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Financing urban housing a major challenge says UN-HABITAT

A new report by the United Nations Human Settlements Programme warns world governments of a worsening urban housing crisis if they cannot come up with the money to build 96,150 houses per day for an additional 2 billion city-dwellers by 2030

By the year 2030, more than 2 billion people will join the growing demand for housing, water supply, sanitation and other infrastructure services in the already overstretched urban areas of developing countries, predicts a new United Nations report. To meet the needs of that additional population, some 35 million new housing units would have to be built every year for the next 25 years, says the UN-HABITAT report on urban housing finance.

Already 3 billion people, or 50% of the world's population, live in urban areas, an estimated one-third of them -- that's 1 billion -- in slums.

'Financing Urban Shelter: Global Report on Human Settlements 2005' says what is critical is the magnitude of the problem. Close to 3 billion people, or about 40% of the world's population by 2030, will need to have housing and basic infrastructure services. This translates into completing 96,150 housing units per day over the next 25 years, the report says.

"The housing crisis is already with us. The large-scale evictions from urban areas of Zimbabwe, the city of Mumbai in India or Malawi are all part of a larger problem of financing urban shelter. The increasing pressure for housing finance is being felt all over the world," notes the UN's Human Settlements Programme's annual report.

In Peru, 82% of the 8 million people living in greater Lima are classified as poor. At least half of poor households and 60% of the poorest households express a strong desire to expand or improve their homes within the next 12 months. However, only 10-15% are borrowing from formal or informal sources.

In Indonesia, during 2000, the country's urban population of 85 million already represented 40% of the total population. By 2010 it will be 50%, representing 120 million people. Annual projections for housing needs over the next 10 years are approximately 735,000 new units, and an additional 420,000 are in need of improvement. But 70-80% of all housing in Indonesia is constructed informally, with minimal access to formal financial markets.

The report also examines the challenges of financing urban shelter development, focusing on the shelter needs of the poor and within the overall context of the United Nations Millennium Development Goals (MDGs), which include achieving a significant improvement in the lives of at least 100 million slum-dwellers by 2020.

Anna Tibaijuka, head of UN-HABITAT, highlights the current contradiction of "affordable shelter that is inadequate, and adequate shelter that is unaffordable," adding that state-subsidised conventional housing was the solution to preventing the creation of new slums.

If adequate financial resources are not invested in the development of urban shelter and requisite services, this additional population will also be trapped in urban poverty, deplorable housing conditions, poor health and low productivity, thus further compounding the enormous slum challenge that exists today.
Tibaijuka says that one of the key challenges in meeting the MDG on slums "is mobilising the financial resources necessary for both slum upgrading and slum prevention by supplying new housing affordable to lower income groups on a large scale". Those efforts would also bring into focus the importance of urban planning, which is lagging behind in many parts of the world.

The housing crisis comes at a time when the global economy has demonstrated a consistent growth of 4% in 2004. However, despite this impressive growth, poverty remains an "enduring problem", as approximately 64% of the population in Africa and South Asia still live below US$ 2 a day, the report says. Most critically, such low incomes prevent the poor from getting better shelter.

In many developing countries, it is unlikely that conventional sources of funding will be available for investment on the scale needed to meet the projected demand for urban infrastructure and housing, the report adds.

Most poorly performing countries continue to face deficits in public budgets and weak financial sectors. Additionally, the report says, overseas development assistance for these countries has not been significant enough to contribute positively to improving urban infrastructure services and housing. Instead, city authorities have started to seek finance in national and global markets, but this practice is only in its infancy. The report concludes that countries and cities will have to rely mainly on the savings of their citizens.

The report also highlights the strengths and limitations of current trends in conventional mortgage financing. While such financing has been expanding for the past decade and is increasingly available in many countries, with new mortgage providers emerging, including commercial financial institutions and mortgage companies, only middle and higher-income households have access to it, while the poor are generally excluded.

UN-HABITAT stresses that it is in the interests of governments to extend mortgage markets down the income scale, as home ownership is beneficial economically, socially and politically. "If you cannot provide housing for the relatively better off, you can definitely not serve the poor," Tibaijuka says.

While there is evidence in some countries of a new (and emerging) middle class, particularly in China and India, in other countries, the middle class has actually disappeared, joining the poor. As a result, the report points out, the problem in many developing countries and even in some developed countries is not that housing is too expensive but that incomes are too low.

Most urban poor households can only afford to build their homes in stages, as financial resources became available, Tibaijuka says. In response, shelter microfinance institutions and community-based funding initiatives have emerged in recent decades.

The report concludes that short-term small loans of one to eight years, in amounts ranging from US$ 500 to US$ 5,000, were more useful for incremental building than the longer-term large loans favoured by the mortgage markets.

It is also important to increase the number of lenders in the housing microfinance sector. Guarantees are an important mechanism for broadening the appeal of microfinance institutions to lenders and addressing the current problem of capital shortage, the report adds.

Naison Mutizwa-Mangiza, one of the authors of the report, says that the challenge of credit lay in the fact that the cost of a typical house was between 2.5 and six times the average annual salary, a ratio that rose to about 10 times in developing countries.

The report analyses such trends as interest-rate subsidies, conventional mortgages, secondary mortgages and a growing diversity of mortgage providers. Among the main challenges, especially in developing countries with economies in transition, were low levels of domestic savings, both private and public. One of the report's conclusions relates to the need for accelerated employment and income generation, says Mutizwa-Mangiza, noting the widening gap between incomes and housing prices in many countries that resulted in the inability of young first-time buyers to purchase homes.

From 1997 to 2004, housing prices had grown by 112% in Australia, for example, 139% in the United Kingdom, and 227% in South Africa. This calls for a shift of the public sector away from direct housing construction towards assistance for home ownership through direct subsidies, he says.

About 70% of housing investment in developing countries takes place through incremental building, which, of course, is not acceptable to conventional mortgage financing institutions. Shelter microfinance has answered this need in recent years, but its scale is still small in many countries. There is also an emerging preference of lending to women.

Tibaijuka stresses that without massive investment -- definitely involving governments -- adequate shelter would not emerge on its own. Governments needed to subscribe to the main principle of the UN-HABITAT agenda -- adequate shelter for all.

Also see: UN World Summit prioritises slum prevention and upgrading

InfoChange News and Features, September 2005