Financing for affordable housing

Millions on earth do not earn enough to afford a house. Housing prices have spiraled up, and would continue to do so as pressure of population and nuclearisation of families continues. As there is a humanitarian angle to affordable housing finance, this topic is very dear to me, and I wish to do much more work in this field... Here is a modest beginning.

Affordable housing, social housing, public housing, low cost housing:

Several terms used commonly as above - they seem like interchangeable but there is a subtle difference. Public housing refers to the provision of housing accommodation by the government or public authorities. Social housing has a meaning close to public housing.

Affordable housing is where the payments that occupier makes are close to 30% to 35% of the occupier’s monthly income.

Low cost housing refers to construction methods as also the financing methods whereby the cost of housing can be reduced.

All these terms eventually refer to the concerted efforts to provide housing solutions to the millions who are not able to afford to pay for their houses. As population explodes, and families become more and more nuclear, the demand for houses continues to increase world-over, and the price for houses continues to soar, making a house beyond the reach of the masses. While food, clothing and shelter are considered as the basic necessities of life, housing is quickly becoming a luxury that masses are unable to affordable. Hence, the need for affordable housing.

Reasons for surging housing demand:

There are several significant reasons for surging housing demand, and why there is a continuing need to add to the stock of available houses.

• Urbanization: It is uniformly accepted that urbanization is the side effect of development. Click here for more on urbanization. The process of development quite often is associated with jobs moving from agrarian sector to industry or services. In addition, development is manifested in education, better income levels, and therefore, an obvious surge for better living conditions. Cities are seen as better places to live and to educate children. From a policy viewpoint, urbanization is not a blessing – it creates ecological imbalances, creation of slums, etc. However, to the extent the process of urbanization cannot be controlled, efforts have to be made to provide shelter to the masses that move every year to live in cities.
• Increase in population: Global population is increasing at a very fast rate, and in certain parts of the World, the increase in population rate is higher than in other parts. Increasing population obviously results into demand for more houses.
• Nuclearisation of families: With transferable jobs and increased mobility of the workforce, both within and outside political boundaries, the size of the family unit has constantly come down. Even in societies where joint family was the way of life, families are increasingly becoming nuclear. This has also increased demand for housing.
• Betterment of living standards:  In general, as income levels have gone up, families have become upwardly mobile.

Why affordable housing finance:

Affordable housing is mainly composed of two elements – affordable cost of the house, and affordable means of financing such cost. Needless to emphasize, lowering the cost of the house is an extremely significant element of affordable housing, as there cannot be any affordable housing finance, unless the cost of the house itself is affordable. Lowering the cost of the house once again has several elements – the area of the house, construction methods which can lower down the cost of construction, and moving housing concentration away from places where land is costlier to places where land prices are more affordable.

The other significant element of affordable housing is housing finance. Housing is one of the assets where financing is almost a sine qua non. Financing the acquisition of any asset is a method of meeting the timing mismatch –  I need an asset now, but I will money to pay for it later. That is a case of mismatch, and borrowing brides the mismatch. In case of houses, that mismatch is the most pronounced. An individual earns during his working life, and would possibly earn and save enough money over something like 2 decades to afford a house when he retires. But the question is, you need a house to stay during your working life too. So, one needs financing to meet that long mismatch.

World-over, from the viewpoint of retail lending, housing is considered as one of the best assets. However, free play of market forces leads to too much of financing being directed to a particular section of the borrowers – the middle income to upper-middle income group. The result is the subprime crisis, which is essentially too much funding being fed to persons who would not need such funding. Thus, while masses World over are still starved of funding even as substantially higher rates of interest, capital from every nook and corner of the World flew to be invested in US MBS. Neither are Ginnie Mae, Fannie Mae or Freddie Mac, who mobilized the MBS paper, nor the investors who invested in the same, are to be faulted. The fault squarely lies on the regulators and governments world-over who have precious little for mobilizing affordable housing finance in their own countries. Hence, it is not a surprise that the Chinese Government would invest billions in US MBS, while there are millions in China itself who are homeless.

This points to an extremely urgent need to develop concentrated, government-supported affordable housing finance models for the less-privileged all over the World. This section of my site is an humble effort to contribute to the massive cause of affordable housing.

More of our write ups:

• Micro Credit in India - Overview of the Regulatory Scenario

• Housing finance system

• Features of a sound housing finance system

• Urbanization and housing shortgage

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