Colin Steele and Keith Collister, Financial Analysts
National Housing Trust head office on Park Boulevard, New Kingston. - File
Minister of Finance Dr. Omar Davies, during his budget speech in April, invited discussion on the Government's intention to consolidate statutory payroll deductions.
Davies suggested the need to "rationalise the structure of these deductions so as to allow the resources to be allocated to areas of greatest need" giving education and health as examples of where these resources could be reallocated.
As HEART Trust and the education tax are already allocated to education, at least in theory, and the minimum pension benefit promised by National Insurance Fund should arguably be increased - which would make it highly inappropriate to use funds from this source - it is reasonable to assume that the Minister had in mind mainly the re-allocation of National Housing Trust (NHT) contributions.
In recent years, the NHT Housing Fund has been used for more than its stated purpose including a grant of $5 billion towards education transformation, investments in Harmony Cove, Loans to Operation Pride, which are uncollectable, and is now responsible for the maintenance of the Trelawny cricket stadium.
In addition, the Government of Jamaica has yet to settle 12 years of unpaid employer contributions which according to Auditor-General Adrian Strachan totals $18.3 billion, over half of which is interest at $9.9 billion.
In the minister's own words, it would be less "messy" for the society to agree a formal re-allocation of the NHT employer contribution to fund priority areas.
HOUSING MANDATE
The current practice of having the NHT make one-off grants to fund central government programmes escapes budget oversight, as does the practice of the Finance Ministry building up huge arrears with the NHT over time.
The implicit assumption behind these various giveaways would appear to be that the NHT already has sufficient capital, which was actually one of five possibilities raised in the final background report on comprehensive tax reform prepared by the consultants for the Matalon committee they made no recommendation in the absence of any research on the issue.
There is clearly a case for an institution to help low income earners who cannot obtain mortgage loans from the private sector to purchase their own homes, but little justification for NHT providing mortgage financing for middle income earners who can be readily financed by private sector lenders.
The primary justification in the past for the NHT taking on this function was the hostile economic environment, as long-term interest rates were prohibitive.
If the fiscal deficit is substantially reduced, interest rates should continue to fall.
Over the last three years private mortgage rates have fallen from 18 per cent to 12.75 per cent.
SUBSIDY TOO GENEROUS
If rates fall another 2-3 points, the NHT will become nearly irrelevant as private markets with the right incentives to borrowers — like tax deductions for mortgage interest — would be able to fund unlimited mortgages.
In order to benefit more low income persons significantly, without affecting the viability of the trust, NHT should provide a subsidy only for the first 3-5 years for low income housing. People don't need a subsidy for 30 years as their income grows, usually every year.
With lower overall interest rates, NHT could either issue 20-30 year bonds to fund mortgages or sell collateralised mortgage obligations, that is, securities backed by mortgage loans that pass through principal and interest payments to the ultimate investors.
No longer should taxpayers be forced, through statutory payroll deductions, to lend their money to NHT.
In addition, NHT could simply sell its existing loan portfolio to the market and use the proceeds to fund new mortgages and return taxpayer contributions.
This would also have the added benefit of dramatically reducing administrative costs, currently $3 billion per year, as there would no longer be the need to keep records for hundredsof thousands of contributors.
Further reductions in overhead costs can be achieved by outsourcing the disbursement and collection of mortgages.
THE CURRENT SITUATION
For the year ended March 2008, the NHT has projected a profit of approximately $700 million. In Prime Minister Portia Simpson Miller's budget speech, she announced a reduction in interest rates on existing and new mortgage loans.
NHT in the Gleaner of Wednesday May 9, 2007, said the cost of this benefit was $900 million per year.
Unless this benefit was incorporated in NHT's budget, the institution will either break even or make a small loss.
In the previous year, former Prime Minister PJ Patterson gave benefits which are estimated to have cost the taxpayer at least as much.
In the context of scarce resources, the following questions are relevant keeping in mind that the annual cost of those gifts is approximately $1.8 billion
Why lower the rates for persons who have already received a subsidised loan when so many are yet to benefit?
Why didn't we lower the required contribution instead?
Why couldn't we use the funds to build more houses?
The NHT and the commercial banking sector (see insert) have the same capital base, $54 billion each, yet the banks' loan portfolios are 2.5 times larger than the Trust's.
The numbers clearly show the inefficient use of capital by the NHT.
In addition, NHT staff costs are projected to increase by over 60 per cent for the two year period ending March 2008.
TRANSACTION COSTS
The housing market would be greatly stimulated if transactions costs were lowered.
The World Bank Report "Doing Business" estimates the cost of purchasing a home at 14 per cent in Jamaica; 4.5 per cent in the UK; and 0.5 per cent in the United States.
By keeping stamp duty and transfer costs at these high levels we have discouraged investment in real estate by both local and foreign investors.
The facts are clear.
The NHT is adequately capitalised to carry out a more relevant mandate.
The Government has begun accessing the surplus for other uses, that is Harmony Cove, Operation Pride, education etc
The Government by delaying the achievement of a balanced budget is denying affordable mortgage financing to the wider population.
Excessive taxation is a disincentive to investments in real estate severely constraining its growth.
The NHT overhead is excessive and burdensome for the taxpayer and can be significantly reduced.
The NHT has benefited only 120,000 or under a quarter of its contributors.
Under this revised plan employees would no longer be required to contribute to the NHT, saving the individual taxpayer more than $5 billion.
With a revised structure, employers would no longer need to contribute allowing the transfer of approximately $5 billion to the Central Government budget.
The construction and related sectors have the potential to employ thousands of skilled and unskilled Jamaicans.
Email: csteele@cwjamaica.com, keithcollister@cwjamaica.com
