The Crowding-Out Effect: Modelling the Impact of Government Borrowing, Inflation & Monetary Policy on Access to Sustainable Finance for Affordable Housing & Social Infrastructure Development

Abstract

The provision of affordable housing in Nigeria remains a critical challenge, exacerbated by limited access to finance for housing developers and homebuyers. This study investigates the crowding-out effect of government borrowing on affordable housing finance and development in Nigeria. The research examines how government debt dynamics for domestic and external borrowing affect access to finance for housing developers and low-income homebuyers through mechanisms like rising interest rates and limited credit availability. The study examines the crowding-out effect of Nigerian government borrowing on affordable housing finance and the development of social infrastructure, utilizing empirical data from 2014 to 2023. It investigates how domestic and external borrowing impact the ability of housing developers and low-income homebuyers to secure financing through increased interest rates and the contraction of credit supply. Leveraging recent data from authoritative sources such as the Central Bank of Nigeria, the National Bureau of Statistics, and the World Bank, the study employs econometric modelling and descriptive analysis to evaluate these impacts. Key findings indicate that the crowding-out effect of domestic debt is more pronounced due to its direct competition in the local financial market; the escalation of interest rates suppresses housing finance, further limiting the penetration rate of the mortgage market; the exchange rate risk associated with external debt increases construction costs, posing an indirect threat to housing affordability and social infrastructure development, underscoring the critical need for fiscal discipline and innovative solutions like blended and Catalytic funds to improve the delivery of social infrastructure and the housing sector’s resilience. Key recommendations include adopting debt management reforms, promoting specialized housing finance instruments, and fostering public-private partnerships.