The much-awaited National Rental Assistance Scheme (NRAS) was launched a few days ago with an initial GHS30 million fund. The goal of the scheme is to address the short-to-medium-term market failures in the renter segment of the Ghanaian housing market. The Scheme will provide low-interest loans to eligible Ghanaians to enable them to pay rent in advance.
Two years ago I wrote a feature article in which I highlighted the importance of such a scheme relative to enforcing the rent control provisions in the outdated Rent Act, 1962 (Act 220) (see https://www.linkedin.com/pulse/proposed-national-rental-assistance-scheme-npp-donkor-hyiaman-ph-d/). My argument was that unlike rent control, which distorts prices and causes capital flight, hence reduces investment in housing by the private sector as revealed by research, the National Rental Assistance Scheme, which combines the features of interest-rate subsidy and a loan, could rather incentivize and stimulate supply as a response to increased effective demand by the target group - youth.
While the above expectation may be valid, I examine in a series of short articles the potential effects of this government intervention as a response to the market failure in the private rented market. In this first article of the series, I examine the potential inflationary effects of the scheme on the low- and middle-income housing market, which could have unintended consequences including worsening the plight of renters.
I advance this position by first discussing the nature of housing tenure in Ghana and how it supports the shelter needs of young people who may lack effective demand. After this, I discuss the nature of housing supply, which is followed by an analysis of the impact of increasing housing demand on rents.
Housing Tenure in Ghana
Homeownership (owner-occupation) is the most favoured housing tenure in Ghana. The 2021 Population and Housing Census indicates that across all 16 regions and locality types (both rural and urban), 48.4% of Ghanaians are owner-occupiers, followed by renters (34.6%), and people who live rent-free (14.8%). In urban areas alone (where the National Rental Assistance Scheme would be operating in the interim), renting is the most popular housing tenure choice (46%), followed by owner-occupation (37.6%), and rent-free occupiers (14.3%). Unfortunately, renters are burdened by substantial housing costs in the form of the two-year rent advance requirements from landlords. Therefore, it makes sense to have a scheme like NRAS to smoothen renters' housing consumption – spread housing cost over time in the form of monthly repayments thereby making it more affordable.
The Nature of Housing Supply and Rent Determination
In Ghana, most (about 90 per cent ) private rented housing targeting low- and middle-income households are supplied informally by individual investors rather than institutional investors. These houses are developed incrementally over 5 – 10 years mainly driven by the availability of sweat equity. The process starts with the land acquisition from customary landholders, followed by the engagement of a contractor or tradesmen and labourers whom they find through personal recommendation. Construction work starts with or without drawings and building permits and continues so far as there are funds for materials and labour. The owner may occupy the uncompleted house while negotiating for infrastructure with providers directly. Although efficient at getting many housing projects to start at the same time, the approach is inefficient in that completion is usually delayed because of financial constraints. There is no government support in this informal housing development process. As a result, there are significant shortages of low- and middle-income housing.
The inefficiency of the informal housing development process is worsened by the imperfections of the land and real estate markets including the housing market, which further constrains housing supply. Apart from information asymmetry, the physical supply of land, which is a necessary input in housing supply is fixed, and the construction industry is inefficient, often causing housing supply to lag demand, especially in the short run. In other words, housing supply is perfectly inelastic (i.e. no change in supply) in the short-run as shown in Figure 1 by the vertical line S1S1, irrespective of rising rents due to housing demand exceeding supply. Although rising rents (i.e. the price of real estate) have the potential to stimulate investors to supply more housing, they are usually unable to do so significantly in the short run. For this reason, rents are often determined by increases in housing demand only. I illustrate this effect with the outward movement in the demand curve from D1D1 to D2D2, which results in an increase in rent from R1 to R2.
In the medium to long term, some supply of new housing (i.e. depicted by line S2S2) although marginal would get onto the market as a response to the high and unsustainable short-run rents (i.e. the law of supply). This is purely based on the inelastic nature of supply facing the land and real estate markets caused by large capital requirements, the fixity of appropriate land supply, information asymmetry, and construction industry inefficiencies. This marginal potential increase in the supply of new housing could then reduce the rents slightly and most likely insignificantly as shown by R3 all things equal.
Figure 1: Analysis of NRAS on Rent and Housing Quantity Demanded and Supplied
Housing Tenure and the Potentially Inflationary Effect of the NRAS
The NRAS has at least two potential effects depending on the housing tenure of beneficiaries. First, the NRAS is expected to relieve some low-earning renters of the huge financial burden of the two-year rent advance requirement. For this category of beneficiaries, the NRAS is not likely to cause rent inflation since there will be no new demand for rental housing, all else equal.
However, there is another category of potential beneficiaries (i.e. people currently living rent-free and becoming new renters) that pose a potential inflationary risk. The two-year rent advance requirement coupled with the general low-income levels in Ghana among other things serve as a barrier to entering the private-rented market, thereby, keeping the increase in new demand for housing by young graduates and early-career people low. Many of these low-earning youth live rent-free with their parents, friends and other relatives in order to maintain their jobs.
The NRAS is not going to only increase the purchasing power of this category of young people, it would also remove the capital barrier they face, thereby making it more affordable and easier for them to rent, all other things equal. This would have the effect of increasing the number of people demanding low- and middle-income housing, all else equal. The housing demand curve is therefore expected to shift outwards (i.e. from D1D1 to D2D2 as shown in Figure 1), thereby, increasing housing demand but would be unmatched by supply (perfectly inelastic) in the short-run. This is expected to put more pressure on rent to rise – rent inflation – generally in the low- and middle-income housing markets but particularly in the low-income housing submarket, which faces the highest shortage in the short run. In the medium to long run, rising rents would stimulate investors and developers to supply more housing (i.e. the law of supply) but not substantially due to the huge capital requirements, inefficient construction sector, and inelastic (perfectly) supply of affordable and trouble-free land.
Potential Moderating Effect of NRAS Fund Size on Rent Inflation
While the above inflationary effects are possible in theory, I argue that its materialization would be moderated by the size of the NRAS fund – how much is available to the scheme for onward lending. The proposed GHS30 million fund in my opinion is small and will serve only a few thousand existing renters and new renters combined. For instance, given an average monthly rent of GHS500.00 for a single-room ‘self-contain’ on the market, an amount of GHS12,000.00 is required to pay a two-year rent advance per person. The GHS30 million fund would serve just about 2,500 renters initially. By increasing the monthly rent to GHS1,000.00, a two-year rent advance amount of GHS24,000.00 is required, which would half the number of initial beneficiaries to 1,250. This number is too small to change rental market dynamics (including increasing rents significantly) thereby causing no to a marginal change in rent inflation.
However, given that the NRAS is a rotational fund, the monthly repayments (excluding interest) should total about GHS 49.9 million over two years to fund about 4,159 new loans, which would bring the total beneficiaries over two years to about 6,659 (i.e. 2,500 (initial beneficiaries from the GHS30 million fund) + 4,159 (new beneficiaries from loan principal repayments only). See Table 1 for the estimates. It is this potential expansion in the fund size and the number of total beneficiaries in the future that could upset rental inflation over time unless investment in new low- and middle-income housing construction is stimulated by additional government interventions like improving investors’ access to affordable and trouble-free land, improving the efficiency of the construction industry, making available concessionary development finance to developers, and stabilizing the cost of building materials, besides others.
Table 1: Potential Beneficiaries of the NRAS in Two Years
Note: · The loan repayments (excluding interests) for each month are computed by multiplying the month's rent by the total number of beneficiaries up to the month under consideration. · Additional beneficiaries from loan repayments is the difference between the number of beneficiaries (i.e. 6,659) and the number of beneficiaries of the initial fund of GHS30 million (i.e. 2,500).
Way Forward and Conclusion
In summary, the NRAS could be a powerful tool for improving young people’s demand and access to private-rented housing. Existing renters who need financial support to meet the two-year rent advance would not increase housing demand significantly. Hence, rents are expected to be stable, all else equal.
However, the benefit of the NRAS could be counter-productive especially in the short-run due to its inflationary tendencies to be caused by an increase in demand for new low- and middle-income housing without a significant response on the supply side due to constraints. This could be one of the effects of the scheme if the beneficiaries are predominantly new renters - people who are currently living rent-free but enter the housing market as a result of the scheme. This situation could result in a paradox – rent inflation hurting the same people the scheme is targeting.
Going forward, it is crucial for the government to resolve housing supply bottlenecks to enable private investors to respond to some of the additional demand for housing that would be created by the NRAS.
Dr Kenneth Appiah Donkor-Hyiaman
Real Estate Economist and Lecturer
Department of Land Economy
Kwame Nkrumah University of Science and Technology
The opinions expressed in this article do not necessarily reflect the position of any organization the author is affiliated with.
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