Housing finance needs to reach South Asia’s poor

High economic growth coupled with rapid urbanisation and a rising middle-class have created a considerable demand for housing and housing finance in South Asia, according to a World Bank report 'Expanding Housing Finance to the Underserved South Asia'.

South Asia’s housing and housing finance markets have grown at an impressive 30 per cent rate in the past decade, but are limited to upper-income groups. "Around 30 million middle and lower-class households in South Asia — which accounts for 11 per cent of the region’s population — have the willingness to pay, but unable to have access to mortgages," the report said.

In India alone, estimates of the housing shortage range from 20 million to 70 million yet as much as half of this excess demand can be profitably serviced by the housing and housing finance markets.

The report examines housing shortages in South Asia, as well as outlines shortcomings of the market for home financing. It highlights the need to make mortgages available to the poor and broaden its reach among the middle and lower-class.

To enable a rapid housing and housing finance market expansion, the report noted, current obstacles should be removed to the efficient functioning of land administration and mortgage markets, to make homes more affordable.

The rising numbers of lower-middle-class groups pushed housing and housing finance demand way beyond current supply, as banks and builders were unprepared to service the lower-income segments. One in every four people on the planet live in the South Asia region, and more than 14 per cent of South Asians have no home, not counting a further 45 per cent living in overcrowded conditions.

The region’s future economic growth, social development, and employment are tied to providing housing and the funding for home-ownership, the report noted.

"The good news is that housing and housing finance services have the potential to expand to middle and lower-income families," said Tatiana Nenova, the World Bank’s senior economist, Private and Financial Sector Development for the South Asia Region and author of the report.

“This requires an improved land administration, strengthened legal framework for all aspects of housing, and promotion of long-term funding for mortgage lenders and developers. Innovative traditional mortgage products and non-traditional options such as Islamic finance, rental finance, and microfinance could meet demand in underserved market segments."

The report emphasised the critical role the private sector must play for a sustainable solution for expanding the affordable housing market to lower-income groups. Public-sector housing provision alone cannot cope with the demographic and urbanisation pressures of low-income groups.

"Large-scale slums and informal settlements that exist in almost all South Asian countries underline the urgency of meeting the demand for homes. There is a shortage of more than 38 million housing units in the region, taking into account average household size, this translates to 212.5 million homeless people, 14 per cent of a total population of 1.5 billion,” said Ernesto May, the World Bank’s sector director for Poverty Reduction and Economics Management.

"Easing access to housing finance for low-income, rural, and informal population groups is the key that will open the door to the solution. In fast-growing economies, the housing sector has the capacity to grow at considerable speed (10 per cent national growth translates into 14 per cent housing growth), and can generate 3.2 million new jobs over a decade," said Ivan Rossignol, the World Bank’s sector manager for Private and Financial Sector Development in South Asia.

The report also emphasised on low-income housing solutions. In some countries in the region, private developers discover that cheaper housing is actually capable of presenting good commercial opportunities.

Faster reorientation of the building industry to lower-income construction is predicated on two conditions: developer finance and efficient land administration. Deficiencies in financial systems, the report noted, should be eliminated to address the dearth of long-term funding for mortgage lenders and developers. Financial markets are dominated by large banking sectors in South Asia.

Despite the gradual liberalisation of the sector in the recent decades and the remarkable growth that came with it, financial services have been limited to basic products and have extended in a very modest manner into housing or related insurance products.

“Going forward, mortgage product innovation and customisation to client needs would make housing affordable to an increasing number of families,” said Janamitra Devan, the WB vice-president for Finance and Private Sector Development.

“There is a considerable potential to expand housing and housing finance to middle and lower-income households, provided appropriate market institutions, enabling policies, and a varied range of innovative housing and mortgage products are in place. In some countries such as India, this shift is already afoot."