4 Major Policy Reforms That Will Address Global Affordable Housing Challenge
Nearly 440 million households across the world are inadequately housed with a majority of them in the developing countries. McKinsey estimates that it would cost at least 16 trillion US dollars to build livable houses for them. This is, of course, a great challenge but a few major policy reforms will go a long way in making housing cheaper.
Increase the supply of land
There are some cities where land is in short supply. This is especially true of cities surrounded by water such as Mumbai, Hong Kong, Singapore, Jakarta and Seoul. Even in such cities, large tracts of land in the core remain idle or underutilised. In case of Mumbai, a significant fraction of very valuable urban land in Indian metropolises is in the hands of various government agencies. No one knows how much land remains idle or underutilised in the hands of the government. When the World Bank did a study of the first of its kind in Ahmedabad, they found that 32 per cent of the developed or developable land was in the hands of the government. The World Bank also found that the city can raise anywhere from $ 3.6 to $ 9.8 billion by selling this land, and that this is over twice the cost of meeting the infrastructural needs of Ahmedabad for the next 20 years. Even though no one has done a study, think tank estimate that at least 30-40 per cent of the land in Indian cities is likely to be government-owned. As government do not periodically measure the capital value of their land asset and the revenue such land could possibly generate in the market, such land remains underutilised. Private firms always try to find out whether their assets could be used more efficiently. However, the government does not. This is true in almost every city in the world. Even the New York City has large tracts of land remaining underutilised or idle, and the government owns some of it. The government can put such land to use by making it easy to sell and acquire land, by changing land use policy, by allowing more mixed-use developments, and by allowing changes in land use.
Facilitate economic growth and better practices
It is true that construction costs itself are a major barrier. As cement and steel would have cost pretty much the same everywhere in the world if barriers to free trade like tariffs do not exist, it may seem that nothing much can be done there. After all, most people in the world cannot afford a unit in a high rise, even if the government allows very tall buildings and makes land cost nearly insignificant. But many construction practices that are already known can cut down the cost of housing if houses are produced on a large scale. For example, using prefabricated parts can lower the cost of housing. This is more feasible in large-scale housing projects and skyscrapers. Technology is advanced enough to allow such buildings. It is this policy that stands in the way. Experts estimate that 70 to 80 per cent of the construction process can be done off site, but because most projects are small-scale, real estate developers are unable to benefit from economies of scale.
Make access to finance widely available
Most Indian households do not have access to formal finance in any meaningful way. There is a belief that low-cost housing is too risky, and that banks and financial institutions do not have much of an incentive to lend to such households. As things stand, this is true. But this is by no means inevitable. If property appraisals become more credible and if the credit ratings of such households are available, they need not stay informal. In India, a large segment of the economy is informal because regulations have forced people to stay informal. For example, if the government decides that businesses and houses need to meet certain standards, small-scale businesses and households that cannot afford to meet such standards will stay informal, and probably remain that way. The challenge developing countries face is much greater, but with clearer property titles, and legitimately lenient standards, it is quite possible to bring more households into the ambit of formal finance.
Allow housing to benefit from economies of scale
Real estate markets are fragmented in many countries. This is especially true in India because the law did not allow large-scale projects. In urban areas, there were upper ceilings on the amount of land private individuals can own. There are restrictions on converting agricultural land to industrial or commercial use. Various government policies have led to the real estate industry having many small firms that are not very resilient to the vicissitudes in market conditions. This prevents real estate developers to plan for the long run, from investing in long-term projects, adopting innovative methods of construction and in hiring a skilled workforce. This will change if real estate markets are liberalised.