Beyond Reach
August 2006 | By Rawle Lucas
The engineering and construction sector is one of the fastest growing sectors in the Guyana economy, averaging about 10 percent growth each year since 1996. This sector was responsible for a 6.2 percent contribution to gross domestic product (GDP) in 2005 and now rivals the beleaguered rice industry as one of the major contributors to the economic activity of the country. Yet, mortgage recordings have been on the decline since 1998, raising questions as to what is going on in the housing sector in Guyana. This article attempts to shed some light on this issue.
Almost everyone knows that owning a house is one of the best long-term investments that a person can make. Apart from giving individuals a place to call home and to enjoy cherished and memorable moments with friends and loved ones, home ownership helps individuals to create wealth since property tends to appreciate in value over time. That is, of course, if the land and the building on it are located in an environment that is appealing and attractive and the property can be properly maintained. To buy a house, most people borrow money in the form of a mortgage and taking a look at this area of economic activity can provide insights into the progress, if any, towards home ownership. Discussing this issue also permits us to understand the control that some of Guyana's essential and important financial institutions exert over our lives. These entities are run by women and men who live among us and who help to decide the lending and underwriting policies that can turn dreams of home ownership into reality or into seemingly unending nightmares.
Sloping Downwards
A clear picture of the mortgage situation in Guyana can be drawn from the official government publication known as the Guyana Statistical Bulletin. The Bulletin is updated quarterly and the data used herein are from the issue of the last quarter of 2005. The mortgage data discussed in this article cover the period 1990 to 2005 and provide an opportunity for us to further our understanding of the dynamics in this area of economic interest. A review of the data reveals that from 1993 to 2005, a total of 21,178 new mortgages were recorded. During the same period, 15,138 mortgages were cancelled, resulting in a net increase of 6,040 additional loans in the recorded mortgage portfolio of lenders. The new mortgages recorded can be viewed as the equivalent of 1,629 housing units coming on stream each year when measured over a 13-year period. This calculated average must be seen as a crude measure of production since the acquisition of financing does not necessarily mean completed construction.
Despite the positive number, the run rate offered by this approximate measure of annual new housing production is not nearly enough to meet housing demand as called for in the National Development Strategy (NDS). According to the NDS, "[Guyana] needs, at the minimum, the building of 5,200 housing units each year for at least the next ten years" if it is to begin to satisfy its housing requirements. During a period when the housing stock should have been growing, the mortgage recording numbers were sloping in the opposite direction. The recording of new mortgages in Guyana has been on a steady decline after peaking at 2,521 new recordings in 1998. Every year since 1998, the number of new mortgages that were registered fell and had reached 1,337 by 2004. This decline represents a near 50 percent drop in the number of recorded mortgages from the observed high of 1998.
The monetary value of the recordings also fell by 51 percent from its 1998 peak of G$8.2 billion to G$4 billion in 2004. In reflecting on these numbers, it should be borne in mind though that the data cover all the areas across Guyana and property values tend to be uneven across these markets. Geographic spread notwithstanding, the downward trend in recordings is a disheartening occurrence that suggests that the door of home ownership may only be slightly ajar, and the door knob of an affordable house still out of hand reach of many Guyanese.
Lenders' Clout
The women and men who are leaders of our financial community can help to open the doors wider if they want to do so. After all, it takes two to tango in the mortgage business, the lender and the borrower but the lenders have more clout than the borrowers. Lenders hold the purse strings and can tug them in ways that could make our emotions alternate between joy and grief. The institutions that they represent in the mortgage market in Guyana consist of the commercial banks, trust companies, finance companies, insurance companies, pension funds and the New Building Society (NBS). Insurance companies, pension funds and finance companies are bit players in the multi-billion dollar mortgage market, holding mortgage assets of less than three percent of the mortgage portfolio. The key players are the commercial banks, the trust companies and the NBS and it is the attitudes and actions of their representatives that matter. Foremost among them are the commercial banks because of the critical role that they play in the creation of credit.
Too Risky
During the period 1993 to 1999, the banks expanded their credit. This expansion also coincided with a 13 percent growth in the number of mortgage recordings. After the loans to deposit ratio peaked at 72 percent in 1999, the banks began to pull back. This period of credit restraint saw an annual decline of 10 percent in mortgage recordings as the commercial banks demonstrated a preference for realigning their asset portfolio. For example, in 1998, the commercial banks held 71 percent of their deposits in loans. By 2004, this ratio had fallen to 41 percent, indicative of a preference for holding greater amounts of liquidity. During this period, the share of loans by banks to the private sector for new construction ranged between three and seven percent.
This posture of risk aversion leaves the impression that the banks are reluctant to work with fellow Guyanese to help them achieve their personal goals in the critical area of home ownership. In fairness to the bankers, they must keep the big economic picture in view at all times since their fiduciary responsibility to the public includes keeping the deposits of customers safe and sound. Their view of the economic and political climate in Guyana cannot be discounted from their risk posture. Taking these factors into account only help to solidify the view that the conservative attitude of the leaders of our financial community contributed to the downward spiral of mortgage recordings.
Risk aversion was not the only thing that stymied mortgage recordings. The banks also limited credit expansion by deliberately keeping interest rates high. The weighted average lending rate of commercial banks in 1999 was about 17 percent and, even though rates started to decline, they remained prohibitively high especially for those persons whose income barely exceeded the low income line. The Trust companies also had high interest rates of about 14 percent while the lowest rate of 11 percent was being offered by the New Building Society to persons whose income was above the low- income level.
Sudden Change
As if by some epiphany, the attitude of the financial institutions began to change by 2004. First, interest rates began to come down much faster than in the past. The commercial banks dropped their lending rates in December 2004 by 9 percent from the December 2003 rate of 15.68 percent. The NBS also lowered its rate to persons with income above the low-income line by 10 percent over the same period. These favorable rate adjustments continued to occur throughout 2005 and into 2006. Second, commercial banks have begun to pursue a more active policy of differentiating their mortgage rates. Like the NBS, the National Bank for Industry and Commerce (NBIC) and the Guyana Bank for Trade and Industry (GBTI) have begun to offer tiered rates for customers of different income levels. Both NBIC and GBTI offer low-income borrowers 7 percent interest. They also offer borrowers in higher income categories 10 and 11 percent interest depending on the amounts borrowed.
The sudden change in attitude was no accident and was a calculated move designed to take advantage of rule changes in the mortgage sector. The NDS had recommended exempting all mortgage lenders from paying corporate taxes on their earnings if their loan programs included loans to low income Guyanese. The NBS was already enjoying such tax concessions and policy makers felt that similar concessions would do the housing market a world of good if extended to other creditors. The government introduced the rule change in 2004 enabling the commercial banks and other lenders to avoid paying taxes on income earned from the mortgage business. The government also waived the reserve requirement on such loans, as well, making it easier for banks to put much more money into the mortgage business.
Expectedly, the rule changes and the change in lending rates had a favorable impact on the market. The value of mortgages in 2005 rose 128 percent over the value of mortgages recorded in 2004. The share of loans issued by the banks to the private sector for new mortgages doubled in 2004 to reach 15 percent of loans made to the private sector. Despite the increase in dollar value, the number of mortgages recorded in 2005 was even lower than the quantity recorded in 2004. It would appear therefore that not enough borrowers are meeting the underwriting criteria of the lenders, and the banks may be lending larger amounts to fewer borrowers. Adjusting interest rates and granting tax concessions to lenders, while necessary, may be insufficient to enable more Guyanese to walk into a place that they can call their own home.
Permission required © 2006 Rawle Lucas