A New Report Highlights the Scale of the Global Affordable Housing Challenge
By Andrew Ditton, Managing Director, Citi Community Capital December 16, 2014 01:58 PM
Recently, Citi hosted a meeting with members of the Partnership for New York City for a presentation by the McKinsey Global Institute to address the massive and growing global affordable housing shortfall. Invited participants included key academics, New York City government officials, major commercial and residential developers, and local affordable housing advocates. To kick start the discussion, senior McKinsey partners presented a recent study the Institute conducted on the affordability challenge. Of the many telling findings, perhaps the most important was also the most basic: affordable housing is infrastructure, a key component, not unlike power grids or transportation networks, of regional economic development strategies. Indeed, I would go a step further and say that the intelligent integration of infrastructure - including core assets like affordable housing, energy grids, retail services, education and healthcare facilities, and safe public spaces - fundamentally impacts the livability and desirability of modern communities.
The McKinsey team analyzed housing costs in 2,400 cities across the globe. The affordability gap in each was calculated using the commonly accepted standard that housing costs should consume no more than 30% of gross income. Looking at actual average costs in these markets, large gaps were found between the two, with households either devoting significantly more than 30% of income to housing payments, or being forced into the informal market. As urban populations grow, vacant land is consumed quickly and at ever increasing prices, and the affordability gap widens. McKinsey estimates that 330 million households throughout the world are currently living in substandard housing or struggling to meet monthly housing costs to the detriment of other basic living needs. Within 10 years, they estimate that this number will be closer to 440 million households. So what is to be done? The McKinsey team identifies four key strategies to increase the development of affordable housing.
- The first and arguably most important is unlocking land supply. Multiple approaches to doing so include penalty taxes on fallow but developable land, inclusionary zoning, better utilization of public land (including air rights), and governmental incentives to encourage land aggregation.
- Industrialized housing construction and value engineering are other "levers" that McKinsey believes could close the gap by reducing basic supply costs. Although long a dream of many housing advocates, one cost containment strategy that includes off-site manufacturing of unit components is gradually appearing throughout the industrialized world and even in some emerging nations. Value engineering, however, is more controversial. Measures such as shrinking unit sizes, requiring less expensive electrical and plumbing fixtures, and lowering ceiling heights will certainly reduce costs, but can also create stigmatized housing (remember concrete block linoleum-floored public housing in the U.S.?) that are often more difficult to maintain.
- Strategies aimed at reducing operating expenses are already under way in many countries, as public subsidy and private financing help lower both energy usage and cost. Less expensive and lower maintenance construction materials are being introduced and tested in various building types and climates, and pooled insurance strategies have proved to be effective in reducing the operating costs of multifamily buildings.
- Lastly, McKinsey describes a series of techniques that could reduce financing costs. As virtually all housing construction and ownership is leveraged, standardized valuations, access to secondary markets, other types of liquidity mechanisms, and greater and more easily accessed public subsidies could collectively make a major dent in boosting overall housing development.
In response to McKinsey's presentation, many attendees noted that most of these proposals had been, or were being tried in New York City. Even chalking up some of this response to Big Apple hubris, New York has utilized many of these approaches to create an enviable record of affordable housing production over more than two decades. Today, the de Blasio administration has committed to building and preserving 200,000 affordable units over the next 10 years, indicating the scale of the challenge in the city.
Citi continues to play a direct and important role in the effort to build and preserve more affordable housing in New York City. In July, Mayor de Blasio announced that a new $350 million fund had been created by the Community Preservation Corporation with the leadership of Citi. Indeed, as America's leading affordable housing lender, Citi has financed the construction and preservation of nearly 120,000 units of affordable housing in the last five years, putting $13 billion to work in communities across the country.
The new McKinsey report offers stark detail on the global challenge of affordable housing and provides a big picture blueprint that housing advocates, economic development professionals, and public leaders would be wise to consider. You can find it here.