Affordable & Pro-Poor Housing.Imperative For Pakistan’s Progress

A Presentation at SBP by;M. Abrar AmeenMarch 25th, 2013.

Dedication

• This presentation is dedicated to Dr. Parveen Rehman, the Director of Orangi Project, who selflessly served the poor; but was murdered two weeks back by forces opposed to, and threatened by the idea of a Progressive Pakistan.

Preamble

• The housing shortfall in Pakistan has assumed alarming proportions. But the sector that has remained largely ignored by all commercial banks, and most of DFIs is the low income segment.

• Owning a house not only brings stability to the lives of people, but is the most prominent source of creation of national wealth. We need to adopt radical, out of the box solutions to address this issue, which, if left unattended, would result in a severe pressure on the already crumbling social safety net, that Pakistan has, largely in the shape of family (not governmental) support.

Introspection

• Is housing a basic need, a right, an entitlement, a public good, or even, as in the case of home purchasing, a civic necessity ?

• Or is it just another household-level consumer choice, a commodity or an investment within the free market system?

• "Housing Policies provide a remarkable litmus test for the values of politicians at every level of office and of the varied communities that influence them. Often this test measures simply the warmth or coldness of heart of the more affluent and secure towards families of a lower socio-economic status (John C. Bacher –Keeping To The Marketplace: The Evolution of Canadian Housing Policy-1993)."

Context of Presentation

• We have been talking about the issues for a very long time, with little headway in coming up with practical solutions.

• Where solutions have been proposed, or presented, their adoption has been hampered by either a lack of will, or lack of interest by the banking community.

• Housing has been relegated to the bottom of the pyramid of products, as banks, and their Managements have become comfortable with, and set their hearts on investing in Government paper for quick and steady returns.

Context Of Presentation-II

• The problem is not insolvable, only the route to the solution requires the will to take the first steps.

• Countries like India, China, Egypt, Indonesia, and others had long resolved to address the issue of provision of low cost housing for low income, and poor segment of their populations.

• They had rolled out programmes for massive increases in the housing stock, with Public-Private partnership, with the result that they now have large communities living in these low cost houses.

Context of Presentation-III

• This presentation analyses the issues, looks at the impediments – some of which we have not addressed out of sheer apathy, and then proposes the solutions to address this festering problem, that has remained on the back burner for too long.

• In the words of a Paper written by Mr.Zaigham Rizvi, some time ago, Pro Poor Housing is an Idea, whose Time Has Come.

The Issues

• Housing affordability is more than just a personal trouble experienced by individual households who cannot easily find a place to live. Lack of affordable housing is considered by many urban planners to have negative effects on a community's overall health.

The Issues - II

• Lack of affordable housing can make low-cost labor more scarce, and increase demands on transportation systems (as workers travel longer distances between jobs and affordable housing). Housing cost increases have been linked to declines in enrollment at local schools.

The Issues, & Effects

• A well located dwelling might save significant household travel costs and therefore improve overall family economics, even if the rent is higher than a dwelling in a poorer location.

• A household's inhabitants must decide whether to pay more for housing to keep commuting time and expense low, or to accept a long and/or expensive commute in order to obtain "better" housing.

The Issues, Causes & Effects

• In a depressed or sparsely settled rural area, for example, the predicted price of the median two-bedroom apartment may be quite easily affordable even to a minimum-wage worker – if only any apartments had ever been built

The Issues, Causes & Effects-II

• The availability of affordable housing in proximity of mass transit and linked to job distribution, has become severely imbalanced in this period of rapid regional urbanization and growing density convergence.

The Issues, Causes & Effects-III

• In addition to the distress it causes families who cannot find a place to live, lack of affordable housing is considered by many urban planners to have negative effects on a community's overall health.

Issues, Causes & Effects-IV

• Affordable housing challenges in inner cities range from the homeless who are forced to live on the street, to the relative deprivation of vital workers like police officers, firefighters, teachers and nurses, who are unable to find affordable accommodation near their place of work. These workers are forced to live in suburbia commuting up to two hours each way to work

Issues, Causes & Effects-V

• The market has been unable to meet the growing demand to supply housing stock at affordable prices. Although demand for affordable housing, particularly rental housing that is affordable for low and middle income earners, has increased, the supply has not.

The Issues, Causes & Effects-VI

• The growing gap between rich and poor since the 1980s manifests itself in a housing system where public policy decisions privilege the ownership sector to the disadvantage of the rental sector.

The Pakistani Problem

• Currently, Pakistan has an overall housing backlog exceeding 6 million units with an annual addition of 300,000 units – based upon conservative estimates from the Population Census of 1998 and the National Housing Policy of 2001. Roughly 30-40 percent of the demand is addressed by mainstream developers who cater to the high-end market. The remaining units fall under the category of the low-income segment.

The Pakistani Problem-II

• The government has made repeated attempts to address this segment through various initiatives – seldom succeeding.

• The current low income housing deficit within Pakistan is 3 million units with an addition of 150,000 units per annum.In addition to these alarming rates, within the urban context, there is a disturbing pattern.

The Pakistani Problem-III

• Of those that do own homes, there is a clear pattern of constructing additional rooms as opposed to constructing new homes. This leads to an increase in the density of homes, thus further exacerbating the housing problem.

• With most homes having been constructed over twenty years ago (58 percent), over 50 percent of the population under the age of 25 , and no solutions in sight, demand in the lower income segments is expected to explode in the next decade.

The Pakistani Problem-IV

• In order to truly comprehend this problem, one must put him/herself in the shoes (or bare-soles) of the average citizen of Pakistan. An individual is earning between Rs: 13500 to 18500( US$ 135-185) per month (working in the public/private sector or self-employed) and is responsible for maintaining his/her nuclear family as well as members of the extended family.

The Pakistani Problem-V

• The average citizen lives with a level of uncertainty on a daily basis, and is constantly faced with a multitude of potential issues to handle relating to running of his/her household and providing for the family.

• For those living in rental units (30 percent of the population), their average monthly income is Rs: 16500 (US$ 165) and their monthly saving, after all expenses relating to rent, food, utilities, transportation and miscellaneous are deducted, under ideal circumstances, is Rs: 1500 (US$ 15).

The Pakistani Problem- VI

• With the average person saving Rs: 1500 (US$ 15/month) and the average 80 square yard plot costing Rs: 700,000 (US$ 7,000), it would take nearly forty years before one could afford such a plot.The result, is the current housing crisis Pakistan is faced with.

The Impact of Non-Affordability

• Lack of affordable housing places a particular burden on local economies.

• Individual consumers are faced with mortgage arrears and excessive debt and therefore cut back on consumption. A combination of high housing costs and high debt levels contributes to a reduction in savings.

• These factors can lead to decreased investment in sectors that are essential to the long-term growth of the economy.

Solutions

• Affordable housing needs can be addressed through public policy instruments focussed towards the demand side of the market where households are assisted in reaching financial benchmarks without which housing is not affordable.

Solutions-II

• This can include approaches that simply promote economic growth in general, in the hope that a stronger economy, higher employment rates and higher wages will increase the ability of households to acquire housing at market prices.

Solutions-III

• Federal government policies define banking and mortgage lending practices, tax and regulatory measures affecting building materials, professional practices (ex. real estate transactions). The purchasing power of individual households can be enhanced through tax and fiscal policies that result in reducing the cost of mortgages and the cost of borrowing.

Solutions-IV

• Public policies may include the implementation of subsidy programs and incentive patterns for average households.

• For the most vulnerable groups, such as seniors, single-parent families, the disabled, etc. some form of publicly funded allowance strategy can be implemented providing individual households with adequate income to afford housing.

Solutions-V

• Or policy instruments may focus on production strategies which facilitate increased production on the supply side of affordable housing which can include refurbished older stock and/or the construction of new housing units.

• Several unfinished apartments blocks in Karachi invite our attention in this regard.

Solutions-VI

• Currently some of the policies that facilitate production on the supply side include favorable land use policies such as inclusionary zoning, relaxation of environmental regulations, and the enforcement of affordable housing quotas in new developments.

Solutions-VII

• Zoning is a device of land-use planning used by local governments in most developed countries. The word is derived from the practice of designating permitted uses of land based on mapped zones which separate one set of land uses from another.

• Zoning may be use-based (regulating the uses to which land may be put), or it may regulate building height, lot coverage, and similar characteristics, or some combination of these

Solutions-VIII

• Challenges in providing affordable housing in China through the free market system are similar to difficulties in many Western countries. Potential purchasers lack wealth to purchase dwelling units and lack income to make regular mortgage payments.

• In response China introduced the Housing Provident Fund (HPF) program nationwide in 1995. It is similar to housing fund programs in other countries such as Thailand and Singapore.

Solutions-IX

• The Housing Provident Fund (HPF), provides a mechanism allowing potential purchasers who have an income to save for and eventually purchase a unit dwelling (which may be a formerly public housing unit). The HPF includes a subsidized savings program linked to a retirement account, subsidized mortgage rates and price discounts.

Solutions-X

• In India, it is estimated that approximately 32% of the population was living below the poverty line, and there was a huge demand for affordable housing. Some developers are developing low cost and affordable housing for this population.

Solutions-XI

• The Government of India has taken up various initiatives for developing properties in low cost and affordable segment. They have also looked at PPP (not the Pakistan People’s Party !, but

Public-Private Partnership) model for development of these properties.

Other Solutions

• Green Housing• In India, The Non-Bank Financial Institution Housing

Finance team completed a Report on Low Cost Green Housing in 2012. This report identified green technologies and materials suitable for lower income households, the largest segment of the country’s current and future market demand. The first study of its kind in India was implemented jointly with the IFC.

• The same methodology can be adopted in Pakistan.

Other Solutions-II

• Mortgage Covered Bond• Mortgage funding sources are critical for

sustainable market development. One of the key funding mechanisms - Mortgage Covered Bonds - has a long history in Europe and Latin America. The mortgage covered bond projects in Morocco, Brazil, Central Europe and Central Asia have done very well.

Other Solutions-III

• Rental Housing• The World Bank is now assisting countries that

would like to bring rental housing to the forefront of the housing agenda and to provide guidance for policy makers whose actions can have an effect on where and how people live. The rental housing projects have been functioning successfully, in Haiti, India, Mexico, Eastern Europe and Central Asia.

Other Solutions- IV

• Mortgage Subsidies for Middle- and Low-Income Population (as in Egypt):

• A loan of US$300 million has been granted to the Arab Republic of Egypt to develop an Affordable Mortgage Finance Program.With strong partnerships established between the World Bank and the Egyptian authorities, the program aims to achieve the objectives to create a transparent and economically efficient subsidy for the broad low- and middle-income market and a credible legal and regulatory framework for the mortgage finance market.

• If the will to emulate such models is there, we can explore similar programmes for Pakistan.

Other Solutions-V• Tri-Partite Model of Developer Finance.• Changes in the law to allow Banks to hold Consumer Housing

Assets on their books.• Changes in the laws to allow Consortium Financing for large-

scale Residential Compounds on State released land at Provincial Level.

• Issuance of Housing Sukuk, with participation by owners of houses of large scale housing projects financed under Islamic Banking.

• Introduction of New Construction Technologies at Duty Free Import basis ( as done in Indonesia )

• Involving Microfinance & SME Banks to provide funding to Low Income borrowers, by releasing Targeted Funding through State Bank.

• Thank You Very Much.