Unleash demand to break the informal housing cycle

The fact that sustainable mass housing is needed to provide decent shelter for more than 1.6 billion of the world’s poorest people — or about one-fifth of the global population — is one that the development community has known for years.

There have been efforts to address the problem, from long-standing declarations and agreements like the Universal Declaration of Human Rights to national policies that put the need for decent shelters at the core. Shelter-focused nongovernmental organizations, including Habitat for Humanity, have been trying to provide decent housing to poor people in low-income countries as well.

But despite widespread recognition and intention to address the global housing gap, the reality is that there is not enough money to build all of these houses.

“We need to build a billion new houses by 2025 and that is pretty clear,” Marja Hoek-Smit, director at Wharton School’s International Housing Finance Program, said Tuesday during the Wharton-Habit for Humanity housing finance course in Hong Kong attended by Devex. “[This is] why it is critical to develop mass housing finance systems and scale them … so we can really address the housing problem at large.”

The finance crash course is part of this week’s fifth Asia-Pacific Housing Forum hosted by Habitat for Humanity International. The forum provides international housing experts and development luminaries a venue to discuss, collaborate and provide innovative solutions to low-cost housing issues. This is a particularly pressing issue in the region — home to 60 percent of the world’s poor — where cities and communities are becoming highly urbanized yet still remaining vulnerable to natural disasters.

Increasing urbanization

Large-scale urbanization in major cities has resulted in rapidly increasing demand for shelter — and is one of the biggest reasons why financing for mass housing has been hard-pressed to keep up. HFHI data noted that about 120,000 people settle in major cities in Asia and the Pacific each day. To make sure there would be sufficient housing for these migrants would mean having to build 20,000 new housing units per day.

“We have increasing housing demand with rising incomes and that is going pretty rapidly,” Hoek-Smit said. “There is a lot of tension in people entering the middle class since they now have a job and a [relatively] good income … but [the stock] is grossly inadequate.”

In an ideal setting, housing investments should take off once a country’s gross domestic product per capita reaches $3,000, and then gradually decreasing after per capita GDP breaches the $36,000 mark. And while investments in decent urban shelters may slow down following a surge in urbanization, Hoek-Smit said it shouldn’t be delayed by several years — as is the case in Asia and sub-Saharan Africa, where there is virtually no urban planning and insufficient national housing policies.

“What is the problem in urban migration and housing? People from rural areas are majority poor because income distribution doesn’t change much despite growth,” she said. “[It] makes the affordability problem for housing much worse. That is what we have to keep in mind.”

There is no denying that there is an immediate need to provide mass housing in urban areas, as one-third of the people living there currently reside in slums. And this situation may just get worse. According to the U.N.’s World Urbanization Prospects, the global urban population is expected to grow by 2.5 billion people by 2050, 90 percent of whom will likely be concentrated in Asia and Africa.

Breaking the cycle

So how can decent low-cost housing be provided despite insufficient financing?

The cycle of informal housing needs to be broken, Hoek-Smit explained, by unleashing a housing demand — the willingness and ability to pay for a specific type of housing — and incentivizing the market supply.

“You have to unleash demand. What is demand? Many of you will say the need for housing. But it is not,” she said. “Need and demand are very different things.”

One way to stimulate demand is to provide low-income people access to finance. This may include mortgages with affordable repayment terms, large-scale and microfinance loans, and offering staggered payments at fixed interest rates. Growth in demand for low-cost housing could meanwhile encourage construction companies to think of more effective and cost-efficient ways to meet that demand, and for lending institutions to create new products that would be affordable for people earning $2 per day or less.

The problem, however, is that many households in low-income settings are too conservative when it comes to investing in assets, including housing. The seemingly high cost and complex process to buy a house are barriers that are often too high for them to overcome. Lending institutions are likewise concerned about households defaulting on their loans.

“For housing products to be viable business propositions, they need to make a contribution to overall profitability of the business relative to their risk and the investment of capital and other resources required,” said Patrick Kelley, Habitat’s senior director for market development and housing finance.

The question then is: Can a housing finance system stimulate people to save for housing, and can finance institutions innovate more to fit the changing needs of people while managing the risks they may face?

There is no definitive answer yet, but Hoek-Smit said continuous cooperation and collaboration, particularly with the private sector, to achieve sustainable solutions is essential.

“In the end, of course, there must be a better model. If you don't get the private sector involved, you will never be able to solve even in emerging markets the housing problem,” she concluded. “It is more expensive to build incrementally than building directly permanent structures [at once].”

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