Asian Pacific Union of Housing Finance Conference

Housing Finance: New Approaches for Access to Finance

April 11, 2013 Ira G. Peppercorn Housing Finance Group Finance & Private Sector Development

Shortage of Affordable, Safe Housing • World Urbanization in 2010 – 50.5% • Slum Dwellers grew from 777mm to 850mm 2000-2010 • Positive factor: 227 million moved from slums; doubling MDG goals • World needs 4,000 houses an hour to keep up with demand (UN-Habitat) 100 90 80 70 60 50 40 30 20 10 0 Northern America Latin America and the Caribbean Europe Oceania World Asia Sub-Saharan Africa

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Nairobi

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Why Does Housing Finance Matter for the World Bank and its Clients?

• Many households aim to improve living conditions and are in need of finance; self construction often slow • Housing Finance helps make long term investment into housing more affordable and accessible for households • Housing Finance can help to support housing demand which is a key economic driver and job creation engine

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World Bank: Critical Factors for Development of Housing Finance Markets •

“Value for Money”

, i.e. maximize the impact of public resources, leveraging government initiatives with the involvement of the private sector, with the goal of achieving a higher multiplier •

Coordination

, i.e. ensure the coordination between administrations and public/private sectors, to maximize the efficiency and effectiveness of the programs •

Public sector role

, i.e. from provider to enabler of housing •

Inclusive housing finance

, i.e. include non-salaried borrowers •

Progressivity

, i.e. ensure an equitable allocation of resources •

Incremental housing

, i.e. consider alternative instruments and mechanisms to promote incremental housing products

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Rising Demand is not Matched with Access to Finance The mismatch in

housing finance market development

is evident across regions, with North America, and East Asia and Pacific regions showing the highest mortgage depth and penetration, and South Asia and Sub-Saharan Africa the lowest.

Mortgage depth (2006-2010) and Penetration (2011)

South Asia Sub-Saharan Africa Latin America & Caribbean Middle East & North Africa Europe & Central Asia East Asia & Pacific North America Mortgage Penetration Mortgage Depth 0% 10% 20% 30% 40% 50% 60% 70%

Annual Urban Growth Rates By Region (2015-2050)

Sub-Saharan Africa South Asia East Asia & Pacific Middle East & North Africa Latin America & Caribbean Europe & Central Asia North America 0,0% 2,0% 4,0% Though the fastest growing urban cities are located in

South Asia and Sub-Saharan Africa

, these regions currently have relatively underdeveloped mortgage markets.

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Development Challenges-Access to Finance For lower income economies there is much greater reliance on informal sources of financing, e.g. family or friends

Home Loan Penetration by use of formal accounts

– Adults ages 25+ with an outstanding loan to purchase a home or apartment Source: 2012 Global Findex Survey

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Challenges in Serving Low Income and Informal Borrowers (i) • A large part of the population has non-salaried income, whose creditworthiness cannot be verified using conventional techniques • The existence of a large part of the population that cannot afford the down payment needed for a mortgage • The inexistence of deep and stable capital market that provides easy access to long term funding • Lack of suitable products in area of rental, self-construction and home improvement finance • Policy actions often not consistent with stated policies: i.e. low income policies and interest rate subsidies used with mortgages • Legal and regulatory structure often undeveloped or ineffective • Differentiation between regulation of mortgage finance and microfinance

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Challenges in Serving Low Income and Informal Populations (ii) • Shortage of safe, affordable housing • Many properties informal without title: lack of asset security • Inconsistent or nonexistent standards for safe building • Land and permitting regulations and processes inefficient • Availability of inexpensive land in city centers • Lower cost housing often far from urban core • Infrastructure not always developed

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Port au Prince

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Moving to Solutions: Some of World Bank Current and Forthcoming Partnerships

India

: Funding and technical assistance for mortgage and housing microfinance for low income people

Bangladesh

: Cooperative housing finance for slum upgrading

China

: Financing and managing public and social housing

Ecuador

: Subsidy restructuring, construction finance for affordable housing, and access to finance

Egypt

: Liquidity facility and smart subsidies

Indonesia

: Subsidy effectiveness, expand mortgage market, public rental housing and housing microfinance

Tanzania

: Funding and technical assistance for housing microfinance

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Low Income Housing Finance Project - India

• $ 100 million World Bank Financial Intermediary Loan Funder through IDA • National Housing Bank is implementation agency • Funds flow to housing finance corporations and micro finance institutions • Distribution partnership with Small Industries Development Bank • Target population: Income under Rs 15,000 • Main target: formal property; informal income • Microfinance will be used • Pilot projects for informal/informal • Technical assistance key component

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Example: India Low Income Housing Finance Project High Income

75% of population 3% of housing loans

Low Income

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EWS, LIG

India - Distributional benefits of expanding access to finance Informal lenders charge higher rates...

Money lender Friend NGO Relative Other Employer Credit group Bank Govt. program 0 10 20 30 40 50 Average annual interest rate on housing loans, by source (%) 6 7 8 9 1 2 3 4 5 10 ...and poorer households use informal lenders more.

0 20 40 60 Borrowing from informal sources, by income decile (%) 80 NGO Employer Friend Other Money lender Credit group Bank Relative Govt. program Poorer households pay more to the same lender...

...and could benefit the most from switching to formal credit.

1 2 3 4 5 6 7 8 9 10 -2 0 2 4 6 8 Rate premium paid by the bottom 40 percent, by source (% points) Source: Calculations using IHDS data, urban households only.

0 5 10 15 Average income gain, by income decile (%) 20

Delhi

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Benefits of Increasing Financial Tools to Low Income People • Low income people can enter formal financial markets • Increase in demand through finance can motivate increase supply • Houses can be improved or constructed faster and more efficiently • Rental housing can be a component of home expansion • Can integrate safety standards into loans • Jobs can created in construction industries • Improvement in housing can mean an improvement in people’s lives

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Thank You Download: Peppercorn and Taffin, Rental Housing at documents.worldbank.org

Contact Information Michel Noel, Manager, Non-Bank Financial Institutions [email protected]

Alfonso Garcia Mora, Lead Housing Finance Specialist [email protected]

Simon Walley, Housing Finance Program Coordinator [email protected]

Ira Peppercorn, Senior Housing Finance Specialist [email protected]

Tuo Shi, Housing Finance Specialist [email protected]