Narendra Modi, Malik Riaz, and Mike Labbé should talk. Together, they can provide solutions to end the housing crisis for the low-income households in India and Pakistan.
South Asia alone is home to one of the largest homeless populations in the world. In India, 170 million individuals live in slums. In the neighbouring Pakistan, the national housing shortfall is estimated at 9 million houses.
However, unlike Pakistan, India has decided to address the national housing crisis.
Prime Minister Modi’s budget on February 28 is expected to disclose the details of an ambitious plan to build 20 million housing units at the cost of $2 trillion in the next seven years. Once completed, the plan will not only house the homeless or the partially homed 170 million, it is also likely to boost the Indian economy for decades, by engaging millions in the development of one of the largest infrastructure development programs.
There is, however, one big challenge. Even when affordable housing is built for the low-income households, speculators and others manipulate the markets for fast returns. The same units are resold at much higher prices, thus effectively reducing the affordable housing stock.
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The affordable housing units in Bahria Town in Rawalpindi, named Awami Villas, were initially sold by the developer for less than a million rupees. Just a few years later, the same units are being sold for two to three million rupees, making them unaffordable for the low-income households.
The real challenge is to find a way to sustain the supply of affordable units when affordable housing becomes unaffordable in the resale market.
Mike Labbé, a Canadian developer and a visionary, offers innovative solutions to ensure affordable housing sustains a mechanism to generate even more affordable units. It can work if the politicians, land developers, and lending institutions collaborate on these solutions.
Housing the homeless in India
India's project will be the world’s most ambitious housing development plan.
Narendra Modi’s plan to build 20 million new homes exceeds far beyond the hitherto largest public housing development plan in the United States, in scale and magnitude.
Enabled by the Housing Act of 1949, President Truman embarked on a plan to build 810,000 units of public housing. The Indian government’s plans are innovative in that they do not burden the State with the entire responsibility to deliver millions of housing units. The government instead is facilitating the private sector to seize the opportunity.
They will initiate slum rehabilitation projects and provide housing to the slum dwellers at affordable rates. The government is helping the builders raise financing from overseas. It already helps the builders in accessing public land for low-cost housing. Plans are in works to change zoning by-laws to allow taller and wider buildings and streamlining the approval process for residential development projects.
The Central Bank in India will help the commercial banks access funds at cheaper rates for their subsequent lending to these projects. Furthermore, the government may increase the tax incentives for housing loans from 200,000 Rupees per year to 350,000.
The precarious housing situation in Pakistan
The State Bank of Pakistan reported earlier in January that the housing shortfall worsens by 0.34 million units every year. A whole host of structural and other limitations have choked the housing supply in Pakistan.
The archaic land and property records hinder large-scale urban residential development. The building industry is atomised and is not trusted by the consumers and institutional lenders. Housing finance is in shambles. The injunctions against interest further limit the application of the traditional mortgage banking in Pakistan.
Know more: Housing challenges
With the exception of Bahria Towns, most large scale residential developments in Pakistan were undertaken by commercial enterprises representing professional groups who acquired the State’s land at cheaper rates and made it available to members of their fraternity.
Defence Housing Authorities are one such example. The recipients of the subsidised land sold the developed land or the residential unit in the market and pocketed the gains. The housing resale market, because of the demand pressures resulting from higher population growth rates and rural-to-urban migration, thus offered extraordinary returns, where housing prices in new developments doubled in a relatively short span of time.
When affordable becomes unaffordable
Given the lack of access to subsidised State land and affordable mortgage finance, the low-income households in Pakistan have been effectively shunned from the owner-occupied housing.
They are forced to live in unplanned neighbourhoods in crowded housing. Multi-generational households continue to increase in size, but are forced to cohabit because of the lack of housing alternatives.
Even when the government or the private sector develops affordable housing and makes it available to low-income households, such housing quickly reenters the resale housing market and transacts at much higher prices. To date, developing countries like Pakistan have largely been unable to sustain the affordable housing stock.
Options for Homes
Mike Labbé, a Canadian developer and an advocate for affordable housing, operates 'Options for Homes', a not-for-profit agency that builds affordable housing for the low-income households.
He has been relentless in trying to persuade the governments in Canada to expand their options for affordable housing and include owner-occupied housing as a solution along with affordable rental housing.
Mike's financing solution ensures that the affordable units remain affordable in the long run. Since 1994, organisations associated with 'Options' have enabled 6,500 households to own their homes. Millions more can benefit if the projects are scaled to operate on a much larger level.
'Options' first develops housing at much cheaper prices than other commercial developers. It accomplishes this by drastically reducing marketing costs, eliminating expensive amenities, and reducing the profit margins.
'Options' also offers the home buyer a second mortgage (loan) worth approximately 13 per cent of the property value. The loan is payable only when the owner either sells or rents out the unit. The loan appreciates with the price of the property. Hence, when the original owner resells the property, 'Options' recovers the loan at the same rate at which the property has appreciated. 'Options' reinvests the gains made into building more affordable housing.
What to do in South Asia?
Large-scale housing developments can customize Options’ solutions to prevent undue profit-making by speculators and those in search of quick fixes.
Here is one option:
The government should make large swaths of land available at highly subsidised rates to established builders, preferably from abroad, to build large-scale mixed used developments. Smaller housing units of roughly 750 square feet should dominate the housing mix.
The builders must be required to use a portion of land price savings (the difference between the commercial and subsidised land value) to establish a fund for the cooperative that will manage the new housing development.
The cooperative will take out a second mortgage on the housing units similar to the one by Options but for a larger value. If the affordable house is resold in the market, the cooperative will recover the loan and the markup in proportion to the price appreciation. The cooperative will then re-invest the profits in building additional housing on the unbuilt part of the developed land.
Smaller unit sizes will ensure that high-income households do not find the units attractive to invest. Furthermore, the cooperatives could be empowered to ensure that households under a certain income threshold are eligible to purchase units in the development. Other restrictions to prevent multiple purchases by the same household could further prevent the speculators from generating undue profits.
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The mechanism will provide the means to sustain the supply of new affordable housing to replace the one that may become expensive in the resale market. The builders will make market returns on the commercial properties (office buildings, retail malls, recreation facilities, etc.) developed as part of the project.
Housing affordability is a global crisis that affects over 330 million households. McKinsey Global Institute estimates plugging the global housing affordability gap will require $16 trillion. There lies a tremendous opportunity for governments, land developers, builders, and lending institutions to create affordable housing and generate value for their stakeholders.
The scale of the opportunity should entice the private sector in the developing countries where it’s not just affordable houses, but affordable cities that need to be built. If individuals like Narendra Modi, Malik Riaz, and Mike Labbé join hands, hundreds of millions can embrace secure tenure and a prosperous future for their families and nations.