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Blog: The Affordability Challenge – how to provide safe adequate housing at a reasonable cost?

(Session IV – Cagamas & World Bank Group “Affordable Housing across Asia” conference, 2 nd April 2019)

As the world becomes more urbanized, the challenge to governments is to provide enough adequate and affordable housing. Importantly, it has been recognized that a range of solutions is needed; it is clear that there isn’t a silver bullet.

Before we can propose solutions, however, we need to understand exactly what affordable housing is. Dao Harrison, Senior Housing Specialist at the World Bank, gave us an insight by providing an overview of a comprehensive affordable housing study in an emerging market: Kenya.

The study, conducted by Dr. Sumila Gulyani, builds a demand-side understanding of housing using survey data from over 14,000 households in 15 Kenyan cities. In contrast to standard notions of an “acceptable” housing unit, only 18 percent of urban Kenyans live in a self-contained unit with a toilet, kitchen, electricity, and private water connection. The market is also delivering two under-studied housing categories explicitly designed for sharing: compounds and dormitories. Surprisingly, these categories are also being seen in developed countries, such as the San Francisco Bay Area.

A key implication of the study is that the rental sector is necessary to meet the market challenge in terms of affordability and mobility. In Kenya, approximately 86 percent of residents are tenants; they outnumber owners in 14 of the 15 cities. Unsurprisingly, rent represents a significant share of overall household income. If viewed as a proxy for monthly mortgage payments, however, they indicate a low ability to achieve ownership.

The study clearly shows that we need to rethink housing policies, including reevaluating what type of housing is deemed “acceptable” and affordable for very low income urban residents. Furthermore, it underscores the need to develop better quality rental housing, and calls for a reassessment of housing and infrastructure investment programs, especially in emerging markets.

Lana Wijayanti, the former Director General of the Housing Finance Implementation Agency of Indonesia’s Ministry of Public Works and Housing, emphasized that governments had to be creative to meet the urban housing challenge. For example, in Indonesia where most of the land in urban centers is owned by big developers, government policy is focused on incentivizing the private sector to increase the stock of affordable housing.

Back in 1989, the government of West Australia (WA) embarked on its own innovative solution. According to its CEO, Paul Graham, Keystart was established to allow low income buyers to enter the home market sooner. Through its Shared Equity Scheme, a prospective buyer would only need to pay a deposit of 2 percent to take out a mortgage; this is opposed to the usual 20 percent required by banks in WA.

Most importantly, however, the loan is based on the borrower’s equity, not on the full value of the property. Any capital gain (or loss) is shared proportionately among the equity partners – the borrower, Keystart, and the WA government. Therefore, Graham pointed out, Keystart should very much be seen as a transitional lender, designed to intervene in the market as little as possible.

Blog: Connecting Capital Markets and Affordable Housing Delivery

(Session IV – Cagamas & World Bank Group “Affordable Housing across Asia” conference, 2 April 2019)

In the post global financial crisis (GFC) world, housing has proved to be an attractive investment market. The problem, however, is that most of the funds utilised go to the middle- and high-end tiers, not affordable housing. Why?

According to Datuk Chung Chee Leong, Chairman of ISMMA and the CEO of Cagamas Berhad, this is because there is a mismatch between the expected returns of investors, and the yields available in the affordable housing sector. For example, rental yields in Malaysia today, especially for houses below the RM 500,000 price range, is between 2 and 3 percent. The expected return of the investors in the capital market, however, is typically between 4 and 5 percent, or even more.

To overcome this mismatch, Datuk Chung suggests packaging a portfolio of affordable housing properties into an asset trust under the Security Commission’s Sustainability Responsible Investment (SRI) framework.

This could then be marketed as an SRI bond or SRI sukuk to investors who aren’t solely looking at returns, but to socially responsible investments, as well.

Another method is to offer affordable fixed rate mortgages, which protects borrowers from market fluctuations. In order for this to happen, Olivier Hassler, the Non-Executive Chairman of CRH France, feels that there must be good financial regulation, which limits the risks commercial banks take. A relatively deep interest rate swap market is also essential to allow commercial banks to fund mortgage lending with their deposits, like many banks do in Europe.

One country in Asia that has successfully developed a fixed rate mortgage market is Korea. According to Junghwan Lee, the Chairman and CEO of the Korea Housing Finance Corporation (KHFC), Korean households were heavily indebted after the 2008 GFC.

Therefore, the government set up a debt conversion programme to alleviate household risk from exposure to interest rate fluctuations. This resulted in approximately 327,000 households (nearly USD 32 billion) converting from floating rate to fixed rate mortgages, accounting for some 48 percent of all Mortgage Backed Securities in Korea. An upshot of this undertaking was that Moody’s upgraded KHFC’s rating from AA3 to AA2.

Siew Suet Ming, Head of Structured Finance Ratings at RAM Rating Malaysia, believes that there is an opportunity for emerging markets to create and find bespoke financial solutions to meet the affordable housing challenge.

She highlighted a recent case where her organisation capitalised on Malaysia’s strong domestic regulations on housing development to allow some developers to monetise passive assets on their balance sheets to free up working capital. This, in turn, allowed them to access cheap funding from the capital market, as opposed to direct bank funding.

Blog: Sarah Murray, Digital Housing Developer

"Hear My Story" – Sarah spoke at the Cagamas and World Bank Group's Constructing & Financing Affordable Housing across Asia Conference (2-3 April 2019)

A professional innovator with 15 years corporate experience at some of Australia’s largest organizations, Sarah Murray became interested in affordable housing the hard way. Even with a successful corporate career, she realized that she simply could neither afford to own or build a home in her native Sydney.

After spending 12 months at the prestigious Stanford University’s LEAD program studying corporate innovation, she decided to put on her innovator’s hat and tackle this problem headfirst.

What she found wasn’t pleasant; this wasn’t a new problem. In fact, according to the UN, we’re already in a desperate situation. It estimates that the world needs 35 million new homes every year. That’s an astonishing 4,000 new housing units every hour. Let that figure sink in for a minute – and then realize that we’re not even talking about maintaining the current stock of affordable housing. And that’s at current trends; global demographic data show that it’s only going to get worse.

Murray’s solution was to merge gaming technology with social enterprise to create PLACE Technologies, which is the developer of the PLACE game. To put it into a nutshell, the premise of the game is that the actual cost to build a house is often obscured, making housing – as in Murray’s case – unaffordable. Think about it. Before you can build your home, you need to design it. This means engaging a building professional like an architect or contractor, which costs money. Every time the design is changed…well, you guessed it – more money is spent. And we haven’t even discussed actual building costs yet.

The PLACE game, therefore, tackles the affordable housing problem by showing the actual cost of each design component. So, for example, when you add that new room for little Bobby, the game automatically computes how much it’s going to cost you, and displays that information. Just like e-commerce makes the consumer culture affordable by cutting out the middleman, PLACE makes housing affordable by making costs transparent.

In order to do this, the PLACE game relies on modular building components. While these may not be everyone’s cup of tea, they do have a relatively long and storied history in the building industry. After all, a forerunner of these components – called “pre-fabricated homes” – was what allowed many WW2 veterans to become homeowners in the Levittown of the US. Murray even highlights how her own father-in-law benefited from the UK’s similar Project Hawick while growing up in Scotland. Besides, advocates of modular construction components believe they have the potential of decreasing construction costs by 20 percent, and reducing environmental waste by 15 percent.

Finally, Murray calls her brand of digital housing development “urban tech”. To her, the fundamental difference from all the other technology catchphrases is that it puts the individual – the human being – at the center of the technology ecosystem.

So, while players interact with the game through a fancy virtual reality interface, they are made aware of the financial and environmental costs of their design choices at all times. And to top it all off, players who actually build their homes with PLACE contribute to a home for someone in need at a ten-to-one ratio.