New Housing Fund Levy: The bigger picture


Kenyans have been talking, with civil servants threatening to strike in a bid to protest the proposed three per cent housing levy.

Photo credit: Shutterstock

On May 4, 2023, the National Treasury presented the Finance Bill, 2023 to the National Assembly.

It is an ambitious Bill that proposes numerous tax changes that will affect multiple sectors of the economy, from housing to cosmetics, manufacturing, SMEs, the rental market and digital assets and economy among others. A week later, the dust is yet to settle.

Kenyans have been talking, with civil servants threatening to strike in a bid to protest the proposed three per cent housing levy.
The housing levy was anchored on the Employment Act and if the changes are to be implemented, all employed Kenyans will be required to contribute three per cent of their monthly basic salary to the national Housing Development Fund, with the employer expected to match the contribution.

The tax proposals have stirred emotions, which was to be expected since it affects every employed person. That said, these proposals lean on a heavily packed backdrop whose main theme is a struggling economy that requires urgent interventions.

The context

During a breakdown and analysis of the Finance Bill by KPMG East Africa on May 8, it emerged that Kenya’s economic situation has gotten worse since the pandemic. In addition, our situation is not isolated, as it is within a global context.

“We have to look at the environment within which the government has prepared the Finance Bill, 2023. As a country, we operate within a group of Nations and anything that happens in other countries has an impact on us,” said Clive Akora, Partner, Tax and Regulatory Services at KPMG East Africa.

Some of the global issues that are trickling down and impacting our economy include global inflation, geopolitical tensions, capital flight (investors rushing to developed economies while ditching developing or struggling countries), global high cost of living, disrupted supply chains and high cost of energy.

On a local level, Akora says that we are struggling with high inflation, the value of the Kenyan shilling is constantly depreciating, we have high unemployment rates, high cost of living and dollar shortages which make it difficult to import raw materials, subsequently affecting production and high-interest rates. Although the challenges began in 2020 and the economy seemed to be recovering in 2021, in 2022, all the indicators of a struggling economy took a significant dip.

“When you compare the situation we were in 2020, the interest rates and exchange rates were fairly reasonable, but now both have gone up. We are likely to be in a more severe situation in 2023/2024”.

We are also struggling to cover our projected expenditure with available tax collections. Historically, Kenya’s collections have always fallen below the budget and previous governments have relied heavily on loans to bridge the gaps. Currently, we have a projected budget of Sh3.66 trillion against Sh2.8 trillion in revenue collections.

We are struggling as a country and one does not need to dig too deep to understand the crisis. Delayed county remittances, civil servants' salary delays, stalled infrastructure development and the obvious high cost of living are some of the glaring indicators.
Needless to mention, the government needs an aggressive approach to address the economic crisis and several areas have been targeted as key areas of focus.

The housing sector is at the top of the list, alongside agriculture, SMEs, digital economies and diaspora workforce among others. For instance, although the Central Bank of Kenya has for a long-time dismissed cryptocurrency, the Finance Bill 2023, proposes a three per cent tax on digital asset transactions. And while the bill seems to take more from Kenyans, it is also promising to take less from others like landlords and leather importers through proposals to reduce tax percentages. Rental income, for instance, will be reduced from 10 per cent to seven per cent in a bid to entice more landlords to comply with rental income tax remittances.

Why housing?

Let’s explore the housing agenda and why it is critical in addressing our economic issues. The National Housing Development Fund (NHDF) is not the newest concept in the list of proposals. It was proposed in the previous regime as a means to achieve affordable housing, alongside the Kenya Mortgage Refinancing Company and a host of tax incentives that enticed private developers to shift focus to low-income housing.

The initial proposal was to introduce 1.5 per cent deductions from employees’ monthly salaries to go to the NHDF. Those in the informal sector had the option to contribute Sh100 to the fund. Although the NHDF was never effected, the Boma Yangu programme was birthed. The programme enables Kenyans to create accounts through which they can apply for an affordable housing unit and remit monthly contributions voluntarily toward the housing fund. According to the programme’s website, there are over 330,000 people currently contributing.

Female real estate agent holding house and keys

The housing levy was anchored on the Employment Act and if the changes are to be implemented, all employed Kenyans will be required to contribute three per cent of their monthly basic salary to the national Housing Development Fund, with the employer expected to match the contribution.

Photo credit: Shutterstock

It seems housing holds the key to injecting some life into our struggling economy, but how? Ken Gichinga, Chief Economist at Mentoria Economist, says, “There is definitely a housing deficit in the country and the government is keen on solving this issue.” However, solving the housing deficit is like hitting two or more birds with one stone. Gichinga explains that housing encompasses a lot. When you break down the process of constructing affordable units, you find that multiple industries are involved. Multiple jobs are created as plumbers, electricians, carpenters, masons, contractors, interior designers, architects and many other professionals are engaged in different phases of construction.

The transport industry gets a boost as materials are transported to sites. Those selling construction materials will experience a boom too, whether they are importing or manufacturing. Once the units are completed, realtors come in to sell the units and they too get a commission and advertisers will not be left out. But the cherry on top of the cake is the handover to homeowners. Owning a home is the biggest step toward financial independence. The housing levy as hinted in the president’s speech during the Labour Day celebration is also meant to improve our saving culture which is one of the poorest globally.

Glaring Challenges

Unfortunately, the proposal on the housing tax presents a number of challenges. Gichinga notes that most of the functions that contribute to housing are devolved. Land transactions are handled by respective county registries while the construction work is mainly contracted to private developers. Materials are sold by respective manufacturers and importers while approvals are also delegated to counties. Then there is the mother of all challenges – the high cost of land which remains unchecked. With the high cost of land, can three per cent of the average Kenyan’s income afford a unit in 7 years?

“The ideal place for the government to start should be policy making. They should be questioning why land prices have gone up and what they can do to stabilise them. Housing is largely a private sector and the government has limited control over the brick-and-mortar work involved in delivering units.”

There is also the challenge of a willing seller, an unwilling buyer.

“People are in different stages of their careers, and some have already bought or built houses. Others don’t see housing as a priority. Some people wish to invest in their children’s education rather than focus on housing. Markets work very well because they are pegged on a willing buyer, willing seller concept. In this case, not everyone is a willing buyer as not everyone wants a home in the long run. Having a blanket approach will not work smoothly.”

In the short term, the mandatory three per cent remittance is likely to worsen the burden of monthly expenditure for different households as people’s purchasing power reduces. And if businesses are forced to remit their employees' housing levy, those struggling, especially SMEs, will be crippled. There is also the question of the high volumes of imports required to make affordable housing a reality. Building materials and some of the raw materials used in manufacturing products like cement or steel are imported.

Remember, we are still struggling with dollar shortages and importing is not as simple as it used to be. The weakening shilling will obviously affect the eventual cost of housing units. All these factors complicate the proposal further. “If we could manufacture more materials locally, the construction and housing sector would be a big force in the economy,” says Gichinga, adding that perhaps if the conversation on housing was to be taken up at the county level, some of the challenges would be mitigated.

Land, for instance, is much cheaper in most counties, excluding major cities and the metropolis. In addition, if counties are empowered, they have the capacity to train construction workers rather than outsource. The impact would be significant, as people will not have to relocate to urban cities in search of work. The counties would be empowered to create jobs and ease the burden from cities, thus potentially lowering the cost of living.

“If every county had a vibrant housing sector, they would turn into hubs of economic activities. The national government can then focus on other big issues such as security, food security and healthcare. There is the principle of subsidiarity which argues that what the smaller body can do, let not the greater body do. By delegating the small tasks on housing, the government frees up space and resources to mitigate the grander risks that might befall the strategy.”

During the KPMG analysis, which was conducted through a live webinar, several poll questions were sent out to the more than 400 people in attendance. 70 per cent of those who responded felt like the proposed interventions will not resuscitate our struggling economy.