Housing finance from public and private sectors

ECONOMIC COIVIMISSION FOR AFRICA

AND GERJ.'i!AN FOUNDATION FOR DEVELOPING COONTRIES Me,e,ting on Technical and Social Problems

Di str, Lll'ilITED

I

^'

E/CN.14/H00/22 23 October 1968 Original: ENGLISH

of Urbanization

.----···;·_:.:C7~,c

(with Emphasis on Financing of Hou.sing) ___ l)_O_'_C_U_MENlS u' ..

,J.-

Adc.is Ababa, 8-23 January 1969

\; \ L E ^~ u ^1} ~i

• TO BE TAK.EN OUT 1'-,0

HOUSING FINANCE FROM RJBLIC AND PRIVATE SECTORS

TABLE OF CONTENTS

House-bu.ilding costs

. . ^. ...

Housing needs

. . ^.

• •• • • • Population growth •• , • • •

. . .

The financial effort_ re.quired

...

Nature of financial resources required Voluntary savings •••

. ^. . ^. ..

Consultative machinery

... ...

The African Development Bank •••

Loans on mortgage •••

. .. ^...

Aided self-help and co-operative housing External finance

... . . . ...

Subsidies - direct and indirect

.. .

The Abidjan experiment • • •

...

The need for lo.w-cost-housing to reduce specu.lation •••

Conclusion

...

E/CN.14/HOJ/22

Pa.ragraphs

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...

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...

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...

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l - 3 4

5 1

8 - 11 12 - 18

19

20

21

22

23 - 24 ... 25

28

...

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30

31 - 34

35

Ej

CN. 14/HOU /22 .HOUSING FINANCE FROM _ PUBLIC AND - PRIVATE SECTORS -

some aspects overall affecting African countries

House-building costs

1. The supply of capital funds :.ow yield is the principal limiting

for long-term use at comparatively factor which badly affects produc-

•;ion of adequate housing and related faciJ.i \i-es in African countrie_s.

In a few cour1:tries covered by a survey upto 1965.!/it was found that an urban dwelling of reasonable minimum standards built in conventional

materials can be_ produced at a cost of approximately US$1,000,

excluding the cost of land, roads, drainage _and water and electricity.

These countries, in which the prices of materials were favourable and where urban housing schemes had been in operation for some years, happened to be those places where the proportion of urban -population was the -largest. In the majority of other African countries, the cost of a similar dwelling ranged from US$2,000 to US$3,500. It was assumed that the average family size would be 5 persons.- In the rural areas it was assumed the average family size was 5.5 persons and that the cost of a rural dwelling constructed mainly with local materials would be U S$500 •.

2, For purposes of this meeting it is not intended to go into detail on the matter of house-building costs since this is a separate project in the Programme of Work and Priorities of the Housing, Building and Physical Planning s·ection of the Commission secretariat. fub-

regional meetings of experts at a high technical level have already started in 1968 in Eastern Africa and it is intended to continue these m!letings in North, West and Central Africa in succeeding years. The - rElport of the sub-regional meeting for Eastern Africa is available ( clooument No. E/CN. l4/HOU/17, E/CN.14/416) in French anc;l English languages.

!(

UN EGA publication Housing in Africa (UN Sales No.66.II.K.4)

E/CN.14/HOU/22 Page 2 ·

3. The survey quoted made general estimates, in the absenc.e of detailed statistical information over a wide range of national differences. For the purpose of an overall estimate designed only to provide art order of magnitude of the problem, two figures were retained: one in the range of US$1,000 for South Africa and UAR, one of USSl,500 for the rest of Africa as· an average,

Housing needs

4.. In addition, an estimate of the housing needs of the whole conti- nent was attempted by the secretariat taking into account an unpublish- ed document entitled ^I World Housing Conditions and Estimated Housing Requirements' prepared in UN Headquarters, New York. The main compo- nents are summarized below:

In Urban Areas (in thou.sandsof dwelling uni ts)

1960 1965

Specification

,.,._

Dwellings needed to house population increase

Dwellings needed to offset obsolescence

Dwellings to remedy exis.ting deficit

B, In Rural Areas Specification

Dwellings needed to house

304.0

130.0

130.0

population increase ,540.0

Dwellings needed to offset

obsolescence 990,0

Dwellings needed to remedy existing

deficit 600.0

130.0

130.0

627.0

667.0

900.0 ' 600.0

---·

TOTAL 2040. 0 2167

.o

543

130.0

130.0

803,0

726.0

900.0

600.0

. ··2226.0

===================--==========

,,,

Population growtl:!.

E/ CN. 14/HOIJ / 22

Page 3

J• In making• the estimate· of housing needs, i t had 1,e.en assume(!.

that the, trend of the population of Africa would. be as follows:

In milliims

1960 1965 1970

Total popilation

237 263 294

Urban population

39 47 59

Rui'al population

198 216 235

Whereas· present estimates of population tre~ds

Y

^are:

In mill.ion

196.I 1970 1-.ill. ¹⁹⁸⁰

Total population

327 352 400 458

Urban population

47 57 77 106

Rural population

280 295 323 3:,i2

5~ Whatever the need for caution in accepting the ffgures, the;y- do :iuggest 'the magnitude of the problem in the light of need for financing.

i'·• If accdunt is taken. also. of. the estimated

:5

per cent growth,·

,mnually in urban .;populations dtce to the exodus :from the rural .areas to cities and towns·, then a further adjustment· is needed to .raise the

• tousing ·requj,rements in urban areas.

The financial. ,3ffort required

,,

___

^{._ ...}

^--·

^~~-

E,.

In an asse.ssmc.nt. of the financial effort required to meet the

housi11g needs of Afr:;,ca" cot:ntries, several hypotheses can be made. One

: , · , f ,-

could assume, for :instance, that t.he imr.,ediata objectiv~ of' housing :rolicy could .be to prs1,ut ,the urban housing situation fr.om deteri.orat- ing .and. to, builc. at l.ec:.s·c enough dwellings to keep pace. wi t)l the in,crease of urb,m popul a tio,~., .incly.di-,•G the effect of internal migrations .to

• > - ' , , • • • • • • , • • ' '

la:r;ge poP\llat.ion, centres. A seco:1d hyp9thesis 9ould be mad~ on t.he assumption that the targnt be to prevent the deterioration of both the urban and rural housir.g situation. Thirdly, i t might be rewarding to assess the estimated coat. of satisfying b.oth current needs, replaceme.nt and deficit.

1/

Secretariat aouroe

E/CN.14/HOU/22 Page 4

9.

The different level of house-building costs in ·the U.!R and South Africa on the one hand, and the rest of the continent on the other, raises a different problem. The greater proportion of urban population in the former countries and the greater share of national income earned by this population, bring the solution of the urban housing problem within reach of the economic possibilities of these countries. The opposite is true of the rest of Africa where one tenth of the income of the urban population (calculated on the assumption that the per caput income of the urban population is three times greater than that of the rural population) would be necessary to meet total urban housing requirements. Even if the target was only to prevent the situation from deteriorating, i.e. satisfying only demographic needs, this would entail an expenditure of about

5.9

per cent of the urban income for house construction only, not including land and services.

10, Taking Africa as a whole, more than

7

per cent of the national income should be spent annually on house construction only, in order

r

to meet all housing needs, i.e. urban and rural needs including replacement and deficit. If allowance is made for the cost of land and services, this would amount to nearly 10 per cent of the national income, or three quarters of what could be reasonably expected to

be devoted to domestic fixed capital formation by the African countries]}

as a whole. This is obviously unrealistic in the present circumstances.

11. The foregoing figures are obviously based on a series of assumptions all of which can be subject to interpretation and critical analysis.

Nevertheless, they begin to suggest that the task of improving the housing situation in African countries, at present levels of income and even after having reduced considerably the present level of house- building costs, is a formidable one. Government policies can and indeed must direct available resources to key sectors and establish strict priori ties. The most immediate task .('.Oc1ld be, for instance, to house population increase in Africa, which would represent alone

'y

It might be useful to recollect in this connexion that in a majority of European countries residential construction represents

35-45

per cent of gross capital formation in construction or roughly

3

to

5

per cent of gross domestic product.

,,

E/ CN, 14/HOU /22 Page

5

about 2 per cent of the total national income. If the target was not only to house population increase out 3.lso to offset obsolescence and to rE!medy existing deficit, tile i:wes·tment :.:-equired would be in the 1'/cfilge of 3-4 per cent of the national income. Those are merely orders of magnitude, covering extremely wide differences in national situations;

they are, however, useful indicators of the nature of the problem and of the scale of means required to solve it.

Nature of financial resources required

12. The real difficulty in Afrjcan conditions, however, is the nature of the financial resources required, Economical housing within the means of low income families can be provided only through long-term ere di t at moderate interest rates. This is precisely the kind of financing which is scarce in countries where national income estimates t.ave large imputed values and personal incomes are low.

13.

The financing problem for economical housing, therefore, is the mobilization of capital funds for long-term investment. Domestic sources must provide a large measure of such funds. By economical

tousing we mean housing for the lower income groups thus leaving entire- ly the provision of more luxurious housing for the middle and higher income groups to financi1.g from the pri v2.te se--,tor. This meeting will d.eal in some detail on d.i:f'ferent types of ir.sti tu tions which can improve on their arrangements by consent of their members in mobilizing domestic savings, part of which ca11 br ~h;:;i,nnelled i:ato housing~

14, Apart from the normal. capital rai ci:-e c,ethr,ds of 1:orrowing and taxation, consideration should be g=:_ve~1 to special measures directly related to housing. Experience in advanc0d. coui; oc'ies has shown the rneri ts of many special devices to accumulate capital funds for housing.

rl'hesf? include a requiremen.t -?or employ9:_ s to p:i.."'Ovide housing for their workers; this ~snot a measure generally to be recommended since the social implications of employer-owned housing can be unfavourable, On the other hand, co-ordirn:tion of economic development with housing and related services may require ~uch a me azure.. Generally, i t is more usual to require employers, e,·C• as in F~ance, to make a contribution fixed in relation to the pevroll oc' nuIJber of omployees - to the housing funds of public bodies.. In a nu1i'ber ·oJ' .Af2~ 0a..._.., r:ou~tries, emDlnv~_T'\'"''-'

E/CN •. 14/HOU/22 Page 6

if they

do

not pro,;ici.e housing, are obliged to pay their workers a special sup;lem;~t. ·· These supple111ents in effect inflate the general rent level.

Consideration 'should be given to channelling at least some part of the allow~ces

(~r

future increases in them) into a public housing fund where they coulci. be used to add to the stock of dwellings and thus lower rent leveis. · · If such a measure were accompanied by a rent control the social effect of the change-over would be considerable since new private invest- ment in housing is relatively small.

15. Compulsory levies for housing on employers may also be accompanied or, as in Western Germany, replaced by income tax concessions or exemption in respect of funds invested in housing.

16;

Another type of compulsory levy is that applied in Italy and Greece, whereby employees are obliged to contribute specially to public funds used for the provision of wore ,rs' housing.

17. Another primary source of capital funds for housing providing safety of capital and a fair yield is social welfare funds and pension funds.

fn''

many advanced countries, there is compulsory direction of these funds into'housing. Similar direction may take place with regard to private sa'irine;s institutions including insurance companies. Recourse has also been had in a number of Latin American countries to compulsory invest- ment, by individuals, in special housing bonds.

18. Western Germany provides a special case, where a full range of income tax exempcoions and concessions stimulate the large..;,scale provi- sion of' private capital for housing. The foregoing measures relate essentially to the mobilization of capital funds by public measures or in'cent.i.ves.

Voluntary savings

19. Volu~tary savings also can provide substantial sums for develop- ment. Volunt,u,y saVingscan provide for housing and these fall under the heading of mobilization of domestic savings already mentioned, The lack of an adequate system of savings institutions and easy facilities is a primary drawback to the mobilization of domestic savings, · Housing

E/CN, 14/HOO /22

!?age 7

polioy in African countries sho-.i.ld enVisage the establishment of a vigorous system of savings and loan associations (building societies)

_{. . .}

~

ssvi-ngs and credit banks making advances on mortgage, cooperative housing sociei;ie:;i, credit unions, and a more productive use of funds ac®mulated within tra.di tional savings societies as they exist in Mrican countries, to provide an incentive and a foous, t house rep:i:-esents for most families a tangible objective for savings, The existenc.e of institutions which give housing loans in return for

saVings

of a fixed ratio can stimulate savings in a w23 not possible where

there

i.s no specific objective for which to save.

Consultative machinerJ

20, Apart from establishing such institutions or encouraging their expansion, housing policy should envisage government or local

government

guarantees on the deposits so as to increase confidence. It.is desirable

to examine the possibility of African international consultative

machinery or. sub-regional rmd/or regional basis providing guarantee as a special effort to encourage the inflow of oapi tal so urgently required for housing. A necessary step in the sharper and more effective def"ini- tion of ·housing policy in Africa as a whole is the assembly and exchange of information on sources of capital for housing in indiVidual countries.

This analycic anc ~h=ing of experience will in most countries serve to improve the approach to the problem,

The African Development Bank

21, The Commission has requested the African Development Bank to make a contribution to the meeting giving the Bank's policy tcwarde housing and showing their intentions for future operations in this field, This forms a separate paper for the meeting,

22, Loans on mcrtg~

Existing institutions carrying out mortgage operations in African countries, with their accumulated skills and experience in their

mor.tgage business have a definite role to play in housing for the people in the low income groups,

the expansion of

They need to develop

as Urioan institutions, attracting deposits a.nd saVings from all

sectors of the polJUlation and making loans on the seouri

ty

of land,

E/ CN .14/HO'J /22 Page 8

or where this ~y:;ie of securi ~y is n::it readily available under a new Oc.,.c1<.>ept of

c;....~ ..

:..'a.r,..t~v f1v..J L,J,;0:,_r.11-!J..,~nG, local government authority, or on a oommuni ty basi3 to pers::ms 111:>.o can c.f:-.>rd to. repay a mortgage loan on a house of reasonable standard in spite of its size. A:fter all is aaid, i t is securi'.~r under which the mortgage loan is granted which is the prime concideration and in a good many cases the stan- dard of houses can ·oe it,p:,:v,ed a.u:rin::; the life time of the mortgage loan. These insti tutionG in the pas·; have temded to concentrate on expensive housing ,ri1ioh rc.:rhiot~ the ,mrr.ber of people to whom loans might be made, They should, thercfo:-o, be pr0:,ared to make loans on less expensive houses fo1· a ui.d;,r s::ictor of the population,

Aided delf-lieJ,,i;:, ^:1:1c' t-o-ope:rnti ve _.b.ousine::._-iocieties

23.. Another aspect of inc:c·~"'sb,g :..api td fo:· housing is the need to maximize the con tri bu tion male t b·ough lubour a."ld available materials in aided self,·help c.::d co-epsrative housing cocieties. A comprehensive housing policy ohould, ther.,,::or0, p~•ovide for mobilizing these resources by providing don,loped plr.i,s of l;;:nu. ^0:1 ,;hich the schemes can be carried out. Tipto 30 per cent of' the c,st of a house ca.'1 be covered by the mutual labour pro7idod +hrour::;h a.:.ci.,<l. self-help and cooperative housing

societies.

24. It must be recog;--si~:•d, howe·.·c>r, tha"!: ev,:n if all possible measures a.re deployed 'to mobi :.i r;e!' .otiml1. l\:;ts 21:..l fiIJ<.!Ourage the formation of long- term capital fur.d.1.1 foi· hcu;c;L1g, 'che emounts realized are in the imme- dia'se futur,;, liknly to fell bhort of raq_uirements. The estimates made earlier rolat!3 DJJ:!.~,. -~v 11:.~·,J(~::i ,;;;.:ren.s~ 1,.t.:::-;.-·c t::; problems are urgent and critical. Sone li!-d_·:cd_ i:-1vr;3t::.·::::1.t r.2ust aleo, however, be f'oreseen in rural houains 11nd 0hi~ ,,i).1 i,,n:rc'o,;:.> -c0.,.,, 102·orlem of an adequate supply of oapi tal.

25, It is at th:cs p0in·: ('.::.~ ~-=-i~:cs c'.'.l,csido::-c.tion must be given to the need for and tJi; i of ::.¹.A.:.~1J 0::gn"t7.:!g dome s·tJic resources by external

supplies of lDng-ter1u ere di t at ucC.:eratc .:nterest rates. A number of African countries have alr0ady como to tte conclusion that adequate pro- grammos can bo und0r't-e:cGr.. only with tho a,ssistance of external crodi t.

"'

E/ CN .14/HOU / 22 Page

9 '

26. From.the point.of vie~·

o:

the lenders, housing >illd urban services in .the dG"re).oping cour.tries of Africa repr.esent a safe credit risk in vi•ew of the lack of housing and services. Rqnts ,p,;;;y:able now for

· wholl;y: inadequate and overcrowded dwellings are sufficient to provide an adequate re.turn en capital invested in gpod housing.

27. There are two principles w::iich shoul.d govern the use of external capi.tal funds for housing and related services. The first is that such funds should be used as far as possi blo as matching funds to stimulate the creation of local capital" The total financing of a housing

project from external fundc1, while a definite contribution, would not be as effective ao using e::ternal fundE to launch a self-help pr<>ject, to provide "seed capital" for a savings and loan institution,

to provide strategic comp)nents such as roofs, windo.ws, doors, serviced lots, etc., which can serve as a nucleus for th.e formation of domestic capital. The production of essential materials and components from external capital is a par-!oicularly suitable measure, especially if i t

. ' . -

reduces imports of materials and develops domestic resou.'r·ces such as cement and timber. The external capital could also be used to pr.ovide materials on long-tern: credit, ThB second principle is that, as·far as poss.i ble, such loans should be soft Joans not requiring repeynJent in foreign cUrI·ency, sines housing d,oes not generate foreign earnings. •.

28. The Afri(,): . .n Sta,te::i, for thei:c part, should c.onsider what measures they might take t,:i enc:our: . .ge externa:L inves.tment in their urban ,hoµsing and services. A cle.ar defini ticn of the housing problem .. the si,stablish- ment of reasonabJ~e nation.::11 targets a.nd the comprehensive mobilization of all relev(ll1.t do;;;c~tic .measures are prerequi_sites. In a,;ldi tion, considerati0n night bEJ given to apl)rop:c·iate guarantees and insurance, perhaps on a continental baois, on e::ternal oapital ·invested in housing and rela:ted services" TLe Afiican D0ve!.opment Bank •might, here also, provide the approp:r:ca'ce moc.:,an: sm,.

&lbsidies - dir,rn'; and ind.iract

---

^-····

29, Some general consic'.crati.or.o in regard to the use of available: , capi tl).1 should be aclded. In principle, . the objective shoul,;l be to :i,ro- vide economic hcusin6 and net to undertake a heavy annual bur,;len pf

E/ CN. 14/HOU / 22 Page 10

subsidy in addition to finding new capital. This implies, above all, rigorous research into cost reduction with a view every year to enhanc- ing the possibility of an economic rent. It also calls for longer amor-

tization periods, with differential interest rates, so that in effect one interest rate can subsidize the other, and favouring owner-

occupation and tenant-purchase with minimum deposits whero feasible.

If, owing to a relatively large number of wage-earners and salary earners, the budgetary position is such that income redistribution through subsidies is feasible, care should be taken to make such

subsidies temporary and to relate them at all times to financial need, There are many modes of such subsidy systems in Europe where overy effort is made to limit the annual burden of housing subsidies to individual need, Special importance attaches in African oonditions to the design of houses with space for a lodger who, in effect, can subsidize the family's rent.

The Abidjan experiment

30. In a particular case, in Abidjan, a real estate society has undertaken the construction of a few hundred dwellings taking into consideration the sub;J.etting possibility. Within the frame- work of a slum clearance operation, it was decided to accommodate them in new dwellings built by this society allowing them to find, within the same city, possibilities or resources similar to those they derived from sub-letting one or several rooms, usually located at the back of a court-yard included in tho compound.

The need for low-cost housing to reduce speculation

31, The contribution of private initiative to the construction of low-cost housing of an acceptable quali +,y is practically nil in most African countries. On the other hand, private initiative is active on the speculative market of high-class housing and, to a lesser degree, of upper middle-class housing. The housing shortage prevailing in most large African cities makes it possible to sell- low quality dwellings at prohibitive prices; and it is usual to amortize rented dwellings over a very short period

f'

E/CN .14/Hou/22 Page 11

usually from three years to six years, whereas in developed countries pr:,vately built rented housing is usually amortized over ten years.

32., Another type of private initiative consists in building dwellings intended in principle for a family but actually let to one family per ha,,i table r0om. The owner or tenant can in this way derive important returns by sub-letting part of his dwelling. This sometimes excessive su·o-letting practice is quite frequent in all large urban centres, wh:cch are overcrowded. As long as housing shortage exists in these areas, it is impossible to expect that controls or regulations can en:orce a solution. The solution lies in a marked increase in pro- duetion of l<.w-cost dwellings.

33-

Rent control as a measure to limit private speculation in housing has been intr0duced in a number of African countries and is being considered in others. Rent co'1trol is a double-edged weapon which, while keeping rents low for social and economic purposes, can reduce in•restment in housing and thus reduce the increase in the supply of housing which in the long run is the only solution to high and

sp,aculative rents.

34..

A particular form of speculation wh:.ch exists in a number of Af~ican countries is that whereby houses erected for owner-occupancy with public loans are re-let at exorbitant rents. Public authorities should set their faces firmly against this form of speculation, by im:,osing a control of such re-letting - i.e,, by reserving for th,amselves the right to relet.

Conclusion

35, The aspects dealt with in this short paper are in the majority of cases treated as specific items under the Agenda, but the paper mll serve to refresh the memory on the problems which the meeting is ex:,ected to consider a.nd to provide some recommendations for solving tl:.,im.