Report
Description

Cities are growing at an unprecedented rate, presenting an incredible opportunity for the development of local economies. However, their residents need good, affordable housing – and this remains a challenge around the world. Well-functioning property markets can act as a financial springboard for enterprises and job creation. An enabling environment for affordable housing can be developed with the right infrastructure, investment and macroeconomic policies targeted towards social and financial inclusion.

The challenge of affordability requires not just short-term fixes but also long-term strategies. Solutions will need to address both the supply side and the demand side of the housing market, and involve public-sector, private-sector and non-profit stakeholders.

Affordability: exploring the problem

Chapter 1 unpacks the notion of “affordability”: It is not only about being able to afford to buy or rent a house, but also being able to afford to live in it. This goes beyond meeting expenses related to operations and maintenance; it also involves considerations of transport, infrastructure and services. If a house is cheap enough to buy and run, but located far from livelihood opportunities or amenities such as schools, it cannot be said to be affordable.

The reasons for a lack of affordability vary from city to city, but commonly include housing costs rising faster than incomes, supply of houses not keeping up with demand, scarcity of land, and demographic changes such as population growth, ageing and changes in household composition.

Supply-side challenge 1: land acquisition and titling

Housing investments depend on land having a legal title and security through tenure and property rights. Chapter 2 explores innovative land acquisition strategies such as:

  • Land-pooling, where an undeveloped piece of land is exchanged for a smaller, developed piece of land, and tradeable land quotas, in which agricultural land on the periphery of a city can be converted if other land is opened up for agriculture beyond the city’s boundaries.
  • Focusing on ensuring property rights – for example, the right not to be forcibly evicted – rather than formalizing property titles.
  • Partnerships between community land trusts, which own and steward land on behalf of a community, and municipal land banks, which acquire vacant land and prepare it for development.

Supply-side challenge 2: land use

City governments generally use two tools – zoning and regulation – to shape where and how new houses can be built. Chapter 3 explores the pros and cons associated with greenfield and brownfield development and discusses strategies such as:

  • Transit-oriented development, in which expansion of cities is planned around new urban transport infrastructure.
  • Algorithmic zoning, with incentives for developers based on assessment of what is needed to maximize the vibrancy of a community.
  • Mixed-use development and inclusionary zoning, to ensure neighbourhoods have a mix of income levels and proximity to jobs and services.
  • Taxation solutions, such as taxing the underlying value of land rather than the value of the property on it, and imposing a tax on vacant land or properties.

Supply-side challenge 3: securing finance

While some investors are starting to see affordable housing as a low-risk addition to their portfolio – as demand from key workers in public services is likely to remain strong through recessions – the private sector naturally focuses on market-rate housing, where returns are expected to be higher. Chapter 4 discusses options for funding the development of affordable houses, including:

  • Government provision of tax incentives, grants or exemptions for private developers to develop certain types of property or develop in designated areas.
  • Government-guaranteed bonds providing cheap, long-term finance to community-based organizations to develop and manage affordable housing.
  • Employing investment models such as microfinance, real estate investment trusts (REITs), impact investing and Islamic finance.

Supply-side challenge 4: design and construction

While land is often the biggest cost in developing housing, construction costs are not far behind – and sometimes even greater. Chapter 5 looks into how housing can be made more affordable by bringing these costs down. Approaches include:

  • Minimizing bureaucracy, as the fees and costs of complying with complicated building codes can add significantly to project cost. There is potential for technology to provide solutions here.
  • Emerging construction technologies such as 3D printing, robot bricklayers, self-driving bulldozers – and solutions related to the internet of things (IoT) and artificial intelligence (AI) that could bring down operational and maintenance costs.
  • Alternative construction materials such as fly ash, cement-coated expanded polystyrene panels, glass fibre-reinforced gypsum, cross-laminated timber and compressed earth blocks.
  • Public-private partnerships on training to address skills shortages in the construction sector.

Demand-side challenges

Should strategies try to make housing affordable for everyone, or target assistance at certain sections of the population? And how should targeted populations be defined: by income level, age, number of children or employment as key workers? Chapter 6 delves into these and other challenges on the demand side of affordable housing, including:

  • Different forms of tenure, going beyond a binary choice between rental and homeownership, can offer more options to city residents struggling to afford a house. They include build-to-rent, shared ownership and shared equity ownership.
  • Rent controls offer the potential to protect tenants, but must also take care not to restrict the future supply of properties to rent by unfairly disadvantaging landlords.
  • Demand-side interventions need to guard against the risk of helping in the short term but not the long term. Mechanisms to keep units affordable on resale include subsidy recapture and subsidy retention.

Recommendations

Effective strategies need to address both supply and demand side challenges. The final chapter sets out recommendations for the three main interdependent actors:

  • City governments have to define their long-term plans for increasing the supply of affordable housing, balancing the need to minimize urban sprawl with the limits of the viability of building denser and taller. They need to address political considerations that could hold back the development of new affordable housing, ensure that housing developments have adequate infrastructure, explore ways to improve the situations of those living in informal housing, and create a strong regulatory enabling environment for the private and non-profit sectors.
  • Private-sector players need to keep abreast of emerging solutions in construction techniques and materials, work with governments to ensure an adequate flow of skilled labour, and consider new solutions in financing and innovative tenure models.
  • Non-profit organizations such as community land trusts, housing cooperatives and microfinance institutions have a critical role in bridging the gap between governments and the private sector to improve the affordability of housing, as well as working with individuals to help them understand their options and make informed decisions.
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