State struggles to justify contentious housing levy

The government is still fumbling to find the right words to justify the Affordable Housing Levy, a year after the law came into effect with more promises of up to 5,000 units completed every quarter being issued.

The Affordable Housing Act, 2024, came into effect in March last year as a way of streamlining contentious issues related to the levy.

With Sh65 billion collected annually, this fund, as noted by Lands, Public Works and Urban Development Cabinet Secretary Alice Wahome, is not necessarily going to be used to put up units but to facilitate offtake.

This model, however, according to Ken Gichinga, chief economist at Mentoria Economics, is twisted on grounds that the purchasing power of Kenyans has been diminished through the levy.

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With expectation of 4,888 units to be released into the market, the CS has promised between 4,000 and 5,000 units every quarter towards the one million targets in five years.

The CS’ justification for the 1.5 per cent deduction on gross pay seems to have angered Kenyans more by opening old wounds considering the tax once started as a savings platform towards home ownership.

The tax, as the CS put it, was necessary because of the small revenue pot. But even so, she said the Sh65 billion annual collection is not enough to put up 200,000 units as targeted.

“We want to use the levy to leverage on private investors and developers who we would guarantee them offtake,” she said. “If you cannot sell, we will give you the offtake guarantee so that the money is not used necessarily for construction.”

This idea, according to Gichinga, is warped, explaining that if the cash was left to circulate in the market it would have created more jobs.

“You are actually creating a weaker economic situation so that you can guarantee affordable housing projects clients who are not getting jobs due to a weaker economy,” he says.

He notes that the demand for housing is higher than the supply, which is a good state for any developer to invest in. However, this is being eroded by further deductions, reducing cash in circulation.

Yet CS Wahome has defended the levy saying it is part of the reason the programme had teething challenges when it was started in 2017 by the previous administration that President William Ruto was part of.

“You actually do not need a fund. We had a big real estate market even before the fund. All you have to do is create a favourable environment for businesses to thrive and people will have income then they will pursue home ownership,” argues Gichinga.

The CS defended the tax even as she referenced Azerbaijan, which Kenya has benchmarked with, but which funds its projects from oil exports.

It is not the first time this administration has fumbled to explain the tax with the officials responsible sometimes speaking from both sides of the mouth.

Housing Principal Secretary Charles Hinga had a hard time explaining the levy when the Kenya Kwanza administration took office.

In May, 2023, the PS left State House briefing drenched in sweat unable to fully convince Kenyans. Then, it was being sold as a contribution at three per cent and was being referred to as a housing fund. However, it was not to be voluntary yet he insisted then it was not a tax or a levy.

Retired President Uhuru Kenyatta had the court slam breaks on this plan in 2018 after a case filed by the Central Organisation of Trade Unions (Cotu) went through and stopped the planned 1.5 per cent deductions towards the National Housing Development Fund.

President Ruto justified the levy as away to provide housing, particularly the urban poor in slum.

The narrative shifted when Kenyans expressed their distrust in the plan and it became a tax.

During his State of the Nation address in September 2024, President Ruto linked the programme to agriculture arguing that it will safeguard food security.

“To protect agriculture and food security from the effects of uncontrolled land fragmentation, urbanisation must be planned and controlled, and the affordable housing program is, therefore, a vital component of integrated land use planning and development program that we are implementing throughout the country, in every county,” said President Ruto.

The model then was that Kenyans will contribute, mandatory, over a seven-year period, where the money will also be earning interest after which they can cash in to get a unit or take their cash and interest. The amount of interest was also not disclosed.

The three per cent contribution was capped at sh2,500 with employers expected to match. The idea, then, was to provide the government with sh9 billion to convince developers to kickstart projects.

“When it (the fund) is driven by law, I can confidently tell the investor that as long as the law is there, they will be paid. If we did not have (that law), the investor will tell us that we cannot afford,” he said.

He said the reason then that every Kenyan ought to contribute even if they have a house or are servicing a mortgage, is similar to how the fuel levy works.

“Do you know we have a road to Moyale, which is built by taxes? You may not benefit from the road as a taxpayer but housing fund confers you a direct right to own a house,” he said.

When this convincing could not work, the administration through the chairperson Finance and Planning Committee Kimani Kuria, National Assembly, decided to convert the fund into a levy, and had it passed through the Finance Bill, 2023, effectively becoming law.

The relief provided was reducing the contribution to 1.5 per cent as it was envisoned during President Uhuru's tenure.

The decision to make it a levy was to ringfence it just like fuel levy or railway levy, so that the money collected ise specifically for housing projects.

CS Wahome, in the interview, noted that she is aware of the cold reception the program has received.

“I would be happier to have better support and appreciation of the program. But nevertheless, I have a duty and responsibility as the CS to drive the program,” she said.