Housing delivery system in most of developing countries is an integration of various interrelated components which comprises land, building materials, infrastructure, building policies and regulations and the most crucial component is finance. Finance component in housing delivery is very important due to the fact that it cause huge financial requirement for housing production. Residential housing as a shelter is one of the Universal Recognized basic Needs (Mushoga 1986:1). It protects people from element of nature like rainfall, Cold, Wind, Sun rays, Wild animals, and others. Provision shelter enables people to engage themselves in various activities with a sense of comfort, security and privacy, enjoyment and confidence. Also according to the Human Right Declaration of 1948 housing is declared as a basic right; “That everyone has a right to a standard of living adequate for the health and wellbeing of himself and his family, including food, clothing, housing and medical care, necessary social services and the right to security in the event of unemployment, sickness, disability, widowhood, old age or other lack of livelihood in circumstances beyond his control. This is stated in article 25.1 of the Universal Declaration of Human Rights, 1948” (Kraus, 1999:1). Following this declaration, the priority accorded the issue of housing is immense to most of the governments and availability of sufficient but basic housing for all is stated as priority for the enhancement and development of social needs of the society. For instance the constitution of South Africa, 1996, lays a new foundation for housing in South Africa where housing is a fundamental human right embodied in section 26 of the constitution denotes that every citizen of the country has a right to access to adequate housing. (Moss, 2000:1).
Housing investment can be considered as capital investment in the economic point of view, it generates stream of services over a considerable period of time and has a positive effect on social welfare, capital formation, income creation, external and domestic price levels.
Housing development process is a long term undertaking project which requires huge sum of money. Based on the long term nature of commitment and huge sums of money involved, risk takers have traditionally been institutions rather than individuals. Therefore without financial backing developers are unable to transform their dreams of owning house become just a night mere. Thus, the first important question in real estate development is concerned with how to undertake the financial arrangement for carrying out the project.
Critical evaluation of the factors that influence financing for housing in the country could lead to the formulation of models that if well assimilated into the existing financial system could yield effective and efficient results.
1.1.1. Case Study; Tanzania
This study focuses on Tanzania as a developing country, where the development of its built environment has been described as vibrant. The research will aim at urban area. Real estate establishment takes place in all parts of the country and this research will attempt to find out whether the factors that affect housing finance in Tanzania are uniform are uniform or vary with that in another part.
Tanzania offers both a micro and macro-economic platform enabling critical evaluation of all factors available in both economic environments. The micro-economic environment attempts to find out the attitude of individual households in the demand and supply of housing finance. The impact on the country’s money market due to macroeconomic shocks for instance volatility of interest rates consequent to inflation, unemployment rate and employment rate among other factors.
1.2. Statement of the Problem
In the line with the government’s efforts in achieving vision 2025 and the overall development of the economy which famously stipulated by the statement “Tanzania Industrial Economy” (Tanania ya Uchumi wa Viwanda), provision of housing is essential with an acute shortage of 200000 units annually and the increasing population, a housing problem arises and as a result consequently, it creates social and economic problems. Housing here is not the only problem but adequate housing that can allow the comfortability of mankind. The most importance attached to housing is the problems by government resulted from lack of proper housing policy and regulations in previous years. The Deputy Minister for Lands, Housing and Human Settlement Development, Ms Angelina Mabula, said that “the government is looking forward to establish an authority that will oversee and regulate all operations in the real estate sector, after the enactment of the Real Estate Development Act. Also the government is in the process of establishing a law that aims at regulating the sector in a fair and professional manner (www.tanzaniainvest.com)
Lack of finance has been caused by the intermittent sources of income and low income from the informal employment. (UN-Habitat, 2003) puts forward that the informal sector which provides for the bulk of employment to the low income earners, has not been generating regular and enough income to undertake the expensive housing construction and improvement. As a result those low income earners need to save for many years if they ever dreams to live in an adequate house.
Fallis (1994) noted that that housing problem might be focused on the causes, for instance, the housing problem may be described as being caused by underdevelopment of mortgage market which leads to loss of simple rental housing. There were various reasons deducted as causes of housing problems, the most important reason has been the variation between the price of habitable and decent accommodation and the individuals who can afford it. In the long run, market forces and government intervention determine the specific size of each housing tenures (Warnock and Warnock, 2008).
There exist a large gap between the demand and supply of housing finance. It needs critical analysis and clear understanding of the money market and the current financial in the country for effective housing finance and house delivery. The construction or purchase of housing in many countries is inhibited because individuals cannot borrow the funds. The available loans are channeled to high and middle income earners. The problem is how to avail the loanable funds to the low income earners? Finding the reasonable measures address this problem and followed by implementation of will provide for adequate affordable housing for the low income earners.
Lack of finance has been caused by the intermittent sources of income and how the low income from the informal employment; (UN-Habitat, 2003) puts forward that the informal sector which provide for the bulk employment to the low income group has not been generating regular and adequate income to accommodate the expensive housing construction and improvement. As a result to this, those in low income group are required to save for many years in case they want to realize a dream of living in an adequate and comfortable house.
In addition to those problems, another problem is how to avail loanable funds to the low income earners who do not have collaterals to act as security and risk bursting the real estate bubbles? Can the available financial models allow it? If so, how to do we avoid a scenario like that happened in U.S.A in 2007; too much borrowing and assumptions that the prices of houses would only go up led to the mortgage crisis. According to (Baker, 2010) before the mortgage crisis, banks offered easy access to money that one could qualify for mortgage with little or no documentation.
Considering the critical analysis and evaluation of the factors that influence financing for housing in the developing country’s could lead to the formulation of models that if well assimilated into the existing financial system could yield effective and efficient outputs
1.3 Research Objectives
1.3.1 The main objective
The main objective of this study is to investigate factors that influence the development of property in Tanzania, Particularly in Dar es Salaam City.
1.3.2 Specific Objectives
Apart from the main objective of this research proposal, the following may be considered as some of the specific objectives of the study.
To establish whether interest rate level influence performance of mortgage financing among financial institutions and commercial banks in Dar es Salaam, Tanzania;
To analyze to what extent that income of the borrowers influence performance of mortgage financing among financial institutions and commercial banks in Dar es Salaam, Tanzania;
To analyze the extent to which mortgage valuation cost influences the performance of mortgage financing among financial institutions and commercial banks in Dar es Salaam, Tanzania;
To view the legal system regarding mortgage financing in Tanzania
1.4 Research Questions
(i) What are the main factors that influence the supply and demand for loanable funds for real estate development in Tanzania?
(ii) What causes most of financial institutions and commercial banks in the country not to engage in mortgage financing?
(iii) What is the impact of Socio-economic and financial factor and government policies in housing development or real estate investment?
(iv) To identify direct and indirect sources of housing finance for households and what strategies can avail the funds to low income households?
1.5 Significance of the Study
The findings on the study will be useful to the stakeholders and various players in the real estate sector. It will find out that the availability of housing is not determined only by the interplay of demand and supply but also other factors such as financial factors, socio-economic factors, and the government policies and regulations. The study will help individual in decision making processes and assessing various ventures that can avail funds for property investment and development.
Knowledge of the factors that significantly influence Tanzanian investment real property demand could help the government, land, housing and settlement sector and other associated sectors and policy makers in planning growth strategies, which will promote standard of living among Tanzanian in the country.
Furthermore, the study is expected to contribute to the body of knowledge on the determinants of housing demand in the countries. In addition the study will provide a future base for more in-depth studies on housing demand and delivery in Tanzania.
2 Theoretical Literature Review
The literature on finance reveals that there are only two types of finance available which are debt and equity finance. Using either as a source of financing a project either depends on the characteristics of assets being financed and transaction cost. Reasoning suggests the use of debt to finance re-deployable assets and equity used to finance non re-deployable assets (Williamson, 1988). Debts are used if the ability to exploit potentially profitable investment opportunities is limited by the resources of the owner (Jensen and Meckling, 1976). Bank lending as a form of debt can be categorized into two: Either as asset specific or corporate loans. Again, the debt can be either secured or unsecured. Debt finance can be obtained from formal financial institutions like banks, micro-finance arrangements, indigenous moneylenders, family members, employers and government.
Equity finance gives the household total control over the decisions when undertaking the project if the household completely funds the project using equity. According to (Tirole, 2006) claimed that financial instruments vary widely according to the characteristic of term to maturity. Equity has no redemption date and therefore possesses an infinite term to maturity. One of the biggest problem facing financial institutions is the lack of information of the promoters and the projects to be financed to determine whether the borrower will be able to pay the principal and interest when they fall due. According to (Altman and Saunders, 1998) emphasized the selection of information on various borrowers’ details to include their character, capital, capacity and collateral.
According to the Land Act, 1999, Cap 345, section 111 (3) make reference to the mortgaged land to mean and include a mortgage right of occupancy, mortgage lease and sublease and a second or subsequent mortgage. In addition section 112 (1) state that; “An occupier of land under a right of occupancy and a lease may, by an instrument in the prescribed form, mortgage his interest in the land or part thereof to secure the payment of an existing or a future or a contingent debt or other money or money’s worth or the fulfillment of a condition”.
2.1 Mortgage Financing as a Means of Property Development
2.1.1 Mortgage Financing
Mortgage financing seems to be a solution to the housing problem in many countries. The mortgage is a debt instrument attached to fixed collaterals of specified real property that the borrower held responsible repay with a predetermined set of payments. Individuals and businesses often use mortgages in the acquisition of large estate or property without paying the entire amount upfront. It is a fixed income investment for the investor supplying the mortgage money to the borrower (Rutledge, 1997:3)
According to the Land Act, 1999, Cap 345, section 111 (3) make reference to the mortgaged land to mean and include a mortgage right of occupancy, mortgage lease and sublease and a second or subsequent mortgage. Furthermore, section. 112 (1) state that; “An occupier of land under a right of occupancy and a lease may, by an instrument in the prescribed form, mortgage his interest in the land or part thereof to secure the payment of an existing or a future or a contingent debt or other money or money’s worth or the fulfillment of a condition”.
2.2 Theoretical Concept of finance
2.2.1 Mortgage Financing
Generally investors and real estate developers commonly, they often use “leverage” or mortgage financing in addressing real estate investment. This is according to Rutledge (1997:1) in the article titled “How real estate debts affect allocation”. He defines leverage as actually the use of borrowed money in relations with acquisition and ownership of assets. In the Investment settings Rutledge (1997), “mortgage debt is normally non resource that is to say the lender may claim the estate property when the borrower’s default but may not recover other assets from the borrowers. The variables in the mortgage finance includes, Independent variables are Interest rate, Cost of processing mortgage finance.
2.2.2 Title Theory and Lien Theory of Mortgage (Models)
These are models in which financial institutions used to deal with mortgage financing, since the mortgage is said to hold a title interest on the property mortgage. The lien model gives the mortgagee a lien interest in the property. In the title theory banks, the mortgage is treated as transferred title to the mortgagee, subject to the mortgagee’s duty to recovery if payment is made. The title is said to remain to the mortgagee until the mortgage has satisfied and foreclosed. Although the mortgagee has the right of possession to the property, there is generally an express agreement giving the right of possession to the mortgagor. The mortgagee is said to hold the title for security purposes only. The mortgagor is given the right of possession(Buckley and Kalarickal, 2004).
In the lien theory Banks, the mortgagor retain legal and equitable title of the property but conveys an interests that the mortgagee can only foreclose upon to satisfy the obligation of the mortgagor. This is equivalent to the future interest of the property that allows the mortgagee to process a foreclosure. The interest is security interest or mortgage which forms a lien on the property, in this theory the possession of the property arises upon a default. The mortgagor has the right to use mortgagee for any interference with the right of possession (Buckley and Kalarickal, 2004).
For practical applications there is generally a little differences between a title theory and a lien theory. The core difference arising in the title theory bank is that the mortgage is given the right to possession of the property before the foreclosure is complete. The language of mortgage provides for possession right being to the mortgagor up to the time of the foreclosure.
2.3 The Housing Overview
This study focuses on the problems of real estate development in Tanzania. Therefore looking at the issues escalating mortgage financing it will better to have a general overview on housing delivery. Various authors have defined the word housing differently. Jorgensen (1977:12) in his book “Housing Finance for the Low Income Groups” define housing as the process and product of creating shelters for humans. He further writes, “In official terminology a house is not house unless it is approved under the existing laws”. However, in this case we will deal with both formal (Legal) and informal (illegal) housing.
According to Stafford (1978:25) in his study on, “The Economics of Housing Policy”, he defines, “Housing is durable and good producing both necessary and luxury flows of consumption services as well as representing a capital asset to its owner”. Implies that it is consumption as well as an investment,
Previously, housing sector in different countries was owned by governments and it was the government responsibility for providing housing to their citizens. However the situation has changed governments are no long housing providers. Governments now play the role of creating favorable and conducive environment for the private sector to invest in housing delivery. According to the 1993 World Bank policy paper gives the roles that governments have to play in the provision of housing. It states “The role of the government in the provision of housing is to remove imperfections in the market and to ensure its smooth operation. The idea that housing needs can be met through subsidies is untenable. Governments should create conditions whereby households are able to house themselves, without direct government as a producer or subside”.
However, Jorgensen (1982) has criticized the government intervention, he writes, “Government intervention has been a productive because scarce resources have been directed to meet many demands of few instead of demands of many”
Governments were advised to throughout the earlier roles as housing producers and instead adopt role of housing sector as a whole and enhance Makoba (2000) in his thesis titled “Financing Mechanism for Home Ownership: A proposal for Tanzania “Suggests for the government to provide enabling environment to housing financing, land for housing, availability and prices of building materials and all items related to housing provision like building regulations etc.
2.4 Present Housing Situation in Tanzania
It is undoubted the shortage of houses is annually increasing at acute rate in Tanzania. Immediately after independence in 1961 Tanzanian government came up with the strategy of housing provision, eradication of illiteracy, hunger, poverty and diseases would be a cornerstone of her domestic policy (Kraus 1999:17). For clear understanding of the housing situation in Tanzania it will be good to know who are living in those houses particularly the characteristics of the population and households. The importance attached in the housing problems by different government have resulted has been boosted by the country’s efforts to develop its mortgage markets, with the introduction of the Tanzania Mortgage Refinance Company in 2010 under the Central Bank’s Housing Finance Programme which can either be institutional, comprehensive, residential or social in nature. There were various reasons deducted as the causes of housing problems but the most important reason has been the variation between the price of habitable and decent accommodation and the number of individuals who can afford it.
2.4.1 Population Growth and Urbanization
Tanzania experienced impressive GDP growth rates over the past decade averaging almost 7% per year, with at least 31.6 percent of the country’s 53.47 million people live in urban areas with population growth rate of 3% and an urbanization rate of 5.5% per annum. The strong and sustained economic growth, coupled with fast growing population (expected to more than double by 2050) have greatly contributed to the acute growing housing sector demand. The acute housing demand has also been boosted by the country’s efforts to develop it mortgage markets, with the introduction of the “Tanzania Mortgage Refinance Company” in 2010 under the Central Bank’s Housing Finance Programme. This has had immediate, tangible impact of the number of mortgage lenders in the market to increase from 3 in 2009 to 28 by June 2016 and the average mortgage interest rate falling from 22% to 16%, Housing Finance in Africa Yearbook 2016(7th Edition) (Africa, 2012).
2.4.2 Economic Characteristics of Households
Obviously, the households’ income backed his capability to repay and thus to borrow. When the amount the borrower is willing to devote annually in repaying the loan is computed in terms of percentage of his/her income. Thereafter, it is possible to express the capital sum as multiple of borrowers’s annual income for a given interest rate and loan term (Makoba, 2000:34)
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