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In addition to providing direct effects on a national economy, residential construction can also have major indirect effects through backward linkages with industries that supply building materials and related products (metal, machinery, wood and so on). This means that an increase in residential activities generates a corresponding increase in output in related industries, ultimately leading to higher national economic growth. Despite several efforts made in the past to reduce poverty, especially in developing countries, access to basic services such as health, education and housing, among others, continues to be a major national and global challenge. On the basis of the mounting poverty problem, the United Nations (UN) member states in 2000 agreed on eight specific goals to be achieved by 2015.
These are generally referred to as the Millennium Development Goals (MDGs). The MDGs have now been revised and four additional targets have been added while the eight goals remain the same. As per this revision, the slums target is number 7.D. Since housing is an important sector of any national economy, it will be impossible to achieve these goals without paying adequate attention to the provision of housing and related infrastructure. Put differently, housing is directly or indirectly related to these goals and can be a lead sector in achieving the objectives; it contributes to the reduction of social vices, enhances social harmony, opens up economic-generating opportunities, improves health conditions, and contributes to sustainable environmental development. This suggests that the benefits of housing investment cannot be stated in welfare terms alone, but also need to be described in economic, social and environmental terms, thereby allowing housing to compete effectively for resources. Since the adoption of the MDGs, UN-Habitat has adopted a more holistic approach to the housing sector, integrating housing policy and programmes as part of the overall development strategies to achieve the MDGs. In particular, Target 11 aims to significantly improve the lives of at least 100 million slum dwellers by 2020. A number of UN-Habitat's empirical studies suggest that housing improvement has a strong correlation with social and economic indicators such as disease control, environmental improvement and increased school enrolment, among others. One of the concerns of opponents of housing investment is its effects on the national economy, especially in relation to inflation and balance of payments. There are various dimensions of the relationships between housing investment and the real economy, as presented below:
• In cases where significant portions of the building material inputs are comprised of imports, building activities can contribute to trade deficits in the national economy. This is particularly true for luxury housing, which is likely to have greater import contents than low-income housing.
• Substantial state investment in housing may divert resources away from export producing sectors. On the one hand, with the exception of homes for paying guests, serviced apartments and seasonal tourist villas, housing is generally not exportable and, hence, does not earn foreign exchange. On the other hand, to the extent that housing investment increases the productivity of labour in export industries, it may indirectly contribute to foreign earnings.
• An increased demand for housing units in the short run, without a corresponding increase in supply, can affect the price of housing itself, the price of housing inputs, and the price of other goods and services. However, the extent to which an increased demand for housing can affect prices depends on several factors, including the elasticity of inputs and whether an increased demand is domestically financed or externally financed.
• Increased housing investment in the short run can pose constraints in the supply of building materials and skilled labour.
• Indiscriminate spending and investment in the housing market may cause speculation in the real estate market and skyrocketing of land prices. Studies have shown that over-borrowing, over-lending and indiscriminate spending was a cause of the collapse of the housing sector in Southeast Asia and consequently had a major impact on the financial crisis in the region in the mid-1990s. The sub-prime mortgage market meltdown in the US is also a good example.
• Indiscriminate deforestation with attendant consequences of ecosystem destruction is in turn contributing to global environmental challenges including climate change. In general, housing investments can have tremendous impacts on a national economy.
Through the several economic benefits outlined above, housing investments could lead to rapid economic development and growth, increasing national wealth and income, which will spur further demand for housing and related activities. In Asian city-states such as Singapore and Hong Kong, for instance, housing for the masses was a key engine of growth in the 1980s and 1990s. However, the connection between housing and national economy is only part of the story. The performance of the national economy also has important implications for the housing sector, especially on factors influencing investment. For example, government spending on the housing sector may increase as a result of rapid economic growth. Alternatively, in situations where government wants to use housing as a recovery tool, its investments in housing and related services will increase substantially. Similarly, the performance of the economy also has important implications for broad macroeconomic variables (inflation rates, interest rates, taxes, subsidies and so on) and institutions (for example mortgage lending). In Thailand, for example, rapid economic growth during the early 1990s led to innovative mortgage lending by the government housing bank, facilitating high-volume, low-cost housing production. Finally, the broader macroeconomic performance has significant implications for a nation's economic model and stage of economic development, both of which are dynamic determining factors for housing policies and programmes.