Recommendations for Overcoming Challenges of Affordable Housing

As demand continues to rise and the supply of affordable housing remains a challenge for the government, the price of existing units has greatly increased, leading to inequality in wealth generation. Owning a house can significantly contribute to the level of wealth an individual will accumulate over their lifetime.

Demand-side challenges of affordable housing primarily concern the ability of city residents to rent a home or access credit and purchase a home. They include determining the eligibility of affordable housing subsidies, grants or exemptions according to income brackets, securing funds, mitigating risks of default, and most importantly, assessing the importance of rental versus ownership for long term affordability. Among the supply-side challenges, land acquisition is perhaps the most important and complicated piece of the affordable housing puzzle. The process starts with confirming the ownership, carrying out a survey that defines the dimensions of the land to be acquired, determination of fair market value, and procurement through a transparent and fair process. In a country like Pakistan, where land records are poorly managed and lack transparency, it becomes increasingly difficult to ascertain the true ownership of any land. The demarcation of land is also a difficult process as the whole exercise depends on a single officer due to a lack of digital mapping. Determination of fair market value is mostly challenging due to a large amount of speculation in the real estate market. While a lack of regulation in price-setting means that most of the land is either overpriced or not worth its demanded value. All these aspects, discussed in this blog by the Iqbal Institute of Policy Studies (IIPS), are considered the most basic supply-side challenges associated with providing affordable housing in urban centres.

Supply-Side Recommendations

Starting from land acquisition, the process should be made transparent and fair so as to protect landowners from exploitation. In this regard, statutory rights must be given in cases of land expropriation after exhaustion of voluntary methods such as land pooling and negotiated settlement. This can only be done by emphasizing on property rights over property titles. Cities should also explore the transition from conventional segregation of single-use land to more mixed-use cases, including inclusionary zoning to prevent low-income households from gentrification. By outlining a research-based, long term vision of anticipated growth over the next 20-25 years, a plan to phase housing development in important areas can be made. By creating a flexible and transparent land policy, different forms of development that create avenues for affordable housing can be encouraged. Financing models should go beyond meeting initial costs and seek to ensure long term affordability. Tax credits are also not a viable solution in the long term. The true potential of real estate developers can be unleashed by relaxing laws and regulations related to development controls, providing bonus systems, fast track approvals, and reduction, exemption, or refund of application fees.

But while relaxing restrictions, cities need to account for the environmental impacts on the overall infrastructure. Sound urban planning and an integrated urban development framework is needed to boost affordable housing on greenfield sites. Cities should also explore tools to generate funds for infrastructure development. Taxation can also be used to raise funds for infrastructural development and optimize land use by disincentivizing lands or properties that are left vacant. Cities with informal settlements should identify mechanisms to provide alternative housing to improve living conditions. Smart grids can help alleviate pressure on energy in cities with a growing population. Lastly, to address labour shortages, cities need to work with the construction industry to identify skills gaps and develop strategies to encourage training. Cities can also encourage large, medium, and small real estate developers to participate collectively in large-scale affordable housing projects.

Role of Private Sector and Non-Profit Sector

The role of the private sector and the non-profit sector in land development cannot be understated. The private sector should embrace innovative technologies to finance land acquisition, secure titles, develop urban infrastructure, and manage subsequent operation and maintenance of affordable housing. Crowdfunding and blockchain hold huge potential, as do Islamic bonds (Sukuk). Developing countries can encourage their private sectors to work with national or state governments to set up mortgage liquidity facilities as it is complex to raise funds from capital markets. The private sector can also develop Real Estate Investment Trusts (REITs), which can become a useful tool in scaling the supply of rental units. Impact investing in affordable, energy-efficient housing can help bring positive social change along with real estate investment returns. Moreover, investments in sustainable design concepts and energy-efficient housing can help optimise can optimise and reduce energy costs. Also, housing providers can work with city governments and the private sector to offer alternative tenure models for those unable to access private rental housing. Lastly, by using advocacy and support, help can be given to homeowners and self-builders to access information on issues of land regulation, legislative instruments, property rights, acquisition mechanisms etc.

Demand-Side Recommendations

Demand-side problems of affordable housing can be alleviated by clear and transparent rules that determine the eligibility of beneficiaries for affordable housing. Accounting for characteristics such as occupation, years of residency, income, household size, age, health risks, and productivity. There should also be policy intervention towards encouraging a balanced tenure model which ranges from rental housing to long term leases. Developing a regulatory framework that protects tenants without distorting supply, and protects landlords from unfair effects of rental controls is also of vital importance. In the case of the private sector, innovative ways should be developed to establish the creditworthiness of low-income households to improve their informal housing. By exploring the potential of diversifying tenure structures, such as build-to-rent and long-term rentals, informal housing can be transformed into formal housing. Lastly, the non-private sector can explore innovative methods to provide financial assistance to the informal sector by working along with the private sector and the city government. By providing education to improve the literacy of borrowers, their ability to plan expenses and minimise the cost of construction or home improvement can be increased.