Supply and Demand Challenges in Housing Affordability

The housing sector has a wide-reaching impact on the economy, connecting suppliers with the demand side of the entire housing value chain. It leads to various lucrative opportunities for the growth of local economies.  However, the population is growing at a rapid pace and so is the gap between housing demand and supply. As a result, adequate and affordable housing remains a challenge. Housing costs increase faster than incomes, the supply of houses not keeping up with demand, scarcity of land, and demographic changes aggravate the lack of affordability.  As more people migrate to avail better living conditions, cities come under pressure to accommodate low-income citizens. Moreover, low-to-middle-income households often have to depend on market-based mechanisms to access affordable homes. Therefore, an efficient property market as well as the right infrastructure, investment, and macroeconomic policies targeted towards social and financial inclusion are crucial to creating an enabling environment for affordable housing. For this purpose, long-term solutions will need to address both the demand and supply side of the housing sector along with collaboration with the public and private sectors as well as non-profit organizations.

Supply-Side Challenges

Land Acquisition and Titling

Land acquisition is the most vital and significant factor in affordable housing. For housing investments, having legal title and security through property rights are essential. However, land acquisition does not guarantee the construction of affordable housing.  Areas with high housing demand can result in the utilization of land for commercial or industrial use by owners in the hope of increasing land value. Moreover, the existence of legal titles through land tenures and property rights may drive investments but conversions of informal settlements into titled land can increase inequalities. For example, formal titles are of no use in servicing long-term loans for low-income groups.

Land Use

Cities use two tools of zoning and regulation to either limit housing supply and increase prices or accelerate the development of affordable housing units and stabilize prices. Limiting the supply of land for development through zoning can cause a surge in housing costs. Also, regulations can aggravate the gap between supply and demand. For example, Toronto introduced regulations aimed to encourage multifamily housing units, but these did not increase new construction as demand was for single-family detached construction (World Economic Forum, 2019).

Securing Finance

Sufficient financing structure and funds are significant to addressing the affordable housing challenge. Investors mostly see affordable housing as a prospective niche rather than a market opportunity for high returns. However, private sectors focus more on market-rate housing due to high return rates. Also, low-income individuals find it challenging to increase capital through formal means. Many homeowners lack full legal title but have the security of tenure, making foreclosure a slow and costly process. Their finance options are mostly regulated and unregulated microfinance organizations, cooperatives, and consumer financing companies other than banks. The credit ratings of these organizations depend on their operations.

For example, the State Bank of Pakistan reported that banks’ lending for low-cost housing in the country was extremely poor, with disbursements reaching barely Rs18 billion against loan applications seeking Rs200bn (Iqbal, 2021).

Design and Construction

Innovative designs, productivity and construction can play a major role in lessening the costs of affordable housing with positive social, economic, and environmental impacts. However, issues like corruption, and complex building codes and permits can increase the costs of construction. Traditional construction practices, lack of research, and technological developments can decrease productivity. Moreover, the lack of a skilled workforce increases construction costs which in turn increases housing costs.

Demand-Side Challenges

Determining Eligibility

The criteria for being eligible to acquire affordable housing initiatives vary in countries. Some countries follow a target while others follow a universal approach. For example, in the USA low-income individuals are eligible for affordable housing whereas, in Singapore the entire population is eligible for affordable housing. However, it becomes challenging to monitor whether such schemes benefit the actual beneficiaries or cater to the needs of low-income individuals or not.

Ineffective Purchase Models to Rent or buy homes

To make housing affordable for all, a combination of effective rental and homeownership tenures is required. However, increasing homeownership is linked to restricted labour mobility which impacts business activities and economic development. Also, due to rising inflation, many individuals cannot purchase homes due to high down payments or mortgages.

Financing for rental and home ownership

Strict regulations on private rentals to control rent prices can discourage the formation and supply of new rental housing. Homeownership in rapidly urbanizing cities is becoming a challenge. Housing programs which provide ease with payments and owning a home often increase property prices and are availed by those who have better access to information and resources, further widening the gap between housing demand and supply.

Recommendations to tackle these Challenges

It is crucial to define and address effective strategies for both supply and demand side challenges. Some of the recommendations are as follows.

Governments must formulate effective long-term plans for accelerating the supply of affordable housing, balancing the need to reduce urban sprawl with the limits of the feasibility of building denser and taller buildings. They should ensure minimal political hindrance in the development of affordable housing, encourage adequate infrastructure in such developments, upgrade informal settlements, and devise a resilient regulatory system for private and non-private sectors.

Private sectors must adopt emerging technologies, innovative techniques, and materials in the construction sector. Moreover, collaboration with governments to ensure a sufficient flow of skilled workforce, and provide innovative solutions in financing and new tenure models.

Non-profit organizations such as community land trusts, housing cooperatives and microfinance institutions have the potential to act as a bridge between the government and private sector to improve the affordability of housing, as well as, aid individuals to ensure a better understanding of the options available to them which is required for making intelligent decisions.

Conclusion

Housing affordability is a concern around the world. Rapid urbanization has made it difficult for cities to accommodate large numbers of people. This is increasing the gap between supply and demand. Therefore, addressing the challenges of both the demand and supply side are crucial in tackling the shortage of affordable houses in big cities. It will not only improve the service delivery of the government but also have a profound impact on economic productivity and growth.

References

Iqbal, S. (2021, October 28). DAWN. Retrieved from https://www.dawn.com/news/1654495

World Economic Forum. (2019, June). Making Affordable Housing a Reality in Cities. World Economic Forum. Retrieved from https://www3.weforum.org/docs/WEF_Making_Affordable_Housing_A_Reality_In_Cities_report.pdf