Quick Guide 05 – Housing Finance

Publication Date: 2011 ISBN: 978-92-1-132320-7

The two extreme outcomes of current shelter systems that are being witnessed today are affordable shelter that is inadequate, and adequate shelter that is unaffordable.
Housing finance is a tool we use to pay for housing. Because a house is a relatively expensive prod- uct, costing many times a family’s annual income, the most useful way of financing it is with a large loan from a bank, which the family pays back over a number of years. In Africa, however, less than 15% of urban households can afford or access a mortgage loan. These households finance their housing in different ways, such as with smaller loans from formal and informal lenders, savings, and even subsidies from employers or the government. Housing finance also includes the money that homebuilders use to build houses, which they then sell to buyers. If a country doesn’t have a comprehensive housing finance system that responds to diverse needs of its population, its ability to ensure that their housing needs are met is seriously compromised.
Of course, the housing finance system is inextricably linked to the housing delivery system. The way we pay for housing depends on the way the house was built – for example, all in one go, or step by step – and vice versa. It is also tied to the way in which the broader macroeconomy in the country functions. Investors, whose money makes it possible for housing finance providers to operate, will only invest if they see the housing finance sector as more profitable than other investments they could make. Without access to investments, housing finance providers are limited in their ability to offer loans for housing. Macroeconomic policy can therefore have an important impact on the avail- ability of housing finance for the population.
The objective of this Quick Guide is to introduce some of the key concepts of housing finance and to provide a quick overview of how a housing finance system works, from the way lenders get the money to lend, through to the loans that builders use to build houses, and then the loans or savings used by families trying to meet their housing needs. The guide presents information about both the formal and informal systems of housing finance and suggests ways in which the two can be better integrated. It sets out the different kinds of housing finance, and illustrates how African households currently finance their housing. Finally, this Quick Guide offers tips for policy makers to enhance ac- cess to affordable housing finance especially by the urban poor.
Across the world, policy makers are grappling with the two extreme outcomes of current housing systems: that in Africa, Asia, Europe, America or Australia, housing is becoming less and less afford- able for significant proportions of the population; and increasingly, that housing which is affordable is inadequate. Well designed housing finance systems can help policy makers address this challenge so that all households have access to adequate, affordable housing, the world over.
This guide is not aimed at specialists, but instead aims to help build the capacities of national and local government officials and policy makers who need to quickly enhance their understanding of low-income housing issues.