October 28, 2014

McKinsey Suggests 4 ‘Levers’ To Close Housing Affordability Gap

Dolapo Omidire

A new report by the McKinsey Global Institute (MGI) has revealed that the affordable housing gap in Lagos amounts to as much as 15 percent of the GDP at $5bn per year. Globally, it was reported that the affordability gap was estimated at $650 billion per year, approaching 1 percent of global GDP.

The Affordability Gap. Source: McKinsey Global Institute, The Economist
The Affordability Gap. Source: McKinsey Global Institute, The Economist, Lagos’ Population is 17m*

MGI defines the Affordability Gap as “The difference between the cost of an acceptable standard housing unit (which varies by location) and what households can afford to pay using no more than 30 percent of income”.

According to the report, Lagos is on track to add 1.3 million low-income households. However, a majority of of these households will not be able to afford housing at market rates and will likely make their homes in sprawling slums with poor and unsafe living conditions. About 60 percent of global substandard housing is concentrated in 10 nations, where Lagos is 3rd with 11 million units. China and India were the only countries that were worse off at 62 and 28 million housing units respectively.

It was rightly argued that the access to decent, affordable housing is fundamental to the health and well-being of people as well as the smooth functioning of economies. This is because with families lacking decent affordable housing, health outcomes are poorer, children do less well in school and tend to drop out earlier, unemployment and under-employment rates are higher, and financial inclusion is lower.

MGI noted 4 ‘levers’ to reduce the cost of delivering affordable housing by 20 to 50 percent:

  • Unlock land (the most important lever) – Unlock land for affordable housing through measures such as transit-oriented development, idle-land policies, release of public land, and inclusionary zoning.
  • Reduce construction costs by improving capital productivity via lean construction, value engineering, procurement excellence, and industrial construction approaches. This can help in cutting costs by 30 percent and shortening delivery time by 40 to 50 percent.
  • Increase operations and maintenance efficiency – achieved through maximising energy efficiency, easy maintenance to avoid dilapidation and value loss. Additionally if general operations and maintenance costs are reduced, it will make owning a home more affordable as it accounts for 20 – 30 percent of annual housing expenditure.
  • Reduce financing costs for buyers and developers – Reduce borrowing costs to buyers and assist in developer financing. It was noted that cost reduction for buyers is a particular challenge in developing economies where financial systems are not as well developed and many low-income citizens are “unbanked” and work informally. It was recommended that as part of housing-finance policy, nations must also consider the role of renting in the housing mix.

MGI believes that the successful application of these approaches depends on creating an appropriate delivery platform for housing in each city. Once this is achieved the path to affordable housing for all should be much clearer.

Currently, the NRMC and Lagos HOMS are encouraging home ownership in Nigeria by providing financial facilities to the mortgage lenders and supporting home ownership for First-Time Buyers. Meaning that work has begun on the 4th lever. However, policy makers should begin exploring options in unlocking land parcels at the right costs and developers should do the same in construction costs reduction. This could be achieved by using innovative designs, pre-fabricated housing as well as clever construction materials that deviate away from the typical and often expensive cement and iron rod.

As outlined in the report, 330 million urban households around the world today are facing issues with housing affordability. Where 235 million urban households live in substandard housing and the other 96 million are so financially overstretched by housing costs that they forgo other basic needs, including food, health care, and schooling for children.

It was stressed that the size of the affordability gap is indicative of the fact that it cannot be dealt with by the government alone. Private sector players need to get involved and begin to utilise the many market-based approach opportunities that are available to create value while reducing costs.

Find out more about the levers and how they can help in more detail by watching the MGI video below and visiting their website to download the report.

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