the creation of The Federal National Mortgage Association (Fannie Mae) and The Federal Home Loan Mortgage Corporation (Freddie Mac) to provide liquidity, stability and affordability to the mortgage market. They provide liquidity (ready access to funds on reasonable terms) to the thousands of banks, savings and loans, and mortgage companies that make loans to finance housing.
The GFC 2008 again affected the US housing market. Both Fannie Mae and Freddie Mac got into difficulties and the American government intervened to prevent further panic in the global financial system and maintain trust in American institutions.
History has shown that markets fail. However, strong institutional arrangements are essential to maintain confidence and take measures on a timely basis to prevent further escalation of adverse events.
Housing being an important policy objective of the current government it is necessary to review the current institutional arrangement in order not to detail the growth of the sector and maintain confidence in our housing market.
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