1. How to Combat Housing Inequality: Focus on Emerging Market Countries Marja C Hoek-Smit The Wharton School, University of Pennsylvania International Housing Association 2016 Annual Meeting NAHB, February 17, 2016 Washington DC

2. Scale of the Housing Problem and Challenges

3. The Scale How to Build a Billion New Houses By 2025 and do so Equitably? >50 million new urban dwellers each year Grossly inadequate stock Rising housing demand with rising incomes

4. One Third of Urban Population in Slums in Developing World; Number is Growing! Total Developing Regions (32.7%)

5. Asia and Africa Face the Biggest Urban Housing Challenge Source: The Wealth of Cities: The investment implications of urban expansion. Prudential Investment Management, 2015

6. Challenge: Urbanization Happens at Lower Per Capita Income Levels then in the Past (GDP per Capita < USD 5,000) From: Glaeser, E. A World of Cities, NBER 2013

7. Challenge: Investment in Housing is Lagging Behind Urbanization Housing Investment takes off at GDP per capita levels of $3000 (PPP constant dollars) And tapers off at $36,000 GDP per capita Investment generally follows growth in urbanization with some lag In Asia and Sub-Saharan Africa investment in urban housing lags demand by many years! Messy urbanization process

8. Challenge: Affordability is Low Land/house prices increased faster then incomes Rising Inequality Rising indebtedness Large % employed in non- salaried jobs (e.g. 40% MX; 60% Indonesia) Low mortgage penetration; Small capital markets; market volatility (specifically oil & other commodity producers) Source:L&T Mumbai

9. Mortgage Markets Are Small in Emerging Market Economies Institutional & Structural Issues

10. High Urbanization Levels with Small Mortgage Markets Reduce Affordability

11. 11 Big Housing Finance and Supply Gap in Broad Middle-Income Segment Formal Housing with Mortgage Formal Housing Subsidized loans oyment Social Programs Upgrading/New Substandard/ Informal Housing

12. Opportunities and Promising Approaches

13. Opportunity: Example India The facts: 1.25 billion population, 30% urbanized, ~20 million new urban dwellers/year Housing consumption 5sqm pp (compare to US: 55 sqm) >100 million people in slums; <50 percent access to water and sanitation

14. Opportunity: Example India (2) The need: 5% increase in housing stock for urban household formation + 5% needed to bring floor-space up to 10sqm pp in less than 20 years; and another 5% to improve stock quality at higher pace Requires ~15 percent growth in stock for many years! The benefit if way can be found to increase housing stock: Housing is ~25 percent of expenditure 10% to 15% growth is a 2.5 to 3.75 percent annual increase in welfare, benefiting the poor disproportionately!

15. How Can These Opportunities Be Translated into Action: Policies Matter 1. Market segmentation is critical o Expand market and credit based approach for lower-/middle income households, stably employed – Expand mortgage lending and provide market-friendly subsidies o Create PPP and community based approaches (upgrading and new owner-construction, rental) for lowest-income groups, informally employed- Expand micro-finance for housing/ supply support Just focusing on Middle-Income housing won’t create enough units to filter down to Low-income households Just focusing on lowest-income groups will encourage take over; and will distort middle income market 2. Create incentives for lenders, developers, non-profits o Housing supply is fairly inelastic in most emerging markets  supply side support needed if growing demand will not cause poor urban environments and price increases

16. Chile: Early Reformer Many Adjustments over the Years 1978 fundamental reform in provident fund mortgage system Expand commercial mortgage market/capital markets Simple vouchers for ownership--worked only for bankable 1990-2000s Segmented Market approach: Finance-based programs for Middle Income - support to lenders to deal with transaction costs, credit and/or funding risks – voucher subsidy for households; includes existing houses Community–based programs for Low Income – after many false starts - variety of location incl. high density infill, avoiding concentration of poor- NGO intermediation- innovative designs Rental programs /vouchers, but small Programs efficient enough to be used as economic stimulus Alejandro Aravena: Quinta Monroy Housing, 2004, Iquique, Chile.

17. South Africa: Single Focus on Low-Income Ownership Program for <30 th % ~3.0 million new formal low-cost houses given away since 1996 Locational issues/distance Vacancies and undervalued sale prices Middle-income segment cannot compete with free houses => no supply Shortfall of 2 million houses remains Informal squatter areas continue to grow

18. South Africa: 2016 Timid Change in Approach New Draft White Paper o Adjust give-away program for lowest income HH; owner- contribution o Provide lower-middle income households with demand-side subsidies linked to housing finance o For acquiring new and existing houses— facilitate mobility o Address supply-side bottlenecks for developers (focus on special projects) o Explore rental options Binding Constraint o Lack of mortgage expansion/ bank dominated system with related constraints in expanding long-term lending

19. Mexico: Focus on Credit Based Formal Ownership for Low-Income HH Housing provident funds control supply-chain; subsidized loans + upfront subsidies /guarantees reach very low income hh-1.5 MW Unit costs/type set by provident funds/ land cost compromised location Massive vacancies Developers under stress Excludes informally employed Housing deficit continues to grow

20. Mexico: at a Critical Junction Shift in subsidy policy to include locational variables in subsidy amount -2013 Expand housing choices, including rental Address vacancy overhang Remaining Challenges: Inclusion of existing houses in subsidy program Active supply side support (regulations, permitting, PPPs) to developers PPP with rental investors Source: Conavi; Mexico city

21. Major Market Distortions b/c of past policies: Past rent control  immobility + no maintenance=> neighborhood decline Vacant units 25% in Cairo-new subsidized units and old stock Since 1980s housing programs provide supply-side subsidies for middle income housing in desert locations 65% of new urban HH cannot afford formal house >60% of new construction in past decades was informal Egypt: Subsidies, Rent Control, High Standards Limited Formal Mid- Market Supply

22. Egypt: Reform Agenda since 2009 Middle/lower middle income Since 2004 - Deepening mortgage market 2010 - Demand subsidy program linked to mortgage for ownership- middle income Central Bank stimulus for mortgage market after revolution Locational guidelines; commuting time to employment centers Lower income Rental or lease-to-own programs Upgrading program for informal housing (legalization first step) Remaining Challenges Attract private developers: PPP arrangement Create diversity in supply: densities, mixed use, infill

23. Thailand 1990s Extend Formal Housing Supply for Broad Middle Income Groups Policies to increase mass housing development: Facilitate private housing/urban development- land acquisition, zoning, permitting, infrastructure Expand mortgage lending – mass market, through competition by Government Housing Bank, small cross subsidies Results Private developers built mass housing Affordable to 20 th percentile But: Price increases Lagging Infrastructure

24. Thailand 1990s Government Provision for <20 th % Manageable when Market Penetration is Deep New small, expandable houses built by Government Government loans, serviced by Government Housing Bank but not in risk-taking position Slum resettlement in core areas; high density rental Slum upgrading – peoples process Result: Major reduction in slum settlements before recent economic downturn

25. Successful Approaches to Expand Affordable Housing for Broad Middle Income Market 1.Reliable mass mortgage system that serves target market – o Need to off-load/sell stock upon completion; owners or rental investors need long-term finance o Alternative of installment sales decreases affordability 2.Access to project finance – both debt and equity 3.Real side requirements: access to serviced land, transport, relative freedom to set density for location, mixed development, facilitative permitting, 4.Competitive market - cannot enter market segment that competes with subsidized stock (South Africa, Egypt, Indonesia) + lack of competition creates poor, dull housing projects

26. MARJA C HOEK-SMIT CONTACT Director of International Housing Finance Program Adjunct Professor of Real Estate Wharton School University of Pennsylvania WEBSITES International Housing Finance Program http://housingfinance.wharton.upenn.edu http://housingfinance.wharton.upenn.edu Housing Finance Information Network http://hofinet.org EMAIL mhoek@wharton.upenn.edu