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FACING THE ENVIRONMENTAL CHALLENGE
FINANCING URBAN
HOUSING: UNITED NATIONS GLOBAL REPORT ON HUMAN SETTLEMENTS
Donatus Okpala, Naison
Mutizwa-Mangiza, and Iouri Moisseev
More than 2 billion people will be added to the number of urban dwellers
in the developing countries over the next 25 years. This implies an
unprecedented growth in the demand for housing, water supply, sanitation
and other urban infrastructure services. This new challenge exists in a
context of already widespread poverty and inequality in cities, with
millions of people living in slums without adequate basic services.
Providing these services to new residents will be essential if this
additional population is not to be trapped in urban poverty, poor health
and low productivity. It is an urban problem with significant
macroeconomic consequences. This Global Report examines the urgent
challenge of financing urban shelter development over the next
generation. The report is divided into four parts. Part I presents the
macro-economic, shelter policy and urban finance contexts of financing
urban shelter development. Part II describes and assesses recent global
trends in shelter finance, including mortgage finance, financing for
social housing, shelter microfinance and shelter community funds. Part
III provides an overall assessment of the shelter financing systems
analyzed in Part II and examines policy directions towards sustainable
shelter finance systems. The Epilogue in Part III examines the
implications of the report’s findings on sustainable urban shelter
policy. In Part IV, the Statistical Annex comprises 16 tables covering
three broad categories: demographic indicators and households data;
housing and housing infrastructure indicators; and economic and social
indicators. These tables are divided into three sections presenting
data at the regional, country and city levels.
PART I: ECONOMIC
AND URBAN DEVELOPMENT CONTEXT
Chapter 1 – Challenges
of Sustainable Shelter Development in Macro-economic Context
By
presenting the latest global demographic projections, Chapter 1
highlights the major social and economic challenges of urban shelter
provision in the next 25 years. The chapter also presents a
macro-economic framework within which to situate the problem of
financing urban shelter and to understand its broader implications.
While most of the urban population growth will occur in East and South
Asia, particularly China and India, many places around the world will
experience the urbanization of poverty and inequality between rich and
poor.
Understanding urban
shelter development challenges
The current global backlog of slum dwellers is about 925 million people.
When this figure is combined with the projected 1.9 billion additional
urban population, it is apparent that 2.825 billion people will need
housing and urban services by 2030. The demand for housing – just to
accommodate the increase in the number of households over the next 25
years – is estimated to be 877 million housing units.
This challenge is not just about the quantity of population, but also
its composition. Cities are changing rapidly, especially in terms of
both the scale and rate of demographic, social and economic
transformation. This pattern of growth will also place additional
strains on environmental resources needed for cities, such as clean
water and clean air. Growing demand for infrastructure services places
immediate pressures on natural resources. Environmental studies show
that cities have important impacts upon the natural environments in
which they are located, what is known as their ‘ecological footprint’.
Consumption of natural resources by urban residents – for example,
firewood in Africa – is frequently growing faster than nature is able to
reproduce those resources. This pressure on natural resources is most
dramatically shown by the increasing cost of potable water in almost
every city in the world.
With this backdrop, it is clear that the capacity of developing
countries to finance their needs depends largely upon their level of
future economic growth and development. If countries are able to
generate employment and incomes for growing populations at an
accelerated rate, they will be able to generate and mobilize the savings
and investment to finance housing and infrastructure services. Two key
factors are needed to translate macro-economic growth into finance for
urban development. The first is governance – how public, private and
non-governmental institutions work together to plan and manage cities.
These institutional challenges range from establishing the laws and
regulations governing life in the city, to developing new residential
areas for the growing population, to decentralized problem-solving at
the community level. The growing trend towards decentralization in most
national governments in developing countries has transformed the roles
and responsibilities of these institutions over the last two decades.
However, this process is also insufficient to provide the needed
housing and infrastructure services for growing populations. The second
factor, finance, is essential for this process. While the financial
challenges are introduced in Part I, they are the subject of the body of
this report.
The macro-economic
context of urban shelter development
The second part of Chapter 1 examines the macro-economic context for
urban development. It addresses the following factors: patterns of
economic growth; sectoral performance and productivity; income
distribution and inequality; poverty and employment; savings; external
debt; patterns of investment (public, private, and foreign); impacts of
external factors upon macro-economic performance; and the urbanization
of national economies.
A
period of unprecedented economic growth at the global level occurred
during 2004-2005. All developing regions grew at a pace faster than
their growth rates of the 1980s and 1990s. Global trade also expanded
considerably, with China’s demand for imported raw materials and food
spurring exports from other developing countries. The most striking
feature of economic growth has been the high rate of growth for the
developing countries, going above 6 percent for the first time.
However, the distribution patterns are worrying because they continue
the trend towards greater disparity in income levels between the
regions, as well as between developing and developed countries. Global
inequality between rich and poor countries, therefore, continues to
worsen, even when there have been extraordinarily high rates of economic
growth. The most questionable aspect of this growth in 2005, however,
is whether it is likely to be sustained in the future.
The growing importance of world trade means that ‘tradeables’, whether
manufacturing products or commodities, have become increasingly central
to the economic growth of all countries, whether developed or
developing. While this places great emphasis on agriculture and
production of raw materials, it also requires improvements in the
efficiency of infrastructure in telecommunications, transport and key
services such as electricity and water supply needed for manufacturing
and other industries.
Despite the impressive economic growth of the past few years, the
enduring problem of massive poverty in the developing countries remains
the top priority problem facing the world today. The incidence of
poverty at the national level is highly correlated with low levels of
education and poor health status, as well as lack of access to basic
infrastructure services such as clean water supply, sanitation and
electricity.
The most direct and important factor contributing to urban poverty is
the shortage of well-paid employment in cities. The challenge here is
both the creation of jobs and the level of wages. The generation of
employment depends generally upon savings and investment within the
macro-economy and local economies, as well. One problem that is
associated with high levels of poverty is a lack of domestic savings
within national economies. Low levels of domestic savings – both public
and private – contribute to low levels of capitalization of the
financial institutions in poor countries. They are also reflected in
low levels of tax revenue collection and therefore place great
limitations on public expenditures and public budgets. The issue of
savings is particularly important to the financing of urban
infrastructure and housing.
The legacy of external borrowing for diverse purposes has left many
countries with unsustainable levels of external debt service. In some
countries, particularly in Africa, the debt service to gross domestic
product (GDP) ratio has reached over 400 percent. These levels of debt
immediately reduce available domestic capital for investment. Given the
above, the patterns of investment in the developing countries have
changed markedly over the past decade. At the same time, there has also
been an important segmentation in the global financial markets, with
some countries – particularly the East Asian countries – being able to
attract high levels of foreign direct investment (FDI). Public
investment as a share of GDP is also low in most developing countries.
They have relatively large deficits in their public budgets, with items
such as the maintenance of infrastructure being a low priority in most
countries.
The lack of resources for public investment in the poorest countries
poses a serious dilemma. Many of these countries do not qualify for FDI.
They are dependent upon official development assistance (ODA) as the
major source of financial support for economic development. Yet, ODA is
also severely limited. Even with promises of additional finance, the
actual levels of official development aid are constrained by lack of
domestic political support in the developed countries, or by the
restrictions of macroeconomic agreements with the international
financial institutions.
Here, urban development must compete with other priorities in the fund
allocation at international and national levels, which are clearly
politically determined within individual governments. Many governments
increasingly assign responsibility for housing and urban development to
the provincial, state and local levels, rather than to the national
level. The weaknesses of the public sector and its inability to
mobilize substantial resources for urban development therefore point to
the need to give greater attention to private sources of finance,
including the role of privatization of infrastructure services.
A
final characteristic of the macro-economic context for urban development
is the urbanization of national economies themselves. Abundant evidence
exists to demonstrate the growing importance of cities in the overall
productivity of countries. The increasing share of national GDP
produced in cities has been well documented. Despite historically rapid
rates of economic growth, there is little likelihood that conventional
sources of funds will be available for investment on the scale needed to
meet the projected demand for urban shelter and related infrastructure.
Chapter 2 – Shelter
Policy and Finance: Retrospective Overview
Discussing the general trends in housing and urban development policy,
this chapter highlights the paradigm shifts that have occurred –
particularly in the policy context of urban shelter finance.
Between 1972 and 1982:
Habitat I
By
the early 1970s, the concept of intermediate technology had been
developed and became popular, with the recognition that different
technologies were appropriate in different contexts. Between 1972 and
1982, the focus of financing was on low-interest loans, loan guarantees
and subsidies as a means of making housing affordable to low-income
people. Interventions in this period concentrated on demonstration
projects of limited size, with regard to a city or region, and were
usually confined to a particular neighborhood or group of neighborhoods.
Projects tended to be outside of municipal control, to have different
standards from elsewhere, different means of implementation and to have
little effect ‘outside the fence’. Projects generally focused on
self-help, providing a context in which the spare time and energy of
low-income people could be devoted to house construction or
infrastructure provision. They were broadly of two types:
sites-and-services projects for new housing provision; and settlement
upgrading for bringing squatter and other informal settlements up to an
acceptable standard of servicing and public space provision.
The concept of adding value through physical work, referred to as ‘sweat
equity’, was strongly ingrained in the projects of the 1970s.
Participants in sites-and-services schemes were helped in their
construction efforts by project staff that provided a range of services.
However, evaluations have shown that many participants used
professional building workers in lieu of sweat equity.
In
addition to finance by sweat equity, there were many subsidies. Some
were declared in the project (on budget) and others were hidden
(off-budget). The participants in sites-and-services schemes tended to
have rather higher incomes than the rhetoric and intention implied.
Dwelling owners in upgrading schemes, on the other hand, tended to be
among the low-income groups and their tenants were probably in even
lower income echelons.
Many beneficiaries found themselves unsuited to the project and bought
their way out by selling to richer households, ignored some of the
project requirements to better suit it to their needs, or defaulted on
payments to make it affordable. Tenants did not benefit much as their
rents would rise and tended to move out to other non-upgraded
settlements where rents were still affordable.
The projects were often too complex for the municipal authority to
implement. The great majority of citizens – those outside the project
‘fence’ in the cities affected and those not finding work in the project
– benefited hardly at all.
The 1980s to the 1990s:
Towards financial sustainability
For all the efforts aimed at improving housing, the unserviced informal
settlements appeared to be expanding rather than in decline. The
limitations of this approach sequenced a low impact upon overall urban
economic development, restrained institutional reforms and the funds
were restricted to ‘retail’ rather than ‘wholesale’ roles.
The 1980s saw ‘step-by-step moves towards a more comprehensive whole
housing-sector approach’. There was a perceived need to incorporate
housing within the wider economic environment. It was recognized that
the individual sites-and-services and slum upgrading projects alone
could not affect the growing housing need and that a well-functioning
finance system for housing for the majority was necessary.
This generated a paradigm shift from multi-sectoral but quite localized
projects, affecting a fortunate few, to an emphasis on creating a
sustainable capability for housing supply and urban development
affecting most residents and congruent with the overall policy and
economic environment. The locus of borrowing changed from almost
exclusively public-sector institutions to financial intermediaries. In
parallel, attention shifted from the physical asset financed to the
institutional structure of the implementing agency and its ability to
mobilize the development required.
Reviews of housing policy transition have shown that there was a fulcrum
of policy change during 1985 to 1987, a mid point between the two United
Nations world conferences on human settlements. By the end of this
short period, the enabling approach had been put together and launched
on the international agenda, at the same time as macro-economic
structural adjustment program (SAP) initiatives designed to enable
governments to recover from years of decline were being implemented.
The enabling approach treated housing and urban development as a multi-sectoral
issue, affected just as much by efficiencies and inefficiencies in
finance as in the construction industry or land tenure systems or the
regulatory framework. The task of the state was seen as creating the
legal, institutional and economic framework for economic productivity
and social effectiveness, in which efficient settlement development
could then flourish.
The mid 1980s also saw the birth of sustainability as an overarching
rubric for development activity. From that time on, no agency could
ignore the need to consider environmental impact alongside social and
economic benefits from its projects. Chapter 7 of Agenda 21 reiterated
the overall objective of improving the social, economic and
environmental quality of human settlements and the living and working
environments of all people, particularly the poor. At the same time,
there was a realignment of emphasis from ‘ability to pay’ to
‘willingness to pay’ as a result of economic analysis which found that
the latter produced much more accurate estimates in shelter-related
cost-recovery calculations.
By
1988, the Global Strategy for Shelter to the Year 2000 (GSS) had been
formulated. It recognized that governments had an obligation to ensure
that an appropriate environment was created for the mobilization of
finance for housing. The objectives of such an effort were seen as
promoting and mobilizing savings, reducing costs, improving the
efficiency of financial intermediation, and assisting the free movement
of capital through the national economy. Housing finance reform,
which is a key component of a shelter strategy, was seen as part of a
broad effort to reform and develop the financial sector.
The GSS had a laudable but over-optimistic objective of ‘decent housing’
for all by 2000. Later in the decade, this term was replaced by
‘adequate housing’. The need for adequate housing has also been
included in many United Nations summit recommendations and closing
declarations. The new paradigm encouraged institutional reform and
development. This coincided with the spread of decentralization of
power from the centre to regions and municipalities and the growth of a
local sense of responsibility for urban conditions.
Reflecting the globalization beginning during the early 1990s, the need
for housing finance institutions to be able to compete for deposits and
investments on equal terms with other financial institutions was
emphasized. Thus, lending had to be at positive, real interest rates
and deposits had to be of sufficient term to support long-term lending.
During the 1990s, some developing countries developed proactive and
well-integrated housing finance policies and institutions. There was a
recognition that purely government-managed finance institutions had
failed in their laudable aims and become bureaucratic, inefficient and
prey to exploitation by insiders.
Mortgage finance is now available in most countries, but its limitations
are obviously militating against its being the solution for most
low-income households. In filling this gap, micro-financing has
progressed from being only enterprise focused to being an important
feature of the housing finance system.
Strategy for the new
millennium
Just before the turn of the millennium, the Habitat Agenda was adopted
at the United Nations Conference on Human Settlements in Istanbul in
1996. The agenda provides a basis for international and national
housing and urban development policy for the 21st century. With regard
to finance, the member states agreed to strengthen existing financial
mechanisms. The importance of developing innovative approaches for
financing the implementation of the Habitat Agenda was also underlined.
In
addition, the United Nations Conference on Human Settlements reinforced
the commitment of states to the full and progressive realization of the
right to adequate housing, as provided for in international instruments.
Any retrogressive measures, such as forced evictions, are regarded as
violations of the right to housing. Indeed, states are seen as having a
duty to respect, protect and fulfill housing rights. However, none of
this is considered to entail a state obligation to provide everyone with
free housing but, rather, to set up the legal, social and economic
environment in which households have adequate chance to fulfill their
needs.
Chapter 3 – Financing
Urban Development
Highlighting the key issues of municipal finance systems, this chapter
analyses the main sources of municipal finance, municipal spending
patterns and privatization of municipal services. The chapter
emphasizes the relevance of urban development finance for shelter
development. The comparative review of the approaches developed all
over the world reveals the emergence of several new trends: the
broadening of locally generated revenue sources; the strengthening of
local financial management; partnerships in the financing of capital
investments; and the enhancement of access to long-term credit for
municipalities.
Sources of municipal
finance
The sources of municipal finance – such as central government transfers,
taxes on property and businesses, user fees, betterment taxes,
development exactions, borrowing and income-generating enterprises –
vary within the regions and from one municipality to the other. The
main revenue sources at present are from central government transfers;
locally generated revenues which include taxes on property and on
economic activities; user fees for the delivery of services and the
improvement of infrastructure; and loans borrowed to finance long-term
investments.
Municipal spending
patterns
Municipal budgets, which reflect the policies and strategies for the
delivery of mandatory and locally approved public services, should be
capable of demonstrating the extent to which the financial results have
been realized, the intended activities performed and the anticipated
outcomes achieved. The analysis of municipal spending patterns in
relation to the local government budgeting, which includes participatory
budgeting and multi-year capital budgeting, shows that these are rarely
achieved.
With regard to local government budgeting, problems arise from the lack
of financial management skills at the local levels. Reliance on central
government transfers also results in a number of constraints. The
controls meant to improve efficiency and collection, or equity in
distribution, sometimes also stifle local initiative and negate some
advantages of decentralization and democratic governance. Most local
capital budgets reflect immediate needs or political expediency rather
than a long-term development strategy, and most municipalities in
developing countries are unable to borrow long-term funds from capital
markets.
Participatory budgeting has emerged from the growing demands for
accountability and transparency in municipal budgets and financial
management, especially in the allocation of scarce local resources and
their utilization. Most developing countries lack funding for
maintaining existing assets. Thus, ‘preventive maintenance’ has to
increasingly become ‘crisis management’. The undue importance laid on
operating expenditures often leads to the deferment of expenditures on
maintaining existing assets.
The experience in many countries has shown that decentralization
policies do not necessarily lead to responsible financial management, as
demonstrated by budget deficits, accumulated debts and the inability to
repay loans. Accountability for performance is a cornerstone of good
governance and a major tool in financial management. It places as much
emphasis upon transparency as upon financial management. Demands for
greater accountability and transparency by voting and taxpaying
constituencies have combined with the constraints on the financial
resources available to the public sector to exert political pressures
for improving municipal financial management. Indeed, increasingly,
mayors, councils and city managers are held accountable for financial
outcomes, as well as for the qualities of the services they deliver and
the projects they implement. Reforms of existing systems and the
introduction of newer concepts and techniques have provided useful
alternatives in financing and operating public services.
Privatization of
municipal services
In
both developing and advanced economies, privatization has resulted in
revenue-producing services, including water supply and solid waste
management, being gradually taken over in the larger urban centers by
specialized multinational firms serving many local government units.
Formal privatization in many cities has not benefited lower income
communities, which underscores the need for the public sector to have a
role in the delivery of essential services.
In
the effort to deliver services effectively and efficiently,
public-private partnerships have been used under joint-funding ventures.
Such partnerships range from the granting of concessions, to joint
venture agreements, to build-operate-transfer (BOT) or
build-own-operate-transfer (BOOT) schemes. Of special interest to
poorer countries are solutions based on partnerships between
municipalities, non-governmental organizations (NGOs) and
community-based organizations (CBOs). In these countries, integrating
poorer communities into the city fabric and giving the poor access to
basic services is hampered by the spread of chaotic urbanization, the
mounting densities in the central zones, the obsolescence of existing
conventional systems and the lack of resources to maintain and upgrade
existing systems.
Municipalities are particularly reluctant to delegate authority or share
revenue with their peer entities. This reluctance is attributed to the
difficulties encountered in getting municipalities to collaborate in
joint initiatives. Moreover, formalizing collaboration through
negotiated agreements and inter-municipal compacts is an even more
challenging task since there are no institutional incentives fostering
such strategic associations.
Decentralization and the privatization of services are facing a number
of constraints in developing countries, as opposed to advanced and
transitional economies. Developing economies have not been able to
enact and implement successful decentralization policies that
redistribute resources effectively. While privatization has forced
governments to examine entrenched practices and to consider alternatives
for their modification or replacement with considerable success, it is
not a panacea.
The major challenges that must be addressed include the large numbers of
smaller, financially weak municipalities; asymmetrical decentralization;
retrenchment of central transfers; weakness of local revenue sources;
lack of strong domestic capital markets; impediments to the development
of municipal credit institutions; inadequate capacity and rules for
sound financial management at the local level; lack of mechanisms to
finance urban investments; and lack of funds for maintaining existing
assets.
In
conclusion, the following recent trends in municipal finance may be
highlighted:
-
Financial discipline and the commercial outlook of
competing private enterprise have, in some countries, forced public
administrators to lower costs, achieve greater efficiency and
improve the quality of outputs.
-
Opening up of public services to market participation
has created more opportunities for competition in the delivery of
these services than previously.
-
A growing demand for accountability and transparency in
municipal budgeting has accompanied political and fiscal
decentralization. There is a marked trend for more rigorous
financial management, clear procedures for the allocation of
resources, and the participation of residents in decisions that
affect their communities.
-
Public–private partnerships, which require significant
delegation of authority and can be very productive, have been on the
increase. Some locally based partnerships involving CBOs and
micro-enterprises have been found to provide successful means for
empowerment and social inclusion, especially in the developing
countries.
PART II: SHELTER
FINANCE – ASSESSMENT OF TRENDS
Chapter 4 – Mortgage
Finance: Institutions and Mechanisms
The cost of a complete dwelling could be between 2.5 to 6 times the
average annual salary. To purchase property, it is very difficult to
finance such costs without a loan and, generally, such loans will need
to be long term. When the repayment period is to stretch for such a
considerable period, a legal framework is required for lenders to be
confident about the security of their finance – hence the significance
of mortgage finance in which the loan is secured on property.
Chapter 4 first considers emerging trends in the provision of mortgage
finance and summarizes the current terms and conditions of such finance.
Second, it looks particularly at the situation with regard to lower
income households who might be seeking mortgage finance and the
affordability of such options for these households. Third, it examines
emerging tensions and opportunities in current mortgage finance and
assesses its potential contribution to addressing household needs for
housing finance.
Providing mortgage
finance
In
general, governments have sought to encourage homeownership and have, in
many cases, provided preferential financing to influence consumer
choice. There has been a general shift towards market-based
mechanisms for providing housing, with attempts to reduce subsidies and
deregulate markets. In part, this is due to the past ineffectiveness of
housing strategies that have depended upon direct provision by the
state. This trend is also consistent with the overall direction of
macro-economic strategies during recent decades.
The importance of deposits to the bank system is widely acknowledged.
Deposits account for 62 percent of the funding of all mortgage loans
within the European Union (EU) countries, and this percentage is even
higher in the transition countries. However, if the only source of
finance available to the mortgage lenders is deposits, then even if they
can secure sufficient funds, lenders face a risk when committing
long-term loans with short-term finance. As an alternative to
short-term deposits, there are several sources of longer-term finance.
One source is the state itself and the direct contributions that it
might make. A second source is private funds institutionalized for
housing finance through specialist saving schemes. A third source is
private commercial investment. Despite these multiple sources, the
availability of long-term finance is limited in many countries.
The secondary market in mortgage finance developed in order to cope with
the risks associated with short-term deposits and longer-term loans.
The US has led developments in secondary markets, which have become
notably significant from the mid 1980s onwards. For the last 25 years,
there have been significant changes in mortgage finance with the growth
of the involvement of capital markets; this began in the US and spread
to Europe and, more recently, is being explored in Latin America and
Asia.
A
number of measures have been taken in Africa to strengthen secondary
markets and, specifically, securitization. In Kenya, a recent draft
national housing policy aims to create a secondary market to ensure
additional capital from overseas and a reduction in the costs of
borrowing.
A
further and remaining source of finance, despite frequent criticisms on
the grounds of economic efficiency and ineffectual targeting, is the
state. Governments have over many decades intervened in housing
markets with the intention of widening access to housing finance, and
they continue to have a major role in housing finance through the
continued use of subsidies.
There are several motivations for state involvement. With respect to
the welfare of households, motivations are, notably, to promote
homeownership as a whole and to specifically address the needs of those
with inadequate housing. The state may also have systemic interests to
ensure that the financial markets for housing are stable.
The common strategies to increase homeownership through the enhanced
provision of finance are:
-
mortgage interest
relief;
-
interest subsidies;
-
housing savings
schemes;
-
guarantees;
-
subsidies for ‘key’
public-sector workers; and
-
intermediate
tenures.
A
more recent shift has been subsidies designed to augment the payment
capacity of the poor (direct-demand subsidies).
One of the most far-reaching systems of state intervention through
direct construction has been used in the case of Singapore, where 96
percent of the households are living in homeownership apartments. The
strategy has been based on the provision of subsidized mortgage finance
(primarily through the interest rate), combined with a dedicated supply
of funds through already existing provident/pension funds. However,
there are many examples of failed public housing policies. One example
is the National Housing Corporation in Kenya, whose production was well
below need, with only several thousand units a year. Two parastatals in
Cote d’Ivoire together constructed 41,000 units between 1960 and the
1980s before being wound up.
Taxation-related
incentives
In
many West European countries, mortgage interest payments are, to some
extent, tax deductible. Interest rate subsidies have been a popular way
of enhancing housing finance affordability. Occasionally this policy
has been criticized as acting as a substitute for prudent macroeconomic
management. Interest rate subsidies may be associated with savings
schemes for housing investments.
However, the case against interest rate subsidies has been strongly
made. It has been argued that direct subsidies are a preferred way of
offering assistance with housing costs as they can be more precisely
targeted on those in need. Interest rate subsidies inevitably favor
those who can afford loans and larger subsidies go to those who are able
to afford larger loans. In spite of this, interest rate subsidies
appear to continue to be used.
In
addition to direct assistance to households to increase the
affordability of housing finance, governments have sought to ensure the
stability of the system and to reduce the risks for lending institutions
when they extend services to lower income households. As the greater
availability of finance has been reflected in growing levels of owner
occupation, risks have increased.
Regional highlights
Homeownership is now the majority tenure across Western Europe, with
exceptions — notably in Germany. Nevertheless, levels of owner
occupation vary considerably, being highest among some of the Southern
European countries (Spain and Italy) where homeownership can be
described as being ‘dominant’. Homeownership is relatively high in
several other countries, notably the UK, at around 70 percent. In
countries such as France, the Netherlands, Denmark, and Sweden,
homeownership has been established as the ‘majority’ tenure without
being especially high or dominant. There is little evidence of
convergence in homeownership levels, either in the sense that they are
moving in the same direction, or that they are converging towards
similar levels.
In
2003, the European market as a whole continued to grow, with the total
value of residential mortgage debt increasing by 7.4 percent, a little
below the 10-year average of 8 percent. The total volume of mortgage
loans in Europe at the end of 2003 was US $3.4 trillion. This figure
has grown rapidly and it now accounts for 42 percent of EU GDP. This
rapid expansion in lending has been encouraged by lower interest rates.
However, it should be remembered that the rise in the volume of lending
is not necessarily associated with increasing access, as one further
trend has been rising house prices, with capital gains for current
homeowners and increasing difficulties for those seeking to become
homeowners for the first time. In the US, homeownership grew on
average, as did income, throughout the largely prosperous 1990s and now
stands at a record high.
The transition countries face a particular problem in that commercial
housing finance markets were previously non-existent. There has been
state support to the development of housing finance systems, with the
expectation that the commercial sector will become an increasingly
significant provider. Unfortunately, much of this support has been
to the benefit of higher income groups who are the only ones able to
afford such finance.
Volumes of housing loans are low in the transition countries. However,
there are indications that housing loan markets are growing rapidly; for
example, in Estonia the scale of housing loans doubled between 1997 and
2000, and in the Czech Republic the scale of loans grew more than
sixfold during the same period. During 2002 and 2003, mortgage lending
grew particularly strongly in Hungary, Poland, and Latvia (by more than
85 percent).
The privatization process that took place resulted in the transfer of
significant numbers of dwellings into private hands. Owner occupation
is now close to or above 90 percent in Hungary, Bulgaria, Estonia, and
Romania, while in Poland, Slovakia, and Slovenia it is above 70 percent.
However, despite this increase in homeownership, the financial systems
needed for such ownership have not developed.
The problems of affordability in the South are considerable. The supply
of mortgages in Southern countries has been limited by a large number of
factors, including low incomes that barely cover subsistence needs for a
considerable proportion of the population, a lack of formal financial
institutions that can capture people’s savings, as well as
macro-economic instability. The recent financial crises have had
negative impacts upon the formal housing finance systems in a number of
countries and have particularly deterred commercial provision of
mortgage finance. However, there are signs of a recovery in lending in
both Asian and Latin American countries.
In
China, the system of housing finance has been significantly redeveloped.
The previous system was one in which dwellings were primarily provided
through work units that housed employees in return for a nominal rent.
In 1995, the government introduced two major programs to encourage home
purchase, the National Comfortable Housing Project and the Housing
Provident Fund.
In
Latin America, less than 30 percent of dwellings are produced by the
formal housing market. Residential debt is in general a fairly low
percentage of GDP, indicating that mortgage lending is not extensive.
Significant difficulties of foreclosure, with long foreclosure periods
taking over one year, are just one set of the problems that has reduced
the attractiveness of mortgage finance in this region. During the last
decade, the core issues facing governments in Latin America appear to be
the longstanding problems of macroeconomic performance and, notably,
inflation, the specific economic difficulties of the late 1990s and the
need to extend finance to those with lower incomes. The related
strategies have been titling, direct-demand subsidies, the use of
specially defined units for housing investment, and the expansion of
capital into the system through strengthening of the secondary market.
While there are continuing problems of underdeveloped housing finance
systems, in part as a result of the economic difficulties of recent
decades, there are some positive trends in Chile, Costa Rica, Panama,
Mexico, and Peru, with uneven progress in Colombia, Bolivia, and
Ecuador. These improvements include financial-sector reforms to
facilitate the expansion of mortgage financing, judiciary reform to
facilitate the recovery of collateral, and increases in housing
production/finance in the private sector. They also involve attempts to
have public housing agencies working more effectively with the
treasuries, private banks, and developers to address the housing needs
of beneficiaries.
The situation in sub-Saharan Africa divides between South Africa (and,
to a lesser extent, Namibia, and, until recently, Zimbabwe), where the
commercial banking sector is significantly involved in mortgage lending,
and the rest of the continent. South Africa’s mortgage market is about
198 billion rand (US$30.7 billion). Most of its housing finance is
provided through bank mortgages. Despite this scale of finance, there
is evidence to suggest that the lower income households remain excluded
from the market. While those who are in formal employment can use their
provident funds to guarantee housing loans, many work in the informal
sector. Moreover, mortgage finance is unaffordable to many.
Although state housing finance institutions have continued in some
cases, the greater emphasis on cost recovery and operating efficiency
during the 1990s has given them considerable problems in securing
finance. Generally, those that do exist have been heavily regulated and
have also been seen as social instruments, rather than financial
mechanisms. More recently, the state has withdrawn from this area and
some housing finance institutions have withdrawn as well. A particular
and continuing problem faced in Africa has been a lack of effective
institutions and instruments to mobilize savings and to channel them
into housing investment. For the most part, housing finance
institutions have remained dependent upon deposits and have not been
able to secure long-term finance.
Terms and conditions
Mortgage lending is associated with a standard package of terms and
conditions which specify the contribution of deposits, in some cases the
period of savings, the interest rate to be charged on the loan (and if
it is fixed or variable), the period of the loan (potentially with
penalties for early and late repayment), and loan-to-value ratios (the
maximum percentage of the loan against a verified value of the
dwelling). A further important factor is the amount that the loan
institution is willing to lend in relation to the borrowers’ income(s).
The increased diversification of housing loan suppliers has reduced the
general significance of savings activities that are specifically linked
to housing; but some form of saving remains essential if mortgage loans
are offered for less than the full cost of the property.
Considerable effort has been made to extend opportunities to secure
housing finance during recent years. This is the product of two related
factors. On the one hand, the housing finance market has become more
competitive as new providers have been encouraged to enter the market.
Such providers have been seeking new customers to extend their
activities. On the other hand, the state has been looking to the market
to address housing need. Faced with considerable housing problems and
seeking to reduce public expenditure, governments have sought to
encourage the market to address needs where possible.
As
noted earlier, affordability is not just about access to and the cost of
housing finance, it is also critically about the price of housing. One
of the most important trends in housing finance in Western Europe has
been the widening ‘gap’ between incomes and house prices. House prices
have risen since 1997, notably in Australia, Ireland, Spain, and the UK.
In 2003, the European Mortgage Federation noted strong price increases
in Latvia, Portugal, Spain, the UK, and Ireland.
In
a number of countries, housing supply appears to be inelastic,
responding only slowly to increases in housing demand expressed through
rising prices. Research has shown that local regulations that
prevent housing construction are a significant cause of high house
prices in the US and UK, as well as in Malaysia, Republic of Korea,
Tanzania, and New Zealand.
In
a context of rising house prices, housing finance systems have a greater
job to do in bridging the gap between incomes and prices. Young people
have particular difficulties in purchasing dwellings as they have had
less time to save for a down payment (deposit) and earnings are lower
for those who have recently entered the labor market.
Turning to more general problems of affordability, US data for 2004
indicates that there are some 6 million households living in
owner-occupied dwellings that fall below the poverty line. This is not
that much less than the 7.9 million households below the poverty line
who are living in rental accommodation. In the transition countries,
there are real problems with affordability due to generally low levels
of income. For example, only 10 to 20 percent of the population in
Estonia and Latvia are considered to be eligible for housing loans. In
the South, the numbers of people able to afford formal housing with the
associated financing costs are limited. As indicated earlier, the clear
emerging trend in a number of countries is that of the extension of
mortgage finance. However, it is very difficult to assess how
successful this has been.
Chapter 5 – Financing
for Rental and Social Housing
While a narrow definition of housing finance may focus only on the
provision of credit, the scale and significance of housing finance
subsidies primarily through rental housing, subsidized loan finance, and
direct-demand (capital) subsidies makes this component difficult to
ignore. An understanding of how the financing of social housing can fit
within a broader system of housing financing is needed. This chapter
looks specifically at some strategies that have recently been used to
provide financial subsidies.
Financial subsidies seek to provide incentives to enable and persuade a
certain class of producers or consumers to do something they would not
otherwise do by lowering the opportunity cost or otherwise increasing
the potential benefit of doing so. Some argue that such financial
subsidies are best avoided and should be a policy of last resort. Such
concerns focus on the potential distortion of markets and are often
accomplished by recommendations on institutional and regulatory reforms.
In addition, subsidies, especially those offered on interest rates, may
have a huge hidden cost.
While subsidies tend to be criticized by economists seeking to encourage
a greater realization of the potential effectiveness of markets, they
remain popular with governments. The interest in subsidies has resulted
in multiple approaches to their delivery, which notably includes direct
interest rates reductions; allowing mortgage interest to be deducted
from income taxes; support for housing savings; support for insurance in
the primary market; support for insurance in secondary markets; and
direct grants. However, concerns remain, notably that such subsidies
rarely reach the poor. Governments in the North and the South have
primarily used two financing strategies to assist families to obtain
housing: assistance for ownership and/or the assistance to afford
adequate rental accommodation.
Three specific trends are well established in a number of countries:
-
Governments have shifted away from the direct
construction and management of public housing. They have used
several strategies to reduce their stocks, with large-scale
transfers to occupiers in some cases.
-
There is increasing assistance for homeownership through
direct-demand (capital) subsidies.
-
Consistent with the two trends above is the greater use
of housing allowances (rather than direct provision) to assist
low-income families renting accommodation in the private or
non-profit sectors.
Despite their focus on lower income households, funding for direct
subsidies is often smaller in scale than interest rate subsidies when
the full costs of the latter over the life of the loan are considered.
Rental housing in the
North
Although in the North the state is generally playing a less direct role
in economic intervention, this is not necessarily the case in housing.
Despite the shift to income-related support, the social rented sector
(defined as housing let at below-market prices and allocated
administratively on the basis of housing need, rather than on the
ability to pay) remains a significant tenure in several states.
However, there have been significant changes in policy and the nature
of housing support has shifted in Western Europe. Support systems with
large, general interest subsidies for new construction and
rehabilitation have been phased out. Targeted income-related subsidies
have become relatively more important, as have subsidies to depressed
housing areas.
There has been a general marked decline in the levels of new housing
units in this sector. As the numbers of designated social housing
and/or public properties fall, there are concerns that the scale of
social disadvantages associated with such accommodation will rise. It
is feared that this will result in a high concentration of social
disadvantage, thereby exacerbating social exclusion, reducing mobility,
and creating greater marginalization for tenants. One further concern
is that the growth of means-tested housing allowances (also encouraged
by the use of private finance) has resulted in higher rents. However,
means-tested housing allowances are considered to offer better
incentives in terms of labor mobility and to enable more effective
targeting.
One of the most significant developments in social rented housing has
been the increased use of private finance for rented housing in much of
Western Europe. Despite this use, there has been limited private equity
investment. Another key trend during recent years has been the
emergence of surpluses in the social rented sector, as a whole, in many
countries. Declining debt burdens arising from lower levels of
construction and the repayment of older debt have coincided with rising
rents to create these surpluses. Several countries have attempted to
establish ‘revolving-door’ systems of finance whereby surpluses are
reinvested in the sector. However, it seems that revolving-door finance
alone does not stimulate increased construction, either because funds
are inadequate or incentives are absent.
Rental housing in
transition countries
Prior to transition, in most Eastern European countries housing was
provided by state institutions (workplace, local government, and/or
housing co-operatives). Essentially, the system was one in which
state-provided social rental systems dominated, with low rents and
administrative allocation systems.
The transition phase included the transfer of some of these dwellings to
their occupants under privatization programs. In some countries, more
than 90 percent of the stock was sold, while in others the percentage
was as low as 6 percent. However, housing markets were very limited.
Even where people own their dwellings, it appears to have been
difficult to trade them.
By
the end of the 1990s, there was some interest in reinvestment in rental
housing — for example in Poland, Slovakia, the Czech Republic, and
Hungary. A significant scale is planned — between 10 and 30 percent of
new construction in Poland, Romania, and Hungary. However, a
considerable problem remains, which is that the institutional strategies
for addressing the housing needs of the poorest have collapsed, with no
alternative being developed.
Rental housing in the
South
Large-scale public housing has not been that significant in the South
despite exceptions such as Hong Kong. While many countries have
experimented on a minor scale, in general the scale of provision
reflects the limited funds available to invest in public housing
initiatives and the high standards that are required. In general,
public rental housing has not been allocated to the poor, nor would it
necessarily have been affordable even if it had been allocated. In some
cases, these properties have now been privatized following the increased
emphasis on market provision. As with the transition countries in
Europe, China has relatively recently begun a policy to transfer to
homeownership dwellings that had previously been rented from state-owned
enterprises and from other state housing providers.
Despite a general trend against direct provision in the South as well as
the North, there is some continuing support for rental housing in a
number of countries. In Hong Kong, the Housing Authority actually
increased its stock by 18,000 units between 1991 and 2001. In the
Republic of Korea, there has been (since 1989) a growing interest in a
permanent rental dwelling program for those on low incomes. In South
Africa, there has also been a policy (albeit as a secondary strategy
subsidiary to the main emphasis on homeownership) to support the
development of a social housing sector and, more specifically, to
encourage the development of housing associations to manage low-income
estates and rental accommodation.
Social housing and
homeownership
In
practice, the high costs of construction of rental public housing and
the ongoing costs of maintenance, often in a context in which rents
remain very low and national housing budgets very limited, has resulted
in large-scale rental programs being considered impossible in many
Southern countries. Despite these problems, there are some governments
that have sought to introduce subsidy programs of a significant scale.
In
a number of cases, they have chosen to use limited funds to support
small loan programs that enhance the process of incremental housing
development. In other cases, governments have chosen to subsidize
a minimum complete dwelling. In yet other cases, effective capital
subsidies have been given through low-interest loans. The limited
resources that exist for housing finance mean that allocations may be
made as political favors rather than as universal entitlements.
Despite the initial political commitment, the Chilean, Colombian, and
South African governments have not put large-scale funding into capital
subsidies. The percentage of state expenditure for these three
countries does not exceed 1.25 percent, while 2 percent has been
considered typical in the South.
Chapter 6 – Small
Loans: Shelter Microfinance
For individuals or households with limited incomes, the only possibility
of homeownership (even in an illegal settlement) is through shelter
investment made in several stages. Land purchase; service installation
and upgrading; and housing construction, consolidation, and expansion
are all made at separate times. An estimated 70 percent of housing
investment in developing countries occurs through such progressive
building. Such incremental shelters, often initially built of temporary
materials, frequently require repairs because of damage (for example,
from natural forces).
In
the vast majority of cases these households are ineligible for
commercial mortgage finance. Households seeking to invest in their
shelter (land, infrastructure, and housing) have been forced to use
their own limited income, seek additional resources from family and
friends, and borrow on informal credit markets or, in some cases, from
groups like credit unions. There have been several institutional
efforts to assist these households secure access to some kind of loan
finance. In particular, shelter microfinance and community finance
mechanisms have grown considerably during recent decades. This chapter
discusses the use of microfinance approaches to shelter lending. The
loans are almost universally to individuals, generally those with some
security of tenure, for investment (construction, improvement and
extension) in housing.
The growth of
microfinance for shelter
The growth of microfinance agencies since their inception during the
1980s has been considerable and there are now many such organizations.
To exemplify the situation in one country, in India the number of such
grassroots-level organizations engaged in mobilizing savings and
providing micro-loan services to the poor is estimated to be in the
range of 400 to 500 organizations. Evaluations of microfinance
organizations have demonstrated that, whatever the loans were taken for,
a proportion as large as 25 percent could be diverted for shelter
investments. Findings such as these have encouraged the exploration of
microfinance lending specifically for shelter.
There are a considerable number of NGOs who have been working with
housing issues, generally for lower income groups, and who have been
drawn into loan financing in order to scale up their activities and/or
to provide assistance to residents who have been successful in acquiring
land. Shelter NGOs looked to the examples of microfinance agencies
seeking to bring financial markets to those who traditionally had been
excluded from opportunities for savings and credit. There are two
distinct groups of such NGOs working in housing finance. The first
group is professional urban development NGOs who have primarily been
drawn into finance programs to influence state policies and the demands
of low-income communities. The second group consists of humanitarian
agencies who have worked to improve housing conditions in low-income
areas. Recognizing that families are able and willing to invest in
their own dwellings, they have directly developed small loan programs at
scale.
In
addition to NGO initiatives, there has been considerable interest in
housing lending shown by the microfinance sector. Microfinance agencies
appear to be diversifying rapidly into housing micro-credit in at least
some regions. One study funded by the International Finance Corporation
(IFC) identifies 141 institutions providing shelter-finance loan
products to the poor. The speed with which housing loans have been
integrated within such agencies appears to have been facilitated by the
similarity of lending practice.
One reason for the diversification of microfinance agencies into housing
is commercial advantages. Such diversification may increase the
financial stability of their loan portfolio and enable them to take
advantage of opportunities for growth, as well as avoid losing clients
to other microfinance agencies that provide housing loans. A further
notable advantage is that the longer repayment period associated with
housing loans helps to draw the borrowers into a longer-term
relationship with the lending agency and increases the likelihood that
further loans will be taken.
Neighborhood
improvement (slum upgrading)
A
further potential role for shelter microfinance is within more
comprehensive slum upgrading programs. There appears to be a growing
interest in using microfinance agencies to provide specialist financial
services within more comprehensive neighborhood improvement and poverty
reduction programs. Within this strategy, the development agency,
central government, and/or municipality finance a process to upgrade the
low-income area with components to regularize tenure and provide and/or
upgrade infrastructure and services. The upgrading program then
contracts with an organization to offer small-scale housing loans for
those who wish to upgrade their homes.
A
good example is the Local Development Program (PRODEL) in Nicaragua that
was set up to enhance development in smaller towns and cities with a
number of components, including infrastructure improvements, housing
loans, and loans for micro-enterprises. A more focused (and
smaller-scale approach) is illustrated in Ahmedabad, India, where the
Slum Networking Project (undertaken within the municipality) wished to
include a credit component to help households afford to contribute to
infrastructure improvements.
While most slum upgrading initiatives have been led by the state, an
alternative approach is that developed from an Indian alliance of the
Society for the Promotion of Area Resource Centers (SPARC) — an NGO —
the National Slum Dwellers Federation and Mahila Milan (a network of
women’s collectives). Their strategy is to develop the capacity of
local communities to manage a comprehensive upgrading and redevelopment
process that is financed primarily by the state (through subsidies),
with additional monies through loans taken by communities and repaid by
individual members. Through a not-for-profit company, Samudhaya Nirman
Sahayak, communities draw down the funds they need to pre-finance land,
infrastructure, and housing development. The scale of activities has
resulted in additional donor finance being drawn into the process
through the Community-led Infrastructure Financing Facility (CLIFF).
A
further model offering a more comprehensive development strategy than
shelter microfinance is the strategy of combining small loans for
housing improvement with land development. One illustration is the case
of El Salvador where low-cost subdivision regulations established during
the early 1990s have helped to stimulate a low-income land development
industry of 200 firms. After developing the area and selling the
household a serviced plot, many of these developers offer a small loan
(often around US $1000) to build an initial core unit. It appears that
this strategy has resulted in affordable secure tenure over the last
decade and — with greater supply — has lowered real estate prices in
real terms.
The neighborhood development (slum upgrading), together with the
servicing of greenfield sites, approaches suggest a number of distinct
neighborhood and housing strategies that include a role for small-scale
housing loans:
-
improvements of
existing housing units (this is the dominant approach today within
shelter microfinance);
-
linked land
purchase and housing loan developments;
-
linked land
development and/or upgrading paid for with a capital subsidy and
housing loan developments; and
-
linked settlement
upgrading and housing loan.
Sources of capital
finance
How do microfinance agencies secure capital for their lending? Some
providers draw on their own capital, notably the private sector and, for
the most part, the small-scale voluntary organizations such as credit
unions.
In
general, microfinance agencies have four sources of capital finance:
deposits, development assistance, governments, and the private sector.
The problem of lack of capital remains even in countries with a
well-developed microfinance sector.
There is a difference of opinion between microfinance agencies about the
need for housing subsidies. On the one hand, there is a belief that
subsidies are needed both because of the traditional association between
subsidies and low-income housing and because of the larger size of
housing loans. On the other hand, it is widely accepted that
microfinance needs to perform without subsidy finance in order to be
able to expand as market conditions permit.
In
situations in which there is no state support, there appears to be an
effective cross-subsidy from enterprise to shelter lending, as the
interest rates are lower in the latter. In some countries, particularly
in Asia, subsidies are available through reduced interest rates, and
microfinance agencies have become a conduit to deliver state support to
the poor. In some cases, the subsidy is provided in the form of an
interest rate reduction. Grameen Bank in Bangladesh and the
Self-employed Women’s Association (SEWA) in India have both accessed
low-interest sources of funds and pass on this subsidy.
Savings and collateral
The link between housing investment and savings extends well beyond the
microfinance sector. In the North, families have traditionally saved
for several years simply to access conventional mortgage finance.
Similarly, many microfinance programs for housing, particularly in Asia
and Africa, have savings requirements. Savings has a place in
microfinance for many reasons. It is a strategy to assist with
repayments in which borrowers have to demonstrate a capacity to make
regular payments and accumulate sufficient funds for the required down
payment or deposit.
Collateral is an asset pledged to a lender until the borrower pays back
the debt. Its major role is in reducing lender risk and it is widely
recognized that a key challenge for shelter microfinance is that of loan
security. Many microfinance agencies seek to minimize the need for
collateral by using existing client history (enterprise lending). A
further strategy used for lending for income generation is small repeat
loans as a way of building up repayment skills and capacities and
providing an incentive for repayment. However, the larger size of
shelter microfinance makes this strategy more difficult to follow.
Another strategy used by micro-enterprise lenders is that of group
guarantees. However, this strategy has been found to be problematic for
housing loans, again because of the bigger loans and longer loan period.
In the absence of such strategies, a wide range of collaterals are
used, including mortgages, personal guarantees, group guarantees, fixed
assets and/or pension/provident fund guarantees. Pension fund
collateral is used particularly in South Africa and Bangladesh and, more
recently, in Namibia, but is not significant elsewhere.
Foreseen challenges
While shelter microfinance might not be effective in every context,
there is now widespread experience and understanding of the process and
considerable appreciation of the approach in many countries. There are
two notable challenges facing the shelter microfinance sector. The
first is the nature of the beneficiary group and the difficulties faced
by very poor households due to problems of affordability and lack of
secure tenure. The second is sources of funding.
Shelter microfinance programs appear, in general, to reach the income
groups served by microfinance agencies lending for enterprise
development and families with similar incomes in the formal sector.
Many shelter microfinance programs appear to be targeted at the higher
income urban poor, sometimes those with formal employment (at least one
member of the family) and often those with diversified household
livelihood strategies. This bias reflects the need of the agencies to
secure high levels of repayments and give out larger loans (with the
administration costs therefore being a smaller proportion of the loan).
Lack of capital emerges as being a very significant constraint on
expansion. Banco ADEMI (in the Dominican Republic) cited lack of
capital as the principal challenge that the organization faces in
providing housing credit, for which there has been substantial demand.
These difficulties reflect a general constraint on the microfinance
sector and, in general, do not appear to be specifically related to
housing lending. In addition, microfinance agencies face an issue of
scale. To be profitable they have to increase the quantity of lending.
There is evidence that this is driving their expansion into shelter
microfinance; but for the smaller agencies, lack of capital to expand
operations appears to be a significant constraint. Longer-term loan
repayment periods are also common in shelter microfinance agencies
despite the small size of the loans. Raising funds for shelter
microfinance may be more complicated than for enterprise lending because
of these longer loan periods. Donor support has placed emphasis on
building the institutional capacity of lending agencies and assisting in
the accumulation of their capital base. There has been a resistance to
providing concessional funds for on-lending.
Chapter 7 – Community
Funds
Community funds are of growing significance in assisting the poor to
address their shelter needs. As the role of the state has diminished,
increased emphasis has been placed on alternative strategies to support
secure tenure, access to basic services, and improved dwellings.
Community funds offer small loans to households but route these loans
through community organizations. The emphasis on collective loans is
for many reasons, but one is that the loans support investments in land
and infrastructure which are necessarily made by a group working
together. This chapter describes community funds, identifying their key
characteristics, and discusses trends within this sector. It looks
specifically at a number of key challenges, notably the affordability of
their strategies and sources of funds.
Community funds are financial mechanisms that encourage savings through
establishing and strengthening local savings groups that provide
collective finance for shelter improvement. This may include any one or
more of the following activities: land purchase; land preparation;
infrastructure installation; service provision and housing construction;
and extension and improvement. Their most distinguishing characteristic
is the way in which funding is perceived — rather than the mechanisms of
the financing process. Community funds use savings and loans to trigger
a development process — not simply to increase the access of the poor to
financial markets. They seek to strengthen the social bonds between
community members (building social capital) so that existing finance
within the community can be used more effectively and external finance
can be integrated within community development strategies.
Community funds are targeted at group borrowing and therefore may
include those with lower incomes.
Generally, there has been increasing interest in community funds during
the last decade. The growth is supported by a general acknowledgement
that small-scale lending has been somewhat successful and that urban
poverty is growing. Two further current trends related to the
development of such funds are worth noting: first, the growing interest
by local government in these approaches, in part related to the use of
such funds to extend essential infrastructure; and, second, the
expansion of Shack or Slum Dwellers International (SDI), a community/NGO
network whose strategies incorporate savings and lending activities for
shelter improvements.
With respect to the latter trend, over the last 15 years, SDI has
evolved into an international movement with affiliates in more than 12
countries. SDI groups have spawned a host of local community-owned and
NGO-administered funds. In Cambodia, the Philippines, South Africa,
Nepal, Sri Lanka, Zimbabwe, and Kenya, federation groups have
established their own funds, which they lend to savings schemes. State
contributions have been obtained in South Africa, Namibia, and, more
recently, Nepal. A further area of interest is the use of community
funds for utility investment for which the local authority may be
formally responsible.
Funding sources
The importance of mixed funding sources is evident. In some cases,
funds have been established by government and located within a state
agency with access to subsidies. In other cases, the fund has been set
up by civil society organizations and financed through a combination of
state funds, NGO monies, community contributions, and, generally,
international development assistance agencies. In both cases, the
communities may make direct contributions to the fund through deposits
to secure loans.
An
important and common characteristic of community funds is that some
subsidy is provided — either through state funds or international
development assistance. This is a further significant difference from
conventional microfinance and its individualized housing loans. While
conventional microfinance programs may offer a subsidy, in general there
is an understanding that this should be avoided. Within community
funds, greater priority is placed on achieving poverty reduction goals
and neighborhood improvement. Subsidies may be needed for institutional
survival if interest rates are below the level required to maintain the
real value of the fund. Equally or alternatively, subsidies may be
required to reach everyone in a community or to reach very low-income
communities.
There are several routes through which subsidies are delivered. The
primary routes are direct subsidies, interest rate subsidies, additional
support (for example, community development and technical assistance),
and unintended subsidies when delayed payment and/or default occurs.
A
further source of finance is that of commercial financial institutions.
A number of groups managing community funds have sought to draw in
commercial banks. At a minimal level, loan funds are released through
banks, thereby encouraging the poor to see such institutions as
something that they might use. In CLIFF, a donor-financed program
working with SPARC, the National Slum Dwellers Federation and Mahila
Milan in India, there is an expectation that the urban poor groups will
become strong enough to be able to borrow from the banks.
Terms and conditions
Savings plays a central role in community funds. However, the programs
may differ in the speed and the intensity of savings. This difference
reflects both the orientation of the program itself and the
possibilities within different countries. For example, in a large
number of countries (including those with experience of informal savings
and loan mechanisms), communities have been skeptical about the value of
savings for shelter investment, and loan finance has been provided
rapidly once the savings commitment was fulfilled. This is particularly
true of countries that have experienced rapid inflation and/or where the
state has confiscated or temporarily frozen savings.
Interest rates are generally subsidized, especially for land purchase
and infrastructure, but often also for housing investment. Three major
reasons emerge for this policy: practical, political, and social. On
the practical side, many of these early programs evolved with an
interest rate subsidy because the relatively large size of the loan made
affordability difficult if market rates were used. Politically, the
policies may have been influenced by communities who were familiar with
state support for housing through a reduced interest rate. This appears
to be particularly strong in Asia where, for example, the Bangladeshi,
Indian, Thai, and Philippine governments all have programs with interest
rate subsidies for low- (and low-medium) income households. From a
social development perspective, inclusion of the poorest and
affordability are critical.
There are two distinctive characteristics of the collateral strategies
used by community funds. First, there is reliance on community systems
and community collateral rather than claims over the individual
borrowers. Second, in cases of land purchase, legal title deeds may be
used. However, the difficulties of loan security are considerable
because of the different attitude towards non-repayment.
Loan periods appear to be longer than those used for shelter
microfinance with, for example, rates of 25 years in the Philippines and
10 years in Thailand. To a certain extent, this is because of the
large size of the loan relative to family incomes. It is also an
acknowledgement of the fact that land purchase, for example, may be only
a part of the investments that the family needs to make. NGO loan
periods are lower and are generally less than five years. While some
appear longer, such as those of the uTshani Fund in South Africa, the
design reflects the fact that funds are primarily released as bridge
finance for the state subsidy.
Challenges
Community funds face challenges that are very similar to those faced by
agencies supporting shelter microfinance initiatives. How can they
secure the funding they need for long-term viability and how can they be
effective in reaching out to those in need of shelter investment?
A
particularly different challenge faces community funds as they develop —
what should their strategy be with respect to the state? Fundamentally,
this is about strategies that maximize possibilities for scaling up
funds while retaining a process that can be controlled by local
communities. Links to the state are almost certainly essential if
funding on the required scale is to be available. However, there is a
concern that funds will be bureaucratized.
Community fund programs are designed for relatively stable communities
who are in need of finance to secure land tenure and to upgrade their
neighborhood. With regard to the challenge of inclusion, community
funds may struggle to include all residents living within the
settlement. They may also find it difficult to assist those who do not
live permanently in areas of the city.
Throughout Asia, Latin America, and Africa, conventional development
processes have failed to deal with many groups of poor people. In some
cases, these are the poorest; but this is not always the case. There
are particular groups who are vulnerable, such as illegal migrants. For
example, Nicaraguans living in Costa Rica, Peruvians in Ecuador, or West
Africans in South Africa are often treated as non-citizens. The
practice of daily saving in India helps to ensure that even the poorest
can participate. The livelihoods of the poor are generally managed
daily (or in three- to five-day cycles), not monthly. Groups who save
monthly exclude the poor. At the same time, richer households may not
be interested in a process that requires them to save daily.
A
group who may also face exclusion is tenants. It may be difficult to
ensure that tenants are granted equal rights as tenure is secured and
development takes place. A further aspect of inclusion is that of
gender. There is a widespread understanding that the centrality of
women is important. In part, this is because women are concerned about
their neighbors, about who is sick and who needs what; it is also
related to the level of poverty and vulnerability experienced by women.
Women’s community role means that if women are central to managing the
savings process, then it is likely that there will be fewer problems
with exclusion within the community. However, this requires that the
process is orientated towards women taking up a leadership role. While
this seems prevalent in the case of savings and loans, in some contexts,
the shift to construction encourages higher levels of involvement by
men.
PART III:
TOWARDS SUSTAINABLE SHELTER FINANCE SYSTEMS
Chapter 8 – Assessing
Shelter Finance Systems
The analysis in Chapters 7 highlights a number of specific issues that
have policy implications with regard to the value of shelter finance in
addressing urban shelter needs. This chapter discusses these issues
across the different approaches to shelter finance addressed in the
Global Report. The issues considered are affordability and the
difficulties of reaching the poor; access to capital and the lack of
loan finance; the move to markets and what the market cannot manage —
including the issues of maintaining financial viability; connections and
diversity within globalization; and risk management within the market.
Affordability and the
difficulties of reaching the poor
Rising house prices have made affordability more difficult in the North,
as well as in the South. There have been very considerable attempts
supported by government to extend homeownership to lower income groups —
for example, through the more extensive use of mortgage insurance.
There are some indications of success (higher homeownership rates) and
some areas of concern as households may find it difficult to manage the
associated risks.
In
the South, the percentage of those who cannot afford mortgage loans is
significantly higher in many countries, reflecting high levels of
poverty. The estimates suggest that these numbers may be over 70
percent in sub-Saharan Africa and the lower income countries of Asia,
and at or above 40 percent in the higher income countries of Asia and
Latin America.
Opportunities to acquire small loans for land acquisition,
infrastructure and housing do appear to have grown significantly during
the last two decades, particularly during the last 10 years. However,
provision still appears very small given potential demand (and in the
context of estimated housing deficits).
The growth of microfinance agencies for enterprise development pre-dates
the specific rise of shelter microfinance. These agencies have been
encouraged to move into this sector due, in part, to the scale of
enterprise loans that were ‘misdirected’ at housing investment. In
other cases, they have extended their loan services to respond to
explicit needs and requests, and because of their own commercial needs
to expand their markets. The major problem faced by these agencies
appears to be a lack of capital for expansion.
The tradition of community funds has grown up to respond to the needs of
urban poor groups to invest in land purchase and to develop
infrastructure on such land. While many loans are for secure tenure and
infrastructure, the financial systems are also used for more
individualized lending, both for housing and income generation.
However, once more, there are indications that the poorest find it
difficult to participate. Such problems are evident in assessments of
the Community Mortgage Program (CMP), a group-lending scheme in the
Philippines that has provided almost 150,000 households with secure
tenure, but which finds it difficult to include the poorest households.
However, it has to be recognized that the use of loans carries inherent
risks for those who are too poor to manage repayment risk, and greater
emphasis may need to be placed on savings and grant combinations.
Although there have been some attempts to develop micro-insurance
schemes with microfinance initiatives, relatively little attention has
been given to such strategies in the context of shelter microfinance.
The role of mortgage
finance: Access to capital and the lack of loan finance
Mortgage finance is unaffordable for many of those living in the South
and a significant minority in the North. Despite this, great emphasis
has been placed by both governments and development agencies on mortgage
finance, and state subsidies for mortgage finance still appear to be at
a considerable scale in more than a few countries.
Different housing markets are not necessarily distinct, and if no other
arrangements are made the higher income groups could take up those
opportunities that are being offered to the poor.
In
both Latin America and Asia, there have been initiatives at the
government and multilateral agency level to support the development of
secondary markets to increase wholesale finance to mortgage lenders.
While it is possible that it is a shortage of capital that is
preventing the expansion of mortgage finance, many other reasons have
been identified in this report. What appears to be of most significance
is the scale of informality in property and labor markets. It seems
that much emphasis has been placed on formalizing land titles; but, as
seen in Peru, this has not necessarily increased the take-up of either
mortgages or enterprise loans. This suggests that access to loans may
be limited in ways that cannot be addressed by reforms to property
titles, increasing the ease of foreclosure or the scale of finance and
competition in the sector.
Despite these problems, mortgage lending does appear to have expanded in
a number of countries. This appears to be associated with economic
growth and with increasing affluence. Competition has intensified and
the market for mortgage finance is moving beyond a small number of
lenders in several countries.
There are risks for individual households in taking on mortgage loans,
and some of these risks have been evident when housing prices have
fallen, notably in the UK and Japan. While mortgage insurance has been
extended, it appears that much emphasis has been placed on protecting
the lender rather than the borrower. Mortgage finance has survived
difficult circumstances in Asia and Latin America during the last
decade.
The bigger picture and
what the market cannot manage
Despite a general emphasis on the expansion of market-orientated
mortgage finance and housing support, more generally, the analysis in
this report does point to a number of areas in which markets alone
appear to be struggling, including institutional failings related to
necessarily collective rather than individual investments in shelter,
and issues related to urban planning and land-use management.
The housing finance market is strongly orientated towards providing
loans to individual households. In two of the situations discussed in
this report, there is a need for collective investment: to maintain
multi-family dwellings in transition countries and to invest in land and
infrastructure for those without tenure in the South. In both cases, it
appears that the market is unable to make an adequate response, in part
due to reasons of affordability, but also because local institutions
that can manage the finance are missing. While the suggestion proposed
by government agencies is often the establishment of formal management
committees, care needs to be given that these do not discriminate
against the poor. To address the housing needs of the poor, housing
finance systems need to provide for loans for such collective purposes,
and appropriate local structures must be in place for this to happen.
The market also seems to struggle with ensuring the quality of the urban
environment (in a physical and social sense). The greater emphasis on
targeting and reduced social provision in the North appears to have
resulted in a greater concentration of low-income households in specific
areas. This applies both in the case of the transition countries and
for the richer countries of Western Europe.
Another important issue is the nature of the developments that are being
supported by the direct-demand subsidies — for example, in South Africa
and Chile. A consequence in both countries is that low-income housing
has been located on low-cost sites, often a considerable distance from
jobs, services and other facilities, with little consideration of the
social cost that results from such physical exclusion. This suggests
that the market is unable to respond to the needs of the poor without
greater interventions from the state — either the funding agency and/or
the local authority. This further suggests that a key task for
government is to ensure adequate supplies of well-located and
well-serviced land.
Connections and
diversity within globalization
The broad context within which the analysis in this report is situated
is one in which financial markets are deregulating and the state is
withdrawing from direct involvement in the economy. Despite this
financial deregulation, there is relatively little evidence that
financial globalization is taking place in the housing sector. Markets
for housing finance have internationalized rather than globalized.
Hence, at present, while money can flow across borders and assets are
sold offshore as well as domestically, there is no globalized market in
which there is a continuous flow of funds into assets whose risks and
returns are independent of national regulatory and banking structures,
and where prices are identical across national borders (for areas with
similar risks).
Internationalization has occurred in place of globalization because,
although the state has withdrawn to some extent, it remains involved and
housing finance markets are still particular, depending upon their
specific historical and structural contexts. As a result, rather than
there being a single market, many national markets exist.
Chapter 9 – Policy
Directions Towards Sustainable Urban Shelter Finance Systems
Chapter 9 discusses the ways in which shelter finance systems could be
strengthened, in terms of both performance and sustainability, on the
basis of the experiences reviewed in the preceding chapters. Its main
purpose is to point the way forward, highlighting best policies and
practices. The chapter starts by identifying policy directions in
improving urban development finance, which is necessary for citywide
infrastructure development. It then proceeds to identify policy
directions in shelter finance.
The essential basis of the municipal side of the compact between
households and the public realm is a system of financing public goods so
that they can be provided across the city, in appropriate quality and
quantity, and at affordable cost, and so that the city can be managed
effectively. Unless urban areas can produce more income at the same
rate that they absorb more people, the resources to develop
infrastructure and build shelter will not be available.
It
is vital that powers, duties and revenues are congruent. If the
municipal authority is responsible for social housing, it should have
the power to take policy decisions on how it will act and receive the
required revenue, or be able to raise the finance.
Towards inclusive urban
infrastructure and services
Municipalities should be able to raise at least part of their revenue
from local taxation, at levels which reflect local conditions. As a
consequence, municipalities and governments need to build the
institutional capacity to levy and collect these taxes, and to spend
them responsibly. Indeed, legislation may be necessary to guide the
responsible use of municipal revenues.
It
is vital that there is some source of loans for capital projects to
which municipalities can apply in order to allow them to develop major
projects that cannot be financed out of annual budgets. There are many
models. Funds may be made available through loans from central
government or an agency thereof, a mortgage bank, a finance company, a
provincial-level institution, or a group of municipalities working
cooperatively.
Just as protecting endangered environments can be funded through debt
swaps, so such exercises can be used to fund housing and urban services,
as shown in the case of Bolivia (described in Chapter 3). As in many
other financing arrangements, having a poverty reduction strategy paper
(PRSP) in place which influences urban policy enables debt swapping in
that it gives the parties confidence that the money will be spent within
a strategy for poverty reduction rather than ad hoc.
The rising value of urban land is a significant potential source of
finance for cities. Extracting public value out of the development
process has been practiced in many countries, some with great success.
The US linkage process, in which city authorities leverage funds from
the profits derived by developers of real estate to fund social
projects, might be effective in cities in the South.
The level of accuracy required in land records for the collection of
property taxes is lower than that for avoidance or resolution of land
disputes. Thus, such systems as half cadastres and the use of regular
low-resolution aerial photography can provide a level of accuracy well
able to support property taxation systems at relatively low cost,
compared with an expensive, high-resolution land survey.
It
is also important that municipalities are paid economic charges for
their services. Thus, functions such as land registry, building
regulation, and planning control should be subject to a charge that
covers the cost. Similarly, user fees for municipal services (markets,
abattoirs, car parks, transport interchanges, bus services, assembly
halls, etc.) should cover life-cycle costs and, where appropriate,
generate revenue.
In
many cities, there is a culture of replacing regular maintenance with
irregular capital projects. It is better practice to cost
infrastructure over its whole life (life-cycle costing) and put aside
money for periodic maintenance over a long life. The savings are
considerable compared with rebuilding at the end of a short life.
The ability of the small-scale private sector to run local supplies of
water, waste collection, and other services in partnership with the
public authorities is well documented and should be explored by
municipalities not already using such partnerships.
Wherever it occurs, corruption saps the ability of central and municipal
governments to meet the needs of their constituents through diverting
money away from the development and maintenance of services. Only when
real progress is made on making corruption simply unacceptable in
business and government, and involving people in eradicating it wherever
it is found, will cities function efficiently and with trust from all
partners.
It
is likely that government funding can have the greatest effect if it is
directed towards infrastructure and services for low-income
neighborhoods and welfare services for the poorest. In the provision of
land, basic infrastructure, and social services to the poor and poorest,
subsidy is likely to be required unless the cost of services is low
indeed.
Unless urban areas can produce more income at the same rate that they
absorb more people, per capita incomes will fall and urban poverty will
deepen. Thus, employment and income are central to the financing
of urban development. The potential of shelter provision to generate
employment for low-income workers should be utilized to generate income
to improve people’s ability to pay for housing. The income multipliers
are very high for construction and even higher for low-technology,
labor-intensive construction. In parallel, the provision of efficient
infrastructure and appropriate shelter is critical in ensuring the
economic productivity of the work force in urban areas and countries as
a whole.
Local governments should reduce the costs of economic activity by
streamlining land allocation, development control, and other regulatory
activities, while retaining appropriate ability to act in the public
good. One-stop shops allowing planning and building control to be
streamlined are capable of radically reducing the transaction costs of
development and encourage more people to take the formal development
route.
Strengthening the
sustainability and performance of the shelter finance system
Turning to housing finance, there is both a need and a demand for layers
of finance for different sectors of the housing supply process.
Mortgage finance, for relatively large sums over a long period of
repayment, is essential for those well off enough to buy a complete
formal dwelling. However, small loans, taken out over short terms of
between one and eight years, loaned at market rates, are growing in
importance in the housing sector.
The problem in many developing (and even in some developed) countries is
not that housing is too expensive, but that incomes are too low. The
locus of attention should not be on the minimum quality and cost of
housing, but on the level of payment received by workers. This
demand-side focus is in line with current trends in subsidies and
concentrates attention on the systemic problem of poverty, which
generates poor housing consequences.
In
many countries in the South, the cost of urban housing is increased
significantly by the high standards to which it must comply. The
introduction of lower standards that are more appropriate to the local
context could potentially make housing more affordable to a far greater
proportion of the urban population. Lower standards would still,
however, have to safeguard the health and safety of the occupants and
protect the public interest.
Most policies behind official development assistance and national
policies are based on the provision of independently serviced
single-household dwellings, owned by their occupants. However, this is
by no means the main form of occupation by households living in poverty.
Instead, large numbers of households live in buildings occupied by many
households. There is much to be gained from encouraging multi-occupied
housing development where it fits in with local norms.
Small-scale landlords in informal settlements are a major source of
affordable housing for a growing majority of households living in
poverty in the urban South; but there are few initiatives to assist
them. It is imperative, therefore, to understand how best to assist the
informal rental sector and, at the same time, to preserve affordability
in order to preclude gentrification.
In
the spirit of the Habitat Agenda, and if the housing backlog is to be
cleared at all, it is vital that all actors in the housing process are
involved in the role in which they are most efficient. The most
important suppliers of the dwellings themselves, and their ancillary
services, are the millions of small-scale building contractors, the
single artisans or small groups of skilled people and the laborers who
service their needs. However much demand there is for housing, it can
only be supplied as quickly as the construction industry can build it.
Finance to provide healthy liquidity among small-scale contractors and
single artisans is an essential prerequisite to effective housing supply
to scale.
In
countries where the housing supply system is efficient and speculative
of what the market demands, developers are often an important part of
the process. Some mechanism for recognizing their contribution with
financial assistance, especially for bridging loans, may be very
beneficial for the housing supply process and could institute the
efficient speculative building of housing, which is common in
industrialized economies.
Recent research into regulatory frameworks for urban upgrading and new
housing development has recommended the removal of constraints that
prevent the poor from borrowing from financial institutions or accessing
credit through other formal channels. In particular, administrative
procedures that delay investments and/or increase risks should be
reviewed as they add to the cost and deter the poor from conforming.
The countries in which most of the urban growth will take place during
the next 25 years have very low domestic savings measured as both per
capita and as a percentage of GDP. As savings are the foundations for
investment, this does not auger well for urban development. It is
important that developing countries maintain as much as possible the
investment and savings arising from local economic activity within their
borders, or benefit from net inflows from investments overseas. It is
difficult to overstress the importance of reliable banks and low
inflation in discouraging capital flight.
It
is in governments’ interests to extend mortgage markets down the income
scale, as homeownership is seen to be beneficial economically and
politically. Measures that could be adopted include reducing the
cost of lending, especially through reducing interest rates; supporting
the system of mortgage financing, especially through extending secondary
markets and reducing risks; and providing direct capital grants to
reduce the size of a household’s mortgage in comparison with the
dwelling cost.
Well-run mortgage facilities are undoubtedly important to the health of
the housing supply system in the North and may be a major contributor to
housing improvement in transitional countries. They are also important
in providing upper- and middle-income groups with housing finance,
without which they would claim the shelter opportunities provided for
those lower down the income scale.
As
mortgage finance is unlikely to assist the majority of the people, it
must not be allowed to divert attention from financing that is helpful
to lower income groups or to drain resources away from low-income
households towards those in the middle- or upper-income groups.
Loan periods and loan-to-value ratios (LTVs) are vital components of
mortgage loans, which are determined by the lender rather than the
global macro-economic environment. Decisions about them can be the
difference between the success and failure of the mortgage company and
can determine who can afford to borrow, at least at the margins. Low
LTVs (and, therefore, high initial deposits) reduce risk but increase
the need for upfront capital. The level of repayments can be varied in
order to help households meet their obligations. Variable-interest
loans allow low payments at the beginning, increasing as income improves
to repay the loan on time.
There is a well-documented link between finance for income generation
and improvements in housing. Many homeowners operate one or more
home-based enterprises from the structure on which they raise housing
finance. The same goes for rental income. One of the most important
sources of low-cost rental property, which is becoming more important as
the years pass, is the extra room built on to a home and rented out to a
stranger for rent, or to a co-villager or relative for no rent but some
other benefit (if only to satisfy family obligations).
It
is obvious that improvements in housing can benefit home-based income
generation, including room rentals. Thus, lenders should take account
of the likelihood of income improvements in the application procedure
through a process which factors in future income generated by the
housing goods, to be provided under the loan. It is also important that
financiers recognize that the poor are more concerned about access to
credit than its cost. Experience shows that there is great demand for
microfinance even if interest rates are high.
Subsidies come in many guises, including direct interest-rate
reductions; allowing mortgage interest payments to be deducted from
income tax; supporting housing-related savings; supporting insurance of
mortgages; supporting the secondary mortgage markets; and direct grants
for shelter.
If
appropriate housing finance is in place, the proportion of households
requiring subsidy should be minimized to only those too poor to afford
the real cost of the shelter available. The need for subsidy can, thus,
be reduced by adopting effective financing systems. The work of some
NGOs to provide funding to assist individuals in accessing subsidies is
very helpful to many households. In Ecuador, a revolving fund provides
the down payment necessary to obtain a national housing subsidy grant.
Social housing is, almost by definition, subsidized housing. The
subsidy element is a financial credit to the occupier and, thus, often
constitutes an important element in a nation’s housing finance system.
Although social housing is becoming residual in Europe and transitional
countries, the need to provide more housing that is affordable to the
low-income households is still present. Those who cannot afford
homeownership or market rents in the private market need shelter through
public rental housing. In the South, however, few countries have been
successful in large-scale public rental housing.
Small housing loans, disbursed through housing microfinance institutions
(HMFIs), are some of the most promising developments in housing finance
during the last decade. They are suitable for extending existing
dwellings, building on already serviced land, adding rooms (often for
renting out), adding services such as toilets, and housing improvements
within in situ neighborhood upgrading. They tend to reach much further
down the income scale than mortgage financing, but not to the households
close to or below poverty lines.
In
the context of large numbers of new low-income households in cities over
the next two decades, it is important to increase the number of lenders
in the housing microfinance sector, rather than to concentrate only on
mortgage finance which, inevitably, serves the middle- and upper-income
groups.
There is a serious issue of funding for on-lending by HMFIs. Many have
received concessionary funds, and their lending reflects the low price
of the capital. If they are to expand their operations, they will need
to cope with borrowing at international market rates and reflect this in
their loans.
In
comparison to enterprise microfinance, shelter microfinance lending
involves long-term and large loans and generates a need for group
security or some security of tenure backed by documentation. In the
context of group lending, mandatory savings periods before loans not
only build up an understanding of finance, but also strengthen community
ties among savers through regular group meetings. Then the group becomes
the collateral, as the members will support each other in times of
difficulty and take away from the lender the complication of following
up defaulters.
Throughout the days of sites-and-services projects and other aided
self-help, efforts have been made to reduce the financial burden of
low-income homeowners by allowing materials to be drawn from dedicated
warehouses or to be supplied on credit through local commercial
suppliers. Recent experience in Mexico and elsewhere has shown how there
may be great potential for this to expand alongside housing microfinance
and the downscaling of mortgages to lower income households using the
longstanding credit culture operated by furniture and household goods
retailers.
Remittances from overseas residents of local nationality are an
important part of housing finance in many countries. Many people can
remit enough to build a house in a few years overseas in quite lowly
employment that would be impossible if they stayed at home in
higher-level employment. But there is a danger that tastes, standards
and ability to pay from a different context may take over the local
markets and drive other residents into poorer housing than they would
otherwise have.
Many charities give large amounts of money towards housing improvement
and shelter for the poorest. There is a place in funding shelter for the
poor for that which arises from altruistic humanitarian support.
Community-based financing of housing and services has been used for both
settlement upgrading and for building on greenfield sites. In a context
where small loans are evidently successful, and where there is an
increase in poverty, it has many advantages for low-income and otherwise
disempowered households. The experience of the affiliates of the Shack
or Slum Dwellers’ Federation has demonstrated that there is great
potential for community-based organizations to manage development
finance to the benefit of large numbers of relatively poor households.
The evident success of community funds has attracted some governments to
take part in their financing.
Epilogue
The shelter issue has become one of a global nature after the concept of
‘human settlements’ found its place in the international development
agenda. Until recently, the classical response to the shelter problems
of the urban poor was social housing, both in developed and developing
countries. However, the massive demand for affordable housing in
developing countries, coupled with the limited resources of the public
sector, would have made this solution inapplicable, even in the presence
of a well-organized and transparent public-housing delivery sector.
Notable exceptions are states such as Singapore, which implemented huge
and very successful public housing programs, as well as successful
policies in other larger countries such as Tunisia and isolated
exemplary projects in many others.
The notion of ‘financing shelter for the poor’ corresponds, in a way, to
the abandonment of the traditional concept of public responsibility
embedded in the ‘social role of the state’. With the commodification of
the economy, where housing is but another good to be produced, sold, and
bought, the solution to the shelter dilemma is based on the notion that
‘the poor’ will always exist, and that their access to a fundamental
human need —adequate shelter — will always require special measures and
special solutions.
This Epilogue starts from the premise that ‘special approaches’ and ad
hoc solutions, however ingenious, will never work at the scale required.
Three points are made. First, the percentage of the urban poor in the
cities of the developing world is far too high to be considered a
residual issue. Second, the demand for affordable shelter is increasing
at an extremely fast pace, notably in the rapidly growing cities of the
developing world. Third, the standards and costs that city life requires
are high and complex. Shelter is only one, albeit the central,
requirement of all citizens. Given the rapid spatial growth of cities in
the developing countries, transport, for example, becomes a crucial
necessity for survival. The living, working and spatial circumstances of
city life require standards and services for all that are far superior
in quality and sophistication to those usually associated with minimal
shelter — a roof over one’s head.
Given these considerations, the issue is not simply financing shelter
for the poor. The issue is making adequate shelter affordable to the
poor. This approach may be called ‘sustainable shelter’: shelter that
is environmentally, socially, and economically sustainable because it
satisfies the Habitat Agenda requirements of adequacy. Its acquisition,
retention, and maintenance are affordable by those who enjoy it. It
does not overburden the community with unaffordable costs. Finally, it
is located in areas that do not constitute a threat to people or to the
environment.
There is no single magic formula to achieve this. Individual self-help
can only produce solutions that are admirably suited to the harsh
circumstances of urban migration, but are also the most fragile of all.
Community-based funding has proven a valuable and indispensable asset,
particularly for improving services and, in some cases, infrastructure
in informal settlements; but it is not likely to reach the scale
required, at least in the short term. It must also be noted that the
admirable solidarity mechanisms found in poor urban communities stem
from the common will to stave off a common threat, often rooted in a
state of illegality and a risk of eviction. They also depend upon the
cultural and ethnic composition of the informal settlement. Strongly
desirable and supported outcomes such as regularization, infrastructure
upgrading, and the improvement of economic circumstances can also bring
the attenuation of community solidarity and mutual self-help mechanisms.
Therefore, they cannot be assumed to work in all cases and for
indefinite periods of time.
Abating housing costs
Housing is becoming an increasingly expensive commodity in all
countries. Between 1997 and 2004, according to a very recent survey,
average housing prices grew by 131 percent in Spain, 147 percent in the
UK, 179 percent in Ireland, 113 percent in Australia, 90 percent in
France, and 65 percent in the US. The only developing country
listed in the survey is South Africa, which registered the highest
growth in the sampled countries: 195 percent.
Of
course, these sharp increases in housing prices can, in many cases, be
due mainly to speculative bubbles. But there is little that policies
can do to prevent or control these phenomena. On the other hand, while
average housing prices are lower in the developing countries, they are
also influenced by steeply rising costs of land, building materials, and
other cost components.
Affordability, therefore, rests to a large extent upon policies capable
of bringing down housing production costs. Housing production cost
components are known: capital, land, infrastructure, building materials,
standards, design, location, and modes of production. To be affordable,
all of these elements will require a substantive element of subsidy; but
in some cases they will only need intelligent policy changes.
Increasing purchasing
power
In
the developed world, a household with two sources of income, wife and
husband, however humble the occupation or the source of income may be,
normally can gain access to decent shelter on the market, however
modest. In the developing world, this is virtually impossible — hence,
the virtual necessity of finding affordable inadequate shelter in a
slum. People who live in slums are known as 'slum dwellers'. In
reality, they are 'working poor': people who work for a living, but
whose income cannot guarantee them access to the basic needs that
everybody in developed countries take for granted — adequate shelter,
proper nourishment, health, education, and decent and non-threatening
living environments.
There is something terribly wrong about the inability of vast numbers of
the working poor in developing countries to gain access to adequate
housing. Part of the problem is the rising costs of conventional
housing addressed above; but an equally important issue is the extremely
low wages in the formal sector and income from other income-earning
activities, particularly in the informal sector. This is why making
shelter affordable to the poor also depends upon increasing the poor's
income.
The issue, of course, is not simply that of wages. A regular income is
also a standard prerequisite for accessing mortgage or shelter
microfinance markets. Continuity in income earning is important
once one enters a mortgage agreement in order to avoid the risk of
losing all of one's investment through the painful process of
repossession. But a decent income is the minimum basis for accessing
decent shelter, particularly in the situations of virtually all
developing countries where workers' benefits and pensions are virtually
non-existent and where the prices of basic necessities rise as rapidly
as those of housing.
Lower housing prices
and higher incomes
Increasing both wages and income opportunities for the working poor
augments the saving potential of the same earning group. The urban poor
show a marked propensity and ability to pool part of their incomes into
community funds and other forms of saving arrangements. This triggers
virtuous circles: the more capital is saved, the more is available for
improving shelter conditions, productivity, skills formation, and
income-earning activities. With upgrading and adequate shelter
solutions, more disposable income can become available to contribute to
basic infrastructure and services, thus making public capital investment
in this area more sustainable.
Financing shelter is only a component of the broader goal of securing
solutions that can make shelter truly sustainable and that can fill the
gap between the two extreme outcomes which are being witnessed today:
affordable shelter that is inadequate and adequate shelter that is
unaffordable. One starting point is to look at the inhabitants of
informal settlements not simply as 'slum dwellers', but as ‘working
poor'. Important opportunities exist for addressing the affordability
gap by acting on both ends of the sustainable shelter equation —
reducing housing production costs and increasing the incomes of the
working poor.
Given the urgency and growing significance of the 'urbanization of
poverty' challenge, it is difficult to think of other areas of
development that deserve more attention and investment on the part of
the local, national, and international institutions committed to
reaching the Millennium Development Goals (MDGs), including the target
of improving the lives of at least 100 million slum dwellers by 2020
and, more generally, to find practical and sustainable solutions to the
global fight against poverty. Cities can lead the way, and the MDG
targets within them — the urban poor — can become the protagonists,
leading actors, and living examples of a brighter future for all of
humanity.
Donatus Okpala
is Acting Director of the Monitoring and Research Division of the United
Nations Human Settlements Program (UN-Habitat) in Nairobi, Kenya.
Naison Mutizwa-Mangiza is Chief of the Policy Analysis, Synthesis,
and Dialogue Branch of UN-Habitat in Nairobi. Iouri Moisseev is
a senior member of the staff of the Policy Analysis, Synthesis, and
Dialogue Branch of UN-Habitat in Nairobi. Their article is the Synopsis
of Financing Urban Shelter: Global Report on Human Settlements
2005, and is reprinted by permission of UN-Habitat.
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