While housing developers are doing good business and Sri Lanka’s rich are buying and selling luxury condominiums for profit, most families can’t raise the money for even a basic house, according to the World Bank.
“Newspapers are full of real estate classified ads for both rental and purchase properties. At the same time, more than 80% of the households in Sri Lanka have no access to home financing, and about 7% are lacking homes. One third live in semi-permanent housing and 6% live in line room estates and shanties,” it says in a report on housing finance.
It said middle-income families find it difficult to get loans for housing because banks need collateral to lend. Because of the mortgage lending system, mortgages are not affordable for most families looking for even a one-bedroom house.
“Using an industry standard of mortgage lending up to three times annual income, a low-cost house of Rs 175,000 could be affordable to an individual with an annual income of Rs 58,000. Accordingly, a 350-square-foot house with one bedroom, a living room, a kitchen, and a toilet that, by one estimate, would cost Rs 175,000 would not be affordable for nearly 45% of the Sri Lankan people,” says the report titled ‘Housing Finance Needs to Reach South Asia’s Poor’.
The World Bank suggested creating property and house price indexes and introducing reforms to government organisations operating in the housing market, to meet demand for housing. The need for housing in Sri Lanka is rising but housing financing is lagging behind, it said. “Housing finance growth is nowhere near the pace necessary to close the housing gap over the next 10-year period,” the report said.
An efficient land registration and titling mechanism is needed, says the World Bank, to help the mortgage market grow, allowing more people to access housing finance. “The first necessity to develop primary mortgage markets is a functional land registration and titling system,” it said.
The World Bank suggests creating property and house price indexes and improving the Credit Information Bureau (CRIB). The World Bank says the Asian Development Bank’s financial sector assessment suggests privatising CRIB. State-owned mortgage banks are also cited for structural reforms. The World Bank says the State Mortgage and Investment Bank (SMIB) and the Housing Development Finance Corporation (HDFC) should be exposed to general market competition and should operate on an equal footing with other market participants.
The use of secondary mortgage market instruments is seen as a possible method to raise funds to expand the local mortgage market. “For the mortgage market to rapidly expand beyond current effective demand and eat into some of the existing housing finance gap, adequate mortgage funding is needed. The required liquidity for fast growth cannot be provided by existing funding sources. Basic and robust secondary mortgage market solutions (such as covered bonds or a liquidity facility) would make this possible. In the longer run, when a sizable primary mortgage market of a certain scale develops, securitisation will become a viable option,” says the report.
The demand for housing however, is building up every year. According to Central Bank estimates the annual demand for housing in Sri Lanka is between 50,000 -100,000 units, but two thirds of the incremental demand is not met. So every year, the backlog demand is adding to new demand.
The housing pressure is felt most in cities, where population growth is faster than the overall national population growth rate of 1% per year.
Nearly 15%–20% of the Sri Lankan population is urban—and that population is expected to grow at 3% –4% a year,” says the World Bank. Out of the 25 districts, four urbanized areas are already experiencing very high population density, causing housing problems.
“However, in 4 of the country’s 25 districts, the population density is comparatively very high, resulting in massive urban housing issues. The people-per-square kilometre density of Colombo (3,330) is followed by those of Gampaha (1,539), Kalutara (677), and Kandy (667),” notes the World Bank report.
The cost of building a house has also shot up over the past few year. The cost of buildings has tripled since 1990 because of the rapid increase in land prices, particularly in city areas, and also because of price increases and shortages of construction material.
“The cost of building has increased about threefold since 1990, thus inhibiting the growth of housing construction. Building materials that registered substantial price increases since 1990 include sand (1,070% increase), timber (568%), and bricks (678%). Labour cost increased by nearly 250% during this period,” it said.
“Information on land prices for 2003 and 2006 obtained from finance companies showed that average land prices in 18 selected areas have increased by about 28%, with a growth range of 12% –71% annually,” says the report.
Developing the mortgage market is seen as a solution to meet housing requirements in the country. However, the World Bank notes that this segment of housing finance is hampered by legal limitations, risk management issues and funding.