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Housing Finance and Development
Housing finance has risen to the top of urban policy and research agendas in recognition of the role that it can play in the delivery of shelter. In turn, well-functioning housing finance systems have a potentially beneficial impact upon both housing and financial sectors, thereby contributing to economic development. Deeply informed by wider neo-liberal economic reform undertaken in developing countries in the 1980s, housing finance is embedded in the enabling approach.
Linked to broader changes in urban management approaches, the enabling approach has sought to address both the supply and demand side of housing and has paid particular attention to ‘getting the institutions right’, which entails economic, financial, legal and institutional reform. Governments in particular have been recast from being providers of housing to creators of enabling environments, urged to undertake regulatory reform and work in collaboration with the private sectors.
Championed by international agencies such as the World Bank (which produced a report in 1993 entitled ‘Enabling markets to work’) and United Nations Settlement Programme (UN-Habitat), this approach has been highly influential in determining housing policies across the developing world.
While covering a range of issues including property rights, the provision of infrastructure, regulation of land and housing development, organization of the building industry, and the development of appropriate policy and institutional frameworks, housing finance is identified as an integral component of the enabling approach (World Bank, 1993). Indeed, even as far back as the 1980s, the World Bank was already moving towards a greater reliance upon finance in not only its housing but wider shelter projects (Buckley, 1996). Starting from a preoccupation with the need to develop mortgage finance as well as the rationalization of subsidies, there has been considerable innovation in housing finance.
As such, it now constitutes a diverse range of financial products, organizations and delivery mechanisms. A range of formal and informal financial instruments is available and provided through partnerships between governments, the private sector, non-governmental organizations (NGOs) and microfinance institutions (MFIs) (Ferguson and Navarrete, 2003; Lea, 2005).
That said, the evidence of whether housing finance can resolve the housing crisis in the developing world is debatable. Recent research highlights the scale of the housing problem, which is the product of two interrelated processes: high rates of urbanization and the urbanization of poverty. Noting the growth of ‘megacities’ as well as the fact that the majority of urban residents in the developing world live in under-resourced small towns and cities, it is estimated that developing world cities will absorb as much as 95 per cent of all urban growth in the next two decades. By 2030, 4 billion people, or 80 per cent of the world’s urban population, will live in the developing world.
Perhaps even more significantly, this explosive urbanization will be accompanied by growing poverty and inequality. As a recent United Nations Centre for Human Settlements (UNCHS) report notes, even while there is evidence of an emerging middle class in countries like India and China, in other parts of the Global South, it has more or less disappeared and joined the ranks of the poor.3 Furthermore, while cities have served and continue to serve as important engines for growth and contribute to national economies, future cities are also likely to be characterized by growing inequality.
As previous research by UN-Habitat has pointed out, the human settlement dimension of poverty is inadequate housing, which is increasingly understood in the framework of slum settlements which not only translate into insalubrious living conditions but also severely limit the development of human capital (Davis, 2006). There has been a substantial increase in the number of people found in such housing.
There were nearly 715 million slum dwellers in 1990, increasing to 998 million in 2005 and predicted to rise to 1.4 billion by 2020 (UN-Habitat, 2006c). It is estimated that Asia is already home to more than half the global slum population (581 million), followed by Sub-Saharan Africa (199 million, which also has the highest slum growth rate at 4.53 per cent) and Latin America and the Caribbean (134 million).
Thus one in three urban dwellers lives in slum conditions, and there is an urgent imperative to address this situation, with slum upgrading being viewed as ‘the linchpin of urban poverty reduction strategies’. Indeed, even while Goal 7, Target 11 of the Millennium Development Goals (MDGs) seeks to achieve ‘a significant improvement in the lives of at least 100 million slum dwellers’ by 2020, this will only address the needs of a small proportion of people living in inadequate housing.
Of course housing finance is only one of a range of instruments that has to be put in place in order to address this housing deficit (World Bank, 1993). At the same time, however, there are particular challenges which have to be addressed in the realm of housing finance.
Housing Finance and Development
While housing finance is one component of the financial fabric of societies, there is also a conflation of a range of financial mechanisms and systems under the rubric of ‘housing finance’. Thus housing finance consists of the organised mobilization of savings, credit and subsidies, or any combination of these (Datta and Jones, 1999; Mitlin, 2007).
Having noted these key types of housing finance, it is vital to recognize the connections between them. For example, savings and subsidies are often linked, as evidenced in the case of the housing subsidy programme in Chile, where households were required to demonstrate a savings record in order to access subsidies. Others point out the advantages of combining savings with credit (Wright, 2000), whereby savings serve as a vital indication of both the ability and willingness of households to put money aside and make regular payments which, in turn, enables them to access credit.
Furthermore, research from the Global South also points to the connections between formal and informal financial organizations in the arena of housing finance: informal savings clubs are likely to deposit their money in formal organizations, while semi-formal organizations can themselves be transformed into formal organizations, as evidenced by the case of PRODEM, which became BancoSol in Bolivia. The financial behaviour of households further reflects these connections as the households sustain complex financial networks that utilize credit, savings and subsidies that may span across the informal, semi-formal and formal sectors. Relatively little is known about the linkages between housing finance and development.
Stepping back to first consider the relationships between finance and development and housing and development, Green et al identify two key strands of research on finance and development. The first body of research highlights the relationship between financial sector development and economic development. Much debate still exists on the causality of this relationship as well as the impact of financial sector development on poverty reduction itself. A second strand of research focuses on the role of micro and small enterprise (MSE) development on poverty reduction.
The growth of the MSE sector has been credited for addressing income distribution, poverty and unemployment, creating the bases for industrial growth, and mobilizing savings, while also addressing financial exclusion among lower-income groups (Green et al, 2006). Thus increasing low-income groups’ access to finance is proposed as enabling them to build productive assets, enhancing both their productivity as well as engendering sustainable livelihoods.
A somewhat similar trajectory of research has traced the relationship between housing and economic development. Research on the meanings ascribed to housing centre on how housing has been seen as either a social or an economic good.
There has been growing consensus that housing is not just a social good but also a critical economic asset with many poor households setting up home-based enterprises (HBEs) or MSEs in or around their homes. Such HBEs or MSEs can make up as much as a third of household income and also speed up the rate of housing consolidation, as money generated is invested back in the house, which also serves as a place of production.
An effective housing sector also has important multiplier effects, creating employment in the construction and building material industry. If they function well, housing markets enable savings, wealth creation and entrepreneurial development (Joint Centre for Housing Studies, 2005). Housing, therefore, can address two interrelated policy priorities: poverty reduction and economic growth through enterprise development.
Viewed through this lens, improvements in both housing and infrastructure have a beneficial impact upon wellbeing, status and health as well as more indirect benefits on income generation and reduction in expenditure on basic needs (Mitlin, 2003). Yet, this said, it is important to recognize that the housing industry in the developing world has not necessarily had the same multiplier effects as evident in the Global North. As Godwin Arku and Richard Harris (2005) illustrate, housing projects in developing countries that aim to deliver conventional Western housing may use imported building materials such as cement, and indeed even import labour in some cases, so that the multiplier effects of housing are not evident.
Nevertheless, it is evident that the relationship between housing finance and development is not as fully explained as those between finance and development and housing and development.
Yet evidence from the developed world suggests that there is a causal and interrelated link between housing demand, housing finance, financial sector development and economic growth . Here, the provision of housing finance has expanded significantly both in total volume lent as well as the extent of the market that is served. In particular, the mortgage market is a key contributor to overall financial sector development. Bruce Ferguson and Jesus Navarrete report that equity held in residential property represents the largest asset held by most households in developed countries and constitutes most of a nation’s wealth. In fact such is the influence of housing on financial markets and development in the developed world that it can potentially offer a way out of recession, but also critically create financial volatility. The mid-2007 sub-prime crisis in the US, which continued to linger through 2008 and into 2009, is a further confirmation of this.
In contrast to the experiences of the Global North, the relationship between housing finance and development is generally underdeveloped in the developing world. This is attributable to a number of factors. First, many developing countries suffer from a lack of financial resources to devote to housing.
Not only are financial sectors generally weak (albeit with some regional variations), but public budgets may be in deficit, and further pressurized due to debt servicing. This is reflected in one of the key statements of the UN-Habitat (2005b) global report on housing finance, which concluded that it was ‘unlikely that many developing countries will have the required finances to fund urban infrastructure and housing needed in the next 20 years’. Indeed, the sub-prime mortgage and lending crisis and the ensuing credit crunch seem to suggest that this situation will get worse in the foreseeable future (Mitlin, 2007).
Second, the lack of availability of appropriate types of housing finance that match the needs and requirements of households means that the majority of households cannot build wealth by increasing or releasing the equity held in their homes. In particular, a lack of (credit) finance as evidenced by small or virtually non-existent mortgage markets means that most households cannot purchase or improve their dwellings, or indeed refinance existing housing in formal financial circuits (UN-Habitat, 2001). Coupled with a general lack of housing finance directed at the second-hand property market, this has negative repercussions on residential mobility, especially at the lower end of the housing market, so many poorer households are unable to release the equity held in their home.
Despite innovations in housing policies and housing finance, therefore, there is still scope to shift the focus from the supply to the demand side of housing. Critically, housing finance must be provided in ways that support urban livelihoods and asset formation rather than increase vulnerability through debt.