New frontiers in affordable housing

By Charles S. Laven and Jonathan Woetzel

Providing decent, affordable housing is a growing challenge in developing and developed economies alike. With demand far exceeding supply, the adverse effects—on mobility, productivity, and growth—are (or will be) increasingly apparent. Fortunately, there are ways to narrow the affordable-housing gap substantially, using mostly market-based approaches at the municipal level, write Charles S. Laven and Jonathan Woetzel in Project Syndicate.

Providing decent, affordable housing is a growing challenge in developing and developed economies alike. With demand far exceeding supply, the adverse effects—on mobility, productivity, and growth—are (or will be) increasingly apparent. Fortunately, there are ways to narrow the affordable-housing gap substantially, using mostly market-based approaches at the municipal level.

Worldwide, 330 million low- and moderate-income urban households either live in substandard housing or are so financially stretched by housing payments that they must forgo spending on essentials like health care and education. By 2025, that figure could reach 440 million households, or about 1.6 billion people (one-third of the world’s urban population—and that does not even cover some of the world’s poorest people, who often live outside of cities, on urban streets, or as squatters, leaving them unaccounted for in census estimates.

Replacing today’s substandard housing and building the additional units needed by 2025 would require an investment of an estimated $16 trillion—a daunting figure, to say the least. But there are four key “levers” that can reduce the cost of housing delivery by 20-50%, thereby making housing affordable (amounting to no more than 30% of total income) for households earning 50-80% of the median income in most cities.

The first lever is more efficient land use. Acquisition of land for development in the right location at a reasonable price has the greatest potential for reducing housing costs.

Location is especially important in developing countries, where many areas lack adequate transport, water, electricity, and sanitation infrastructure. Investment in these areas would improve and expand land use—whether by unlocking unused land or equipping areas to support more inhabitants—thereby helping to reduce housing costs.

Similarly, cities can loosen land-use restrictions, such as unit size requirements, to allow for higher-density, and thus more valuable, projects. In exchange for providing the increased value to real-estate developers, municipal authorities could require that a portion of the land or a certain number of units be set aside for affordable housing. Such a cross-subsidy would increase the housing supply across income bands, at no direct cost to the public.

The final step toward improving land use is the implementation of measures to discourage land hoarding. China, for example, imposes an idle-land tax on formerly public land if its owners fail to initiate the development process within a year.

This brings us to the second key lever to expand affordable housing: a more cohesive and efficient construction industry. As it stands, the housing-construction industry is highly fragmented, impeding its ability to take advantage of economies of scale, and builders often rely largely on the same methods used 50 years ago.

By standardizing design elements like ceiling heights, fixtures, and flooring, construction companies can cut costs and raise productivity, as workers gain experience with repetitive tasks. Further savings are possible through industrial approaches, such as the use of components – for example, walls and flooring slabs—built offsite. And most builders lag behind other industries in terms of the efficiency of purchasing and other processes. Together, these improvements could cut housing-construction costs by up to 30% and delivery time by 40-50%.

The third key lever to make housing more affordable relates to operations and maintenance – everything from heating the building to repairing cracked tiles—which account for 20-30% of total housing costs. Here, the biggest opportunity lies in efforts to improve energy efficiency, with insulation, windows, and other retrofits generating energy savings of 20-30%.

Additional savings would be possible if maintenance and repair companies were more transparent and competitive, and operated on a larger scale. To this end, public institutions could certify and list suppliers that meet quality standards, or bring owners together in buying consortia—an approach that has helped the United Kingdom’s social-housing agencies cut costs on some items by more than 20%.

This article originally ran in Project Syndicate.

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