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Solving the World’s Affordable Housing Challenge

December 23, 2015 | By

The demand for affordable housing isn’t just limited to the United States. An estimated 330 million households around the world had to pay more than 30 percent of income on a standard housing unit in 2014, according to the McKinsey Global Institute (MGI). By 2025 that number of households is expected to increase to 440 million.

This “global affordable housing gap” (the difference between what people can afford and market prices of adequate housing) would affect 1 in 3 urban dwellers, or roughly 1.6 billion people, according to McKinsey Global Institute’s report.

“In one hour, there are 1,500 families migrating to cities who are looking for a new home,” Jan Mischke, a senior fellow at the McKinsey Global Institute and a co-author of the report, told Housing Industry Forum (also published by Fannie Mae).

“Within one month, 400,000 newcomers will not be able to pay the market price for housing,” adds Mischke.

Meeting the demand for the 110 million new housing units needed by 2025, which could cost $400 billion in mortgage insurance annually, presents an opportunity for the global finance sector, according to the report.

To replace today’s housing with decent housing and build the additional units needed by 2025 would cost as much as $11 trillion in construction alone (and $16 trillion total when including land costs).

Managing Affordable Housing in the U.S.

Cities in the U.S. are feeling the crunch as well. The report says that New York is “one of the most expensive cities in the world,” and half of NYC’s households — or 1.5 million households — cannot afford basic housing using 30 percent of their income. The city’s median income is $51,000, says the report.

The report sets the standard apartment at about 968 square feet for the average household of three at a monthly cost of $1,750, or $21,000 a year. “The affordability gap comes to about $18 billion per year, equal to about 4 percent of New York’s GDP,” notes the article.

Fortunately, New York, like other cities, is making headway, and the MGI report includes details of Mayor Bill DeBlasio’s plans to create 80,000 new affordable housing units and preserve 120,000 existing units.

It won’t be an easy solution in New York, and DeBlasio is already getting pushback from city officials and residents. According to NYC officials, they want economically diverse neighborhoods and are balancing trade-offs between the number of affordable units versus the level of affordability.

Approaches to Narrow the Gap

There are ways to reduce the cost of building new affordable housing while simultaneously reducing the affordable housing gap, like lowering the cost of land, construction, operations, maintenance, and financing, according to the report. Countries can also release or devote underdeveloped lands for affordable housing developments.

For instance, Turkey’s Mass Housing Administration (TOKi) is using 4,120 square kilometers of land it had acquired from other local government agencies with the intent of building affordable housing units priced 30 percent below the market rate on some of that land.

Countries and cities “can make real progress in narrowing the affordable housing gap,” says the article.

“Initiatives succeed when they are based on solid data and a clear understanding of how a city’s housing markets serve households of all kinds,” says the article. Furthermore, treating housing “as part of a broader effort to incorporate lower-income groups into the lives of cities and open a path for poor residents to raise their income” will go a long way in addressing the need for affordable housing, the article notes.

Source: “Blueprint Addresses Global Need for Affordable Housing,” published on Housing Industry Forum, Nov. 24, 2015.

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