Housing Finance in Emerging Markets: Policy and Regulatory Challenges The World Bank Washington, DC March 10-13, 2003 Role of Land and Urban Development Regulations Lawrence M. Hannah (with gracious assistance from Bertrand Renaud, Steve Malpezzi, Alain Bertaud and thanks to the late Steve Mayo )

Objectives for this Session Housing finance system (HFS) in the context of the housing sector Land and urban development regulations in the housing sector Housing sector as a market The well-functioning housing sector Performance of the housing sector Causes of differential performance Linkages between land & urban development regulations and HFS Suggest land & urban development regulations to mitigate risk to the HFS

The Housing Sector as a Market Based on Bank policy paper Housing: Enabling Markets to Work (1993) Housing sector is a market where prices and rents allocate resources Observable even in slums and non-market economies With actors who have identifiable interests o Consumers o Producers o Governments (local and national) o Financiers

The Performance of the Housing Sector Characteristics of well-functioning housing sector General methodology for measuring performance Indicators for relative prices, rents, land, infrastructure Role of housing policy in sector performance

Linkages between Housing Finance System and Housing Sector Regulation – I Healthy HFS depends on: o macro stability and growth o financial sector development o a strong regime of property rights o appropriate product (real estate) to finance Appropriate real estate product means: o primarily that it is affordable o also durable because it is security for a long term loan o and desirable for resale so that collateral retains value

Linkages between Housing Finance System and Housing Sector Regulation – II Inappropriate product (high relative prices) may: o require more finance than HFS can supply o increased demand for subsidies Unstable prices that make real estate collateral unattractive Inappropriate standards (too high) lead to informal building Rent control may make financing of rental housing difficult Affordability is thus the key linkage between regulation and the HFS

Affordability of Housing Seven pillars of housing policy Demand is regular Supply is idiosyncratic How regulations shape the supply curve for housing

THE SEVEN PILLARS OF HOUSING POLICY A. STRENGTHEN HOUSING DEMAND 1. Improve property rights: bring cadastres up to date, ensure effective property titling, provide prompt and fair arbitration procedures 2. Develop mortgage credit: move away from “special circuits”, remove obstacles to commercial lending for housing, link up to capital markets 3. Implement a system of well targeted subsidies: identify groups in need of support; finance from the budget; separate credit from subsidies; link subsidies directly to beneficiaries, and avoid subsidizing inefficiency and stagnation in privileged special institutions B. MODERNIZE HOUSING SUPPLY 4. Expand the supply of serviced urban land by clarifying and improving the division of labor between public and private sector operators. 5. Provide the regulatory framework for land development and real estate by means of clear and predictable land development rules, consistent construction and real estate codes, sound and stable national and local taxation. 6. Promote the emergence of competitive construction and real estate industries by upgrading codes, taxation, public procurement, contracting, technology, etc... C. MANAGE HOUSING POLICY EFFECTIVELY 7. Develop the institutional framework for national housing policy

Land and Urban Development Regulations affect Affordability: Typical land and urban development regulations Land conversion restrictions Zoning Infrastructure provision and financing Building codes Project level urban planning including road widths, set-backs, other provisions Economic regulations such as rent control, price controls, anti- speculation regulation

Land and Urban Development Regulations affect Affordability: Analytical models and Outcomes Programmatic assessment – An integrated view of housing sector interventions and their effects on sector actors and outcomes. Project level assessment – How project outcomes are influenced by regulations. Special Cases – Use of Greenbelts

Better Designed Land and Urban Development Regulations How can better regulations mitigate the threat the HFS Understand the environment in which the regulations are to be applied Regulations need to be applied predictably Assure fairness and transparency Plan, schedule and appropriately finance trunk infrastructure Use cost-benefit techniques to assess regulations Use market measures when setting regulations not planning rules Generally don’t make housing more expensive than it needs to be

Conclusions Healthy HFS depends, to some extent, on a well-functioning housing sector Affordability of housing is the key characteristic which matters for the HFS Affordability is determined by both demand and supply factors Land policy and urban regulations working through the supply side can improve affordability