Alternative Approaches to Deliver Affordable Housing

What is affordable housing to someone earning fifty dollars per month? This—along with other questions on providing affordable and stable housing for the world’s most vulnerable residents—was the topic of a recent panel discussion at this year’s World Urban Forum, hosted in Katowice, Poland. Though the speakers mostly focused on the African continent, their discussion undergirds a troubling reality—rapid urbanization around the world is worsening an already destabilizing global housing crisis, and the COVID-19 pandemic has only highlighted the inefficiencies in the international system and the market failures exacerbating the problem.  

A Global Affordability Crisis

Representatives from the European Investment Bank, the Islamic Investment Bank, UN Habitat, Shelter Afrique, and the French Development Agency joined moderator Charles Hinga Mwaura, principal secretary at the State Department for Housing and Urban Development in Kenya, for a discussion on the various hurdles to providing formal housing to residents. Chief among these challenges is the lack of long-term financing options, zoning rules, the cost of land, fractured construction supply chains, and ineffective governance structures in affected countries. While these obstacles may be common around the world, the unique challenges of providing housing in countries like Kenya and Nigeria caused panelists and participants to reevaluate some of the most commonly cited policy solutions. According to Mwaura, 91 percent of Nairobi residents are renters; 65 percent live in informal settlements, and 15 million Kenyans work in the informal economy, compared to the 2.9 million with formal employment. In a population of about 50 million, Kenya records less than 30,000 mortgages. 

In Nigeria, the proportion of mortgages to residents is even lower. Nigeria’s mortgage banks report less than 500 mortgages in each of their portfolios; Lagos, Nigeria’s largest city, has a population of roughly 23 million people, but only a total of 36 mortgages. Femi Adewole, managing director of Family Homes Fund Limited—a collaboration between the Nigerian government and the Nigerian Sovereign Wealth Fund—was critical of the panel’s narrow focus on for-sale housing and mortgage promotion. While homeownership is traditionally seen as a method of building wealth, Adewole argued that the nuances of providing affordable housing in Nigeria and across the African continent, especially throughout sub-Saharan Africa, make such strategies untenable. Major intervention by the World Bank across the continent in the last decade focused almost exclusively on mortgage refinancing schemes, with minimal success; Adewole underscored that mortgages are inaccessible to the 83 percent of Nigerians earning below $200 per month—even more so when considering that most of the urban context exists in the informal sector. 

Adewole ultimately argued that mainstreaming formal sector rental housing in policy discussions around affordable housing delivery, rather than the historic emphasis on ownership, is pivotal to providing the most immediate relief to marginalized societies in developing countries. Indeed, renters around the globe, from Nairobi to New York, are most burdened by the affordability crises and most likely to have to choose between illness or homelessness throughout the COVID-19 pandemic. Reimagining the rental sector and prioritizing rental protection is the most immediate method of easing post-COVID housing inequity. Examples of majority-renter housing markets can serve as a model for how governments can feasibly mitigate the affordability crisis.

Case Studies from Industrialized Countries

In Germany, social housing projects are heavily subsidized, and over half of German households rent their homes—in Berlin, that figure rises to 83 percent. As in the rest of the world, renters in Germany have a much lower net wealth than their homeowning counterparts, and are composed of much younger and much older age groups. German policy preferences renters in a variety of ways. Eligibility for social housing is broad, increasing the pool of those who qualify. High transfer taxes and no mortgage interest tax deduction makes homebuying very expensive, disincentivizing the purchase of multiple homes for investment purposes.  

In Japan, where over one third of citizens rent their homes, rental prices have managed to remain stable for the last two decades, in part because the national government controls zoning laws and is generally favorable toward construction projects that increase housing stock. Japan’s legal framework also preferences tenants, as highlighted by the country’s leasing system. Tenants are entitled to long-term leases that they can choose to renew indefinitely or terminate at any time; the landlord, however, cannot refuse renewal and cannot terminate a lease early without a lawsuit. Rent renewals on long-term leases, per Japanese law, cannot increase the rent significantly, and these renewals usually afford the tenant a deal at below market value, protecting them from swings in rent prices.  

Challenges for the Developing World

In Lagos, it is common practice to require new tenants to pay one year’s worth of rent upfront; this legal practice excludes all but the wealthiest Nigerians from seeking formal rental opportunities. Although Japan’s protections assist in stabilizing renter turnover, some real estate developers and landlords, dreading the thought of long-term tenants for whom they cannot increase rent, will purposefully construct housing that is unattractive to likely long-term tenants (like families and the elderly) and instead focus on building smaller units like studio apartment to attract students and young professionals, who will likely leave the unit and allow a rent increase on the next tenant. Some level of incentives for developers and landlords to provide adequate stock for long-term renters should be considered as part of a broader tenant protection package to mitigate this risk as well.  

Providing stable, affordable rental housing is perhaps the most viable way of tackling the global affordability crisis gripping developed and developing nations alike; along with governance strategies to encourage high density construction projects, favorable zoning policies, and significant federal subsidies to increase housing stock, renter-friendly policies to cap rent increases and stabilize tenant turnover are essential tools moving forward.