Mortgage Lending: Static State or Bouncing Back?

Let's begin by clarifying the concept of a mortgage, as many people often use the term interchangeably with 'home loan'. It is understandable, given that acquiring a primary residential property is a common aspiration once individuals embark on their professional careers. To break the ice, a mortgage is a financial agreement involving real estate offered as collateral for a loan, whereas a home loan specifically funds the purchase of a house. Essentially, a home loan is a subset of mortgages tailored for residential property acquisitions. On the other hand, a mortgage encompasses loans used to purchase various types of properties or land—ranging from residential and commercial properties to raw land, apartments, and industrial properties.

Mortgage terms typically span 15 to 30 years, catering to diverse age groups and sectors seeking to own land and property. Young couples, college graduates, and budding entrepreneurs are often inclined towards longer-term mortgages like the 30-year loan, benefiting from lower monthly payments. This flexibility accommodates other short to medium-term financial goals such as purchasing a car or covering tuition fees. On the flip side, individuals or businesses who prioritize property ownership over immediate gains in other aspects of life, might opt for a 15-year mortgage. This choice also offers flexibility, recognizing that substantial upfront property payments are uncommon during the early stages of one's career or for startup businesses which depend on CAPEX for survival and growth.

Mortgages also enables the consideration of renting out the purchased property, potentially covering all or some of the loan payments and thereby minimizing the risk of liquidity challenges throughout the mortgage term. However, this has not been the case in Zimbabwe for the past two decades or so, largely due to challenges stemming from the lenders' side, with clear implications for borrowers as well. As of December 31, 2023, mortgages accounted for just 5.58% of the total banking sector loans, with arguably a significant portion being attributed to corporates.

From the perspective of lenders, macroeconomic instability and underlying institutional vulnerabilities triggered a banking crisis in the early 2000s, resulting in the collapse of numerous local banks. Between 2000 and 2009, approximately seven banks experienced failures, including Time Bank which ceased operations in 2004 way before bouncing back in 2022. Another period of instability followed post the hyperinflation crisis of 2008, during which Royal Bank, Trust Bank, and Interfin Bank, among others, also closed their doors, with these failures occurring in 2012, 2013, and 2014 respectively. ?

From the standpoint of most borrowers, increasing poverty rates and elevated unemployment levels directed financial resources towards immediate consumption rather than savings and property acquisitions. Banks, wary of currency fluctuations, implemented rigorous mortgage criteria that benefited property owners or individuals with substantial salaries. This segmentation limited mortgage accessibility for the wider population, despite the potential value of purchased properties or land that could serve as collateral upon mortgage loan drawdowns.

Instead, we observed a trend where many of our local banks began investing in properties directly to safeguard value and mitigate currency risks amid decreased lending appetite. This development raised a persistent question in my mind: “If banks have confidence in the property sector, why not expand mortgage loans denominated in foreign currency?” This sector is predominantly dollarized, and the likelihood of a property bubble in Zimbabwe seems minimal, considering the huge housing backlog. Nevertheless, perhaps there are insights that our banks possess which I am yet to uncover.

With the introduction of the new currency (ZWG) aimed at stabilizing and revitalizing all sectors, particularly benefiting the underserved low to middle class, the current landscape shows varying degrees of regulation. Sectors like Fast Moving Consumer Goods (FMCG) and manufacturing are compelled to accept payments in both US dollars and ZWG, while others such as the energy and property industries are allowed a more gradual adaptation. Please don't misconstrue my point, this approach aims to safeguard the purchasing power of consumers earning salaries in both currencies. However, it poses challenges for sectors like manufacturing and retail, which face currency risks and may struggle with restocking using ZWG. This uneven playing field is compounded by consumers converting ZWG into US dollars to pay their monthly rents, complicating an early assessment of the ZWG's success as a medium of exchange.

Recently, John Ndere, Managing Director of Dawn Properties Consultancy, noted a rising adoption of ZWG in the real estate sector, which traditionally operates in foreign currency. He attributed this shift to the stability and confidence introduced by the new currency. According to him, there is an increasing number of transactions involving buyers and sellers using ZWG, suggesting its acceptance as a medium of exchange in real estate. Does this signify the beginning of a new era, or is it merely a short-term trend? Are we likely to witness a surge in property activity using ZWG? Setting aside any tendency towards recency bias, I would affirm this assertion once tenants begin paying their rentals in local currency. While I understand this could unfold gradually, I will monitor closely to see if it moves beyond rhetoric to reality.

On a brighter note, Public Service, Labour, and Social Welfare Minister July Moyo recently urged building societies to resume mortgage lending, aiming to facilitate home ownership among workers. This call comes at a crucial time when many financial institutions had reduced mortgage lending, particularly towards individuals, due to decreased disposable incomes caused by the volatility of the Zimbabwe dollar. Since the battered currency was replaced by Zimbabwe Gold on April 5th this year, one would not be wrong to envision the decimation of the prolonged struggle to purchase or construct homes.

Addressing this issue is critical, especially for the working population, who have historically faced challenges using the local currency in property transactions. Zimbabwe currently faces a housing backlog of over 1 million units. Recently, the National Building Society (NBS) launched a housing project in Glaudina, Harare, with efforts from the National Social Security Authority and other shareholders of the building society aimed at tackling the housing challenge. FBC Building Society has been actively involved in addressing housing challenges as of late, but there's still much ground to cover. With such a significant housing backlog, it is evident that mortgages can play a pivotal role in addressing this issue.

Currently, I believe that the property and energy sectors, particularly fuel, predominantly operate using the US dollar. Furthermore, although ZWG is a structured currency, it is not fully convertible. Customers can exchange US dollars for ZWG notes and coins at a Homelink branch, but they cannot perform the reverse exchange at the same location to obtain US dollars using ZWG notes and coins. This convertibility issue needs to be addressed because people generally seek assurance regarding the safety and usability of their currency.

The convertibility of ZWG across all sectors should improve gradually. I hold the view that as long as individuals cannot promptly convert ZWG to US dollars for international or foreign currency denominated transactions, there will be scepticism about holding our new currency compared to the US dollar. This could pose a significant challenge in increasing its usage in the property sector. Convertibility is crucial for me, as well as for others, and the proposal for mortgage lending presents a promising opportunity to rejuvenate the mortgage industry, provided the aforementioned challenges are effectively tackled.

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