Mortgage Financing, Housing Investments, Macroeconomic Volatility and Economic Growth in East Africa Community Countries

Abstract

Mortgage financing is a critical part of financial systems that contribute to financial markets development and deepening and has potential positive effects on a country’s financial and economic growth. An effective mortgage market guarantees long-term returns since it entices investors. Moreover, borrowers have better access to funds when the market is efficient, and this aids in stimulating economic growth. However, most financial institutions attach myriad of conditions and covenants which impede mortgages access which negatively affects mortgage credit to GDP ratio. Further, various macroeconomic fluctuations such as interest rates fluctuation, inflationary conditions and currency fluctuations adversely affects mortgage lending, housing investments and economic development. Mortgage financing leads to increased housing investments that act as catalysts for enhanced economic growth. Housing investment is important in an economy as it influences on savings, employment, labor productivity and total investment. The study looked into the relationship between mortgage financing and economic growth, the mediating effect of housing investments on mortgage financing and economic growth, the moderating effect of macroeconomic volatility on mortgage financing and economic growth and the combined effect of mortgage financing, housing investments, and macroeconomic volatility on economic growth of EAC member countries. Theory of financial intermediation, the theory of investment multiplier, new neoclassical economics theory and structural form theory were used in this research. The researcher utilized a positivist research philosophy and both a descriptive and explanatory research designs. Secondary data was gathered through country-specific Central Bank reports, World Bank reports, IMF reports, as well as Africa Development Bank (AfDB) reports between January 2001 and December 2020. Descriptive statistics, correlation analysis, and panel data model estimations were conducted. The moderation and mediation effects were tested using Baron and Kenny’s (1986) model estimation processes. According to the research, number of mortgage accounts and value of mortgage accounts have a significant positive effect on economic growth among EAC member countries; housing investments have no significant mediating effect on the association between mortgage financing and the economic growth of EAC member countries. Likewise, interest rate volatility and exchange rate volatility had no significant moderating influence on the link between mortgage financing and the economic growth of EAC member countries while inflation rate volatility had a significant moderating influence. Lastly, mortgage financing, housing investments and macroeconomic volatility significantly influence the economic growth of EAC member countries. In conclusion, the study results inferred that mortgage financing significantly affects economic growth, inflation rate volatility moderates the relationship between mortgage financing and economic growth of EAC member countries, housing investments does not mediate the relationship between mortgage financing and economic growth of EAC member countries whereas interest rate volatility and exchange rate volatility did not significantly moderate the relationship between mortgage financing and economic growth of EAC member countries.. The study recommends the need to come up with measures that will increase mortgage uptake in the EAC member countries as this will contribute to economic growth. The study further recommends the need for policy makers to stabilize the inflation levels prevailing in EAC member countries.