Global: Preparing A Housing Finance Strategy

Introduction:

This guide sets out the key elements of a housing finance strategy and the process of developing a housing finance strategy, including the study of housing demand, identifying available resources, market forces and strategies to accomplishing housing finance goals and objectives. It provides assistance for member states on how to prepare successful housing finance strategies and action plans. It guides member states in their future housing finance planning and better positions themselves to meet market potentials and address the gap between demand and supply in housing finance.

Why a Strategy?

The cold reality is that in many countries families who want to construct, purchase, or improve their housing situation, are inhibited because they cannot borrow funds. Loans that are available are channeled to middle- and higher-income families. In these countries most families, especially the poor, improve their housing only as their savings will permit as they are unable to leverage their incomes through loans. The effect of this situation, combined with extremely low income levels, are families in cities and in the countryside who live in extremely difficult conditions characterized by poor quality dwellings and an absence of water and sewerage services that much of the world takes for granted.

Variations in the Depth of Housing Finance Strategy:

How restricted is the availability of housing finance in some countries? Characterizing differences among countries in the development of their housing finance systems is a challenge because of the limitations on data and market fragmentation and segmentation. As discussed further below, lending for housing in some transition countries and many developing countries is segmented primarily between formal lending – mortgage lending similar to that in industrialized countries – and micro lending that supports the incremental construction and improvement of dwellings for occupancy by households who either cannot qualify for or cannot access formal mortgage loans.

Organizing a Housing Finance Strategy:

A housing finance strategy is a plan for deploying available resources (and if needs be, increasing them) to finance the demand for housing by different segments of society. The purpose of a strategy is to get the most from available resources. Preparing and implementing a strategy is a task that requires broad stakeholder involvement, a good deal of technical analysis, and strong political leadership.

The Housing Finance Strategy Must be Comprehensive:

Too often housing finance strategy address only the requirements of formal finance and then only in a country’s principal cities. Such strategies will often omit a major share of all households. This is a clear mistake.

Consider the following observations over the past decade of developing nations:

• In Mexico, self-built housing accounts for roughly half of all new buildings.

• In nine Asian countries, between 40 and 95 percent of all households have no possibility of acquiring a unit built by the formal sector, and therefore little chance of obtaining finance.

• An estimated 70 percent of housing investment in developing countries occur through progressive building and therefore with little finance beyond household savings.

• Room- and unit-renters account for the principal tenure form for lower income families in the urban areas of a number of African countries.

How Will the Housing Finance Strategy be Fulfilled?

Establish conditions so that private sector lenders, formal and micro finance, can extend credit to most market segments without taking undue risk.

Over the past twenty years there has been a gradual but fairly pervasive shift toward market provision of housing. In some cases this is due to the poor performance of public institutions charged with constructing housing or acting as lenders. But probably more important is that in many countries governments have helped set the necessary conditions that permit private lenders to prosper and serve most of the market.

Prior Conditions for Preparing a Housing Finance Strategy:

The process detailed below for developing a realistic and actionable national housing finance strategy presumes that some fundamental conditions exist. Simply stated, market conditions must be reasonably conducive to long term housing lending to make such an exercise worthwhile. If basic conditions are not in place, improvements to the housing finance strategy will be nearly impossible.

Conditions that should be in place to facilitate micro and formal lending include:

Support for both micro and formal lending

• reasonable macroeconomic stability – high or volatile inflation produces large interest rate risks; stagnate growth restricts the ability of borrowers to make payments

• no interest rate controls on mortgage lending; they typically make lending unprofitable

• well-defined and protected property rights through a functioning registration system.

• are not in place, improvements to the housing finance system will be nearly impossible.

Conclusion:

A couple of points in the Action Plan are worth noting. First, the plan should emphasize the continuing need for consultation with all the relevant stakeholders so that coalitions for advancing the innovations remain strong. It is likely that road blocks will be encountered and political strategies for overcoming them developed anew.

The second point concerns the implementation schedule. For the particular examples in the tables, the time lines are quite brief, being universally under a year, assuming that the parliament passes the proposed legislation in the next session. The time requirements would be much greater—several years—if a new institution were created, such as a secondary facility or a credit bureau. Creation of either of these entities is complex and requires substantial up-front cash and experienced experts to lead development.

Also Read: Nova Scotia’s Provincial Housing Needs Assessment Report