By 2030, 3 billion people, about 40% of the world's population, will need new housing and basic urban infrastructure and services. Breaking down the numbers translates to a current annual need for 14 million new houses and a conservative estimate of $420 billion in total investment needed. The urgency and magnitude of the need for affordable housing in the coming decades is clear.
So where will the money come from for housing investment? How will it reach those people who need it the most, whilst keeping pace with rapid population growth and urbanization? Why do we still have market failures in the housing sector which are in plain sight of many emerging market cities in the form of slum housing?
These were the key questions raised at the 6th Global Housing Finance Conference hosted by the World Bank Group, where over 300 government and private sector representatives came together to discuss ways to expand affordable housing for all.
The keynote speaker, Ngozi Okonjo-Iweala, Nigerian Minister of Finance and Coordinating Minister for the Economy, highlighted three key benefits of pushing housing further up the development agenda ():
- The Housing Sector is a significant contributor to economic growth and has multiplier effects on the broader economy. Studies suggest that in the U.S., every dollar spent on housing generates as much as $1.60 in the wider economy.
- Housing development creates jobs and supports economic inclusion. From direct to indirect jobs and skilled to unskilled jobs, the impact of housing on job creation is clear. In India, it is estimated that the impact of 2 million new affordable homes would be direct employment for 3 million people working in construction, indirect employment for 24 million people in linked industries and services (wood, steel, paint, electricity etc.), and a 2% growth in gross domestic product (GDP). There would also be a USD 17 billion rise in the demand for credit, a 16 million ton demand for cement, while the need for steel would rise by 6 million.
- Homeownership leads to increased social benefits. Studies have shown that stable housing and homeownership gives citizens a true stake in their communities.
Despite these obvious benefits, there are still global constraints in building more affordable housing, both on the demand and supply side. Demand constraints are usually related to finance. Housing finance has very low penetration in emerging economies – typically less than 5% of the adult population has a loan to purchase housing, compared to 25-35% in U.S., Canada, and Western Europe. On the supply side, there are constraints related to land and property rights limiting the development of large scale affordable developments, and regulatory obstacles that present difficulties in registering land titles and/or outdated building codes and planning regulations.
Some key takeaways derived from the conference and could also be a step towards overcoming these obstacles and pushing the housing finance/development agenda forward are:
- Public-Private partnerships play a critical role in helping to deliver affordable housing. The mix of participants at the conference is indicative of the need for both the public and private sector to work together to create affordable housing finance solutions. The nature of the relationship may vary, but one without the other is almost guaranteed to fail.
- Funds from institutional investors should be mobilized to address the housing gap. Long-term resources (accumulated savings, pension funds, investment funds) need to be connected to long-term investments. This is where capital markets can help intermediate through instruments such as covered mortgage bonds, mortgage-backed securities, as well as enhanced systems to incentivize longer term savings.
- A holistic approach to affordable housing. We need to look at all the building blocks in a housing finance system – from raw materials to land, to skills, to finance – to give us the full picture of the issue and how to go about addressing it. This implies challenges in prioritizing, sequencing, coordinating with stakeholders, and linking different sectors of the economy.
- Formal mortgages are not always the most appropriate financial instrument for every borrower. Traditional mortgages are not going to satisfy all the demand, especially for those on lower incomes. Housing micro-finance or rental housing may offer more affordable solutions in many cases. To address this, the World Bank Group is currently working with some countries towards ‘underwriting informality’. This means doing the extra work to better understand a borrower’s income stream and designing products that are better suited to their needs. It may mean smaller loans, shorter repayment periods and allows a borrower to buy materials in bulk, take on builders and have the work done to a higher standard. Ultimately, it means getting access to better quality housing in a shorter space of time.
The theme of the conference - - implies the need to communicate the importance of achieving the affordable housing agenda. Providing housing for 3 Billion people by 2030 is both a challenge and an opportunity. It is not an impossible feat, but one that can be overcome if we work together to develop financial systems that will increase access to sustainable housing finance in the developing world, and create opportunities for affordable housing for all.
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