Housing is a special consumer good and a special part of the financial markets. It is a major component of the world stock of physical capital. It is the largest single category of consumer expenditure, aside from food. It is the largest component of the typical asset portfolio, far exceeding average holdings of cash and financial assets. The result is that financial markets are very important for housing and housing is very important for the financial markets. Housing is also a key component of social welfare, particularly for the poorest of society, which in turn makes it a politically sensitive issue in most societies. As a result, governments in many developing countries at one time took a direct approach to meet perceived housing needs, i.e., the government built houses. For a number of reasons, this approach proved to be very ineffective and inefficient and some countries switched to providing formal sector serviced plots.

This approach has been largely superseded by the view that there is no good substitute for the potential energy and collective “wisdom” of a competitive market in providing housing. The task of the government has shifted towards “enabling” the market to operate as efficiently as possible. Because housing finance is both a key part of the financial sector and a key method for enabling households to expand their effective demand for housing, it has become a focus of attention among donor agencies and many developing countries. Since the late 1980s, they have emphasized the gradual development of sustainable private housing finance systems, built up as an integral part of the overall financial system. Financial systems are now viewed as the “brain” for allocating investment in a market-oriented economy and it is essential that they be as undistorted as possible. This view sometimes has made for difficult policy discussions in the area of housing finance, where the social and political concerns over housing seem to conflict with the desire for an efficient financial system.