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New Frontiers in Affordable Housing

SHANGHAI – Providing decent, affordable housing is a growing challenge in
developing and developed economies alike. With demand far exceeding supply,
the adverse effects – on mobility, productivity, and growth – are (or
will be) increasingly apparent. Fortunately, there are ways to narrow the
affordable-housing gap substantially, using mostly market-based approaches
at the municipal level.

Worldwide, 330 million low- and moderate-income urban households either
live in substandard housing or are so financially stretched by housing
payments that they must forgo spending on essentials like health care and
education. By 2025, that figure could reach 440 million households, or
about 1.6 billion people (one-third of the world’s urban population) –
and that does not even cover some of the world’s poorest people, who
often live outside of cities, on urban streets, or as squatters, leaving
them unaccounted for in census estimates.

Replacing today’s substandard housing and building the additional units
needed by 2025 would require an investment of an estimated $16 trillion –
a daunting figure, to say the least. But there are four key “levers”
[2] that can reduce the cost of housing delivery by 20-50%, thereby making
housing affordable (amounting to no more than 30% of total income) for
households earning 50-80% of the median income in most cities.

The first lever is more efficient land use. Acquisition of land for
development in the right location at a reasonable price has the greatest
potential for reducing housing costs.

Location is especially important in developing countries, where many areas
lack adequate transport, water, electricity, and sanitation infrastructure.
Investment in these areas would improve and expand land use – whether by
unlocking unused land or equipping areas to support more inhabitants –
thereby helping to reduce housing costs.

Similarly, cities can loosen land-use restrictions, such as unit size
requirements, to allow for higher-density, and thus more valuable,
projects. In exchange for providing the increased value to real-estate
developers, municipal authorities could require that a portion of the land
or a certain number of units be set aside for affordable housing. Such a
cross-subsidy would increase the housing supply across income bands, at no
direct cost to the public.

The final step toward improving land use is the implementation of measures
to discourage land hoarding. China, for example, imposes an idle-land tax
on formerly public land if its owners fail to initiate the development
process within a year.

This brings us to the second key lever to expand affordable housing: a more
cohesive and efficient construction industry. As it stands, the
housing-construction industry is highly fragmented, impeding its ability to
take advantage of economies of scale, and builders often rely largely on
the same methods used 50 years ago.

By standardizing design elements like ceiling heights, fixtures, and
flooring, construction companies can cut costs and raise productivity, as
workers gain experience with repetitive tasks. Further savings are possible
through industrial approaches, such as the use of components – for
example, walls and flooring slabs – built offsite. And most builders lag
behind other industries in terms of the efficiency of purchasing and other
processes. Together, these improvements could cut housing-construction
costs by up to 30% and delivery time by 40-50%.

The third key lever to make housing more affordable relates to operations
and maintenance – everything from heating the building to repairing
cracked tiles – which account for 20-30% of total housing costs. Here,
the biggest opportunity lies in efforts to improve energy efficiency, with
insulation, windows, and other retrofits generating energy savings of
20-30%.

Additional savings would be possible if maintenance and repair companies
were more transparent and competitive, and operated on a larger scale. To
this end, public institutions could certify and list suppliers that meet
quality standards, or bring owners together in buying consortia – an
approach that has helped the United Kingdom’s social-housing agencies cut
costs on some items by more than 20%.

The final affordable-housing lever is expanded access to finance,
especially for low-income households, which often face the highest
borrowing costs – if they can gain access to finance at all. For the
world’s many “unbanked,” who cannot accumulate savings or establish a
credit record, the only option is to pay steep risk premiums for high
loan-to-value mortgages.

To expand access to finance, countries can improve underwriting by
establishing credit bureaus, which are uncommon in developing economies,
and training and certifying property appraisers. In some countries,
collective-savings programs – that is, provident funds and building
societies – have helped low-income households to accumulate down
payments, with the pooled savings also providing capital for low-interest
mortgages.

At the same time, to reduce financing costs for developers, municipal
bodies can “de-risk” projects by committing to purchase affordable
units or guaranteeing qualified tenants. Cities can also streamline
approval processes to accelerate completion.

These four levers, if used systematically, can reduce the costs of housing
for those who need it the most, while creating a better-functioning market
that provides more choices for households across income levels. Indeed,
while municipal and national governments will have to take additional
measures to address the needs of their poorest citizens, cities have
powerful tools at their disposal for closing their affordable-housing gaps.

charles
Though no single solution will work everywhere, initiatives that integrate
land policy and more accessible finance with efforts to modernize housing
construction and management can lead to progress everywhere.
_CHARLES S. LAVEN IS PRESIDENT OF FORSYTH STREET, AN IMPACT INVESTMENT
COMPANY, AND AN ADJUNCT PROFESSOR OF REAL-ESTATE DEVELOPMENT AT THE
COLUMBIA UNIVERSITY GRADUATE SCHOOL OF ARCHITECTURE, PLANNING, AND
PRESERVATION. JONATHAN WOETZEL IS A DIRECTOR OF THE MCKINSEY GLOBAL
INSTITUTE._

Copyright: Project Syndicatejonathan

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