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Promoting Access and Affordability in Housing Finance

Promoting Access and Affordability in Housing Finance. IFC‘s e xperience in supporting better and safer housing o pportunities in Emerging Markets Friedemann Roy April 11, 2013. The conundrum: how to improve access to housing finance for low income groups?.

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Promoting Access and Affordability in Housing Finance

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  1. Promoting Access and Affordability in Housing Finance IFC‘s experience in supporting better and safer housing opportunities in Emerging Markets Friedemann Roy April 11, 2013

  2. The conundrum: how to improve access to housing finance for low income groups? • Evidence that economic growth support housing finance market penetration (r = 0.82) • In which direction are markets in Asia heading? • Do low income groups benefit from increased access to housing | finance with rising GDP? Mortgage debt to GDP and GDP per capita (2009) Source: World Bank Database

  3. Higher incomes typically mean improved access to financial services High income groups Mortgage Middle income groups Small housing loans Low income groups Informal financial sources

  4. A triangle diagram to depict perspectives of housing finance markets Housing (= demand) • Supply • Funding • Housing units • Finance • Microfinance institutions • Banks • Non-Bank financial institutions

  5. What determines demand for housing? (I) • Economic climate and quality of enabling environment: Source: World Bank Database - Asian countries are an important growth driver of World GDP- Continued reforms of enabling environment but pace differs by country

  6. What determines the demand for housing (II) • Rising population and increasing urbanization • World Population is estimated to grow from 6.9 billion (2010) to 9.3 billion (2050)* • In 2050, 6.2 billion will live in cities (today 3.5 billion)** • Asian countries will experience a rise of their urban population by 1.4 billion and will have the highest number of megacities (> 10m)**** • Rising incomes • Increasing disposable income and purchasing power • (e.g. it took India 15 years to double its income per head – compare: Britain 150 years after industrial revolution began)*** * Le Monde ** This is Africa *** The Economist **** United Nations

  7. Responses to increasing demand for housing • Globalhousingdemand is projected to double over the next two decades to about USD 5 trillion yearly (McKinsey Institute) • Supply of funds • Capital markets in most emerging Asian economies are dominated by government bond issues • Deposits remain most important funding instruments for housing loans • Supply of dwellings • Not sufficient to cover demand, especially in affordable segment Deposits Capital market funds Funds Supply Developers Self-construction Dwellings

  8. Prospects of housing finance markets in emerging Asia: benefitting from improving regulatory environment and continued economic growth • Markets are advancing, but overall market penetration is still low • Markets are benefitting from high demand and rising interest of investors • Can house price inflation and/or rising number of defaulting borrowers be contained?

  9. Who offers finance to low income groups? Many suppliers, but different target markets Structural Indicators of MFIs, 2010 Source: MIX Market, DB Research

  10. Microfinance – a panacea to offer housing finance to low income groups? • Over the last decade, Microfinance Institutions (MFIs) throughout the world and Asia have experienced considerable growth of their portfolios • Ventured into new product offerings beyond traditional group lending schemes • But portfolio quality has deteriorated due to: • Reaching out to riskier borrowers without lenders having adequate risk management capacities • Lack of adequate lending standards • MFIs have become more commercial and subject to competition. However, the instruments to monitor moral hazard/adverse selection have not been updated

  11. IFC’s experience to support access of low income groups to housing finance: understanding affordability - two measures Source: numbeo Ratio of median house price to median disposal family income (per year) Ratio of actual monthly mortgage rate in relation to monthly income

  12. Understanding affordability and preferences: depending on income, it may differ Mortgage-able Upper: (Formal income, legal title) Small-scale housing loans, micro mortgages Moderate to lower: (Formal/informal income Legal title/no legal title) Community based shelter funds, savings Low income group: (informal income, no legal title)

  13. Project examples where IFC been involved to support access to housing finance for low income groups Haiti: • Why? • Country is prone to natural disasters • High degree of informality and weak enabling environment • What is IFC doing there? • Redesign of lender’s existing housing micro finance product line and incorporation of partnership(s) with building material provider(s) combined with offering of technical assistance to borrower

  14. Haiti: partnership between lender and construction technical provider and building material supplier Sign-off on construction progress and quality Customer Loan Agreement Provides construction material

  15. Afghanistan: housing microfinance capacity building • Why? • No housing finance products for low income groups • Significant demand for renovation and new construction • What is IFC doing there? • Development of appropriate housing microfinance products • Support to establish required infrastructure within lender’s organization (underwriting, servicing, risk management etc.)

  16. Afghanistan: IFC’s Housing Microfinance (HMF) Toolkit • Toolkit = guide for product development and operations • Describes recommended HMF products and parameters, operational procedures, and set of tools and techniques for market surveys • Includes guidance on shariah-compliant HMF products • Based on international best practices and on-the-ground feedback • Two parts: • Product development • Loan processing (from loan application to delinquency management)

  17. Kyrgyzstan: Lending for home improvements • Why? • Housing stock in need of improvement, temporary housing (“novostroika” = marginal housing rings) • What is IFC doing there? • Support lenders to develop specific HMF product adapted to Kyrgyz market • Lenders offer to borrowers loans and technical construction support • Technical construction support comprises instructional videos, brochures and software modules

  18. Summary and conclusions • Two main trends: • Rising population and increasing urbanization • Not discussed today: green housing opportunities • Outlook for investments in residential real estate markets in emerging Asia is promising • But risks need to be carefully managed (i.e. credit risk, interest rate risk, liquidity risk, etc.) • Design of right market entry strategy is key: • With the right product and the right strategy, sustainable growth can be achieved

  19. Dr. Friedemann Roy Global Product Lead IFC Housing Finance Advisory Services IFC A2F Tel. +1 202 473 9838 E-mail: froy@ifc.org

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