“Financing Affordable Housing for Low Income Groups: Innovative Funding for Low Income Housing”
The Housing and Finance Crisis – What hope for the world’s poor
Anna Tibaijuka, Under Secretary-General of the United Nations
Executive Director, UN-HABITAT

Honourable Ministers, Distinguished Guests, Ladies and Gentlemen

As I am sure has already been said, this conference is very timely. I must thank the organisers of this conference at Wilton Park for their foresight in putting such a complex set of issues onto their agenda.

We have seen over the recent months an explosion of many of the world’s economic problems, but this needs to be seen alongside the continuing problems of affordable housing and finance in developing countries, which are not yet improving to meet demand.

The beacons of hope for the world’s poor are not currently shining very brightly. But not all is lost – there are glimmers of hope everywhere, not least amongst the world’s poor who are becoming recognised rightly for their ability to save, and to ensure regular repayments of loans. This thrift is now seemingly in short supply in the richer parts of the world.

UN-Habitat is pleased to be in a position to contribute positively to this debate. We have recently concluded our 22nd session of the Governing Council of the UN Human Settlements Programme where Financing Affordable Housing was the overall theme of the session and the subject of the central dialogue where Ministers, slum dwellers and practitioners were able to put their points of view collectively.

What is certain is that there is a major concern that ‘finance’, and by that we mean access to formal credit facilities, is becoming less affordable as a result of high interest rates, and the current nervousness in lending to the low-income housing market. Both of these factors have a major impact on the world’s poor.

What is uncertain is when, if ever, this situation will change. Unfortunately there is a long history to the subject. The ‘Habitat’ international UN conferences of Vancouver 1976 and Istanbul 1996 did at least bring together the global concern for adequate shelter and housing provision. However, they did not bring about a timetable for concerted action.

The outcome of these conferences – the ‘Habitat Agenda’ - rightly put the issue of affordability and thus ‘finance’ as one of the key central challenges, together with an examination of the ways in which the global financial systems might respond to the growing gap between the housing ‘haves’ and the housing ‘have-nots’.
But even now the statistics are appalling – worldwide, some 1 billion people are now living in sub-standard accommodation or ‘slums’, and this is currently on the rise - by some 25 million every year.

Reversing this trend does not mean trying to stop urbanisation as such – urbanisation brings many benefits to people in general, such as better chances of access to economic livelihoods, better chances of children gaining an education, and being part of the growing modern world. But how people are integrated into urban areas on a sustainable basis is indeed a challenge.

In every country there have been long running debates about the ways in which the poorest can have access to at least some basic housing provision, be it affordable rented accommodation or a recognition that their own modest investments in shacks that can be improved over time is part and parcel of the modern city.

And yet housing is so central to the health of any economy that it is still amazing that there is so little attention paid now to the ways in which low-income housing can be integrated into the organisation of our cities throughout the world. If someone does not have a place to live they cannot contribute to the economy of the city.

This is where the importance of ‘slums’ comes into play. They are an important and unwittingly strategic part of the city economy, but they desperately need improvement in the context of a sustainable housing and housing finance strategy.

The availability of sufficient land for low-income housing, therefore, is the first essential component. It is amazing to many that in planning terms this requirement is likely to constitute over 50% of all the required expansion land of any city at any point of time, and this is a tall order for politicians. But one that must be tackled if the world’s poor are to have any hope of gaining access to better housing opportunities.

The second component is the servicing of this land with proper access and basic infrastructure – drainage, water supply and sanitation. This is most often a municipal responsibility, but one that also requires the central government’s support.

And thirdly, the inhabitants need access to formal credit arrangements to mobilize their savings and to make their own investments in the future of the city.

This last point is the real issue that must be tackled decisively in the light of the current global economic situation.

Poorly regulated housing finance systems are directly related to the current global economic and financial crisis. At the core of the initial problem was a neglect to pay attention to the establishment of affordable housing finance systems by governments who in turn relied on people in private financial institutions whose interests were far removed from the housing needs of the poor. This led to the phenomenon of toxic debts that have in turn undermined the most valued ingredient of banking, namely trust.

I believe that there are several lessons that need to be learned in this debate. I outlined these in a recent policy statement, and it is worth emphasising once again.
There is a need for global regulatory machinery that includes the issue affordable housing finance

In a global world economy, we need globally responsive regulatory mechanisms and machinery. I might also observe that the current financial crisis shares a common trait with the climate change challenge. Those who contribute the least to the problem – those who live on less than two dollars a day – are likely to suffer the most and the longest. The negative effects are already tangible on the ground in the north such as housing foreclosures and job losses rendering it is estimated a new 100 million joining the ranks of the world’s poor!

A vision of a need for a global facility to assist in delivering housing to the poor is not a new idea. From the outset at the 1972 Stockholm conference on the human environment, the need to put in place global and national institutions for human settlements financing was discussed and agreed. It led to the creation of the Habitat and Human Settlements Foundation as a global shelter facility to assist in housing and municipal finance. It then took 35 years to enable the Experimental Reimbursable Seeding Operations – ERSO – about which you will hear more tomorrow.

Ladies and Gentlemen

It can be said that affordable housing is rarely adequate, and adequate housing is rarely affordable.

A key conclusion that we can already draw from history and from our experience in dealing with affordable housing finance in particular is that the perennial problem of “affordable housing not being adequate” and “adequate housing not being affordable” cannot be left to the market place alone.

The sub-prime mortgage crisis that sparked off the current global financial crisis was the outcome of a one-dimensional approach to housing and a “one-size fits all” model of housing provision. It did not look at how to improve incomes to make housing more affordable. It did not look at how to make housing cheaper so as to make it more affordable. It did not look at the need to have a mix of tenures whereby poor people could access decent housing through a well-considered rental market as well as through home ownership.

Financial prudence and banking principles were thrown out of the window. Financial “engineering” became normal practice as different so-called “innovative products” from brokers competed with each other. It was all target driven. Commissions and bonuses were collected, CEO payments rose into the stratosphere, but the risk remained on the one end – with the borrowers – and at the other end – with the shareholders across the globe where so many had their pensions and savings entrusted.

Apart from an appropriate oversight or regulatory framework coordinated at the national level and between nations, this equation is made up of an income component, a cost of construction component, a cost of money component, a tenure component, and a market component. In the vast majority of countries, these components need to be further broken down to account for gender specific needs and constraints.

Conference delegates

In our efforts to assist the world’s poor in terms of finance and affordable housing, we need to discuss the convergence of global and local development agendas. Whilst the current financial crisis extends beyond the initial crisis of poorly regulated housing finance systems, most experts agree that one of the most effective ways of stimulating economic recovery is public investment in housing and infrastructure.

China, the biggest creditor nation that is underwriting a significant proportion of the economic recovery packages of the north, already decided last year to inject some $600 billion into its own economy, two thirds of it devoted to green infrastructure and pro-poor housing.

Experts concur that investment in housing and urban infrastructure, properly planned and managed, helps create jobs and stimulate demand across all sectors of the economy.

Although housing finance in developing countries is in permanent crisis as displayed by expansive slums, the sector has not been able to attract the attention it deserves from Government as well as their development partners. For example, it still remains a struggle to have housing deprivation recognised as a critical dimension of poverty. Few developing countries readily include development into their poverty reduction strategies supported by the World Bank or UN Development Assistance Frameworks. Hopefully the work of UN-Habitat will become more meaningful since it is becoming recognised that a country that ignores investing in affordable housing finance is not likely to achieve sustainable development and social cohesion let alone the Millennium Development Goals they have all agreed to work towards.

As I have mentioned, UN-Habitat has three important field testing operations in hand – the Slum Upgrading Facility (SUF) and the Experimental Reimbursable Seeding Operation (ERSO). The third is Women’s Land Access Trust which essentially is part of SUF dedicated to women’s groups.
 
The central objective of SUF is to work with domestic financial institutions and community organisations to mobilise local domestic capital for slum upgrading and related infrastructure activities through a blending of grants, capacity building and technical assistance to poor urban communities and municipalities. Within this framework, pilot WLAT have been established in Tanzania, Kenya, Ghana and Uganda. Projects are to be opened soon in Ethiopia and Mozambique. These housing cooperatives are assisted to access finance for land acquisition, housing development and mortgage finance to repay loans on occupation.

The objective of ERSO is to develop experimental loan operations and other innovative financial mechanisms for enabling access to housing finance and strengthen institutional capacity to leverage the contributions of communities, local authorities, the private sector, government and international financial institutions to achieve sound results and potential scaleable development and finance programs which can be sized over time to address the needs of all those living in substandard accommodations. Both initiatives are implemented in close cooperation with existing international development actors in housing finance.

Since providing financial services to the poor can be a risky undertaking from the perspective of conventional banking practice, UN-Habitat requires sound analysis of the risks involved. This transparency enables informed and sound decisions, serving both the interest of the lender and borrower. Building on the prudence of informal communities for developing durable solutions to serve their own needs will be a key element.

Experience so far shows that pre-investment activities are central for developing the right products and projects for low-income dwellers. Important elements are to combine provision of loans with technical assistance and capacity building and apply sound procedures and due diligence for selection of borrowers and implementing partners. 

A key response of UN-Habitat to the financial crisis has been in terms of Global Advocacy and Dialogue. At the recent World Urban Forum in Nanjing, China, last November, UN-Habitat ha facilitated a dialogue with key actors on the impact of the financial crisis with a special session on housing finance and national policy and systems.

Based on the recent experience of the Central Bank of Thailand, this session concluded that real time and transparent information on the financial environment helps to ensure stability of domestic markets. The model presented may serve as a blueprint for a network of practitioners dealing with financing affordable housing and infrastructure. The dialogue was continued at GC22 as the central theme.

Against the background of the current global debate on new international rules and agreements for the financial markets, UN-Habitat will invite World Bank and IMF to future fora such as the Governing Council to engage in a dialogue about the implications of a new international financial architecture on housing and infrastructure finance in developing countries and stress the importance of the sector.

Conclusion

In conclusion, may I say that this conference should bring an even greater focus on the issues of finance and affordable housing? Our aim is to provide a platform where the best practices can be seen in this context with the objective to more rapidly upscale processes that can lead towards more and more people having a decent roof over their heads and be in a position to contribute to the economic recovery that the world so desperately needs.

What we find throughout the developing world is a situation where people want to invest their little savings and their hard work in their own new and improved housing as part of a new city life. To do this they need access to credit facilities and help from the city community in developing new and upgraded residential areas.

Whatever we can do to find the best pointers to this goal will be gratefully received not only by the sum dwellers and the low-income groups, but also by the citizens of every town and village that want a better urban future.