Expanding Housing Finance to the Underserved in South Asia

         Currently, more than a billion people around the globe live in inadequate housing. One in every four people on the planet lives in the South Asia region, and more than 14 percent of South Asians have no homes or live in such inadequate housing as urban slums and squatter settlements. South Asia’s housing and housing finance markets are dynamic, but limited in their outreach, catering to upper-income groups. The impressively high growth rates of these markets give hope that housing and housing finance services have the potential to be expanded to middle- and even lower-income families. In some countries, such as India, this shift is already afoot. The challenge is that South Asia is home to about half of the world’s poor people, and these people require more complex housing solutions because existing market terms are not directly affordable for them.


      The contribution of the housing and real estate sector to overall economic growth, social uplift, and employment is considerable in the context of the rapidly expanding economies. Personal residences account for 75–90 percent of household wealth in emerging-market countries, which amounts to three to six times their annual income. Housing represents 15–40 percent of the monthly expenditure of households worldwide. Similarly, economic development investment in housing accounts for 15–35 percent of aggregate investment, whereas housing construction and housing-related sectors constitute approximately 9 percent of the labor force worldwide. In South Asia, 40–50 industries are considered to be directly linked with housing construction. A unit increase in expenditure in this sector has a multiplier effect and the capacity to generate income as great as five times the cost of the unit. If the economy grows at the rate of 10 percent, the housing sector has the capacity to grow at 14 percent and generate 3.2 million new jobs over a decade (World Bank 2008a). In India, for example, for every rupee invested in housing, Re 0.78 gets added to the national GDP. The National Housing Bank of India estimates that the construction sector provides direct employment to 16 percent of India’s workforce; and the housing sector alone is the second-largest employment generator after agriculture, accounting for 58 percent of the workforce in the construction sector. Although the Pakistani construction sector has only a 2.3 percent share in GDP, its share of the employed labor force is disproportionately large (7 percent). Construction in Pakistan has been growing at an average annual rate of 10.2 percent over the last five years (data from Pakistan’s House Building Finance Corporation).


      Housing finance plays a critical role in the development process by supporting strong housing markets, while strengthening the financial sector and contributing to overall economic growth. With strong housing and housing finance markets come many economic and social benefits, such as greater consumer savings, more social and labor mobility, and increased investment. In addition, strong housing markets support job creation in construction and manufacturing, and they improve living conditions and basic infrastructure. The availability of

    housing finance also has social implications. Where the rapid flow of population to cities puts pressure on the housing supply, and where either new construction is unable to keep up with escalating demand or the lack of financing makes housing unaffordable, slums proliferate. Conversely, when mortgage financing is available, the market for housing grows, and a larger share of the population can become homeowners.


      Housing and housing finance build assets and livelihoods, and thus contribute toward poverty reduction. However, a housing finance system could provide benefits to the economy beyond development of a housing market and contributions to employment and growth. For example, instituting a sound property registration system would enable entrepreneurs to use their property as collateral for business loans.


      With transparent lending for housing, where risks can be measured and mitigated, financial institutions would be able to put capital that they might otherwise have held against residential mortgages to other productive uses, such as business lending. In addition, housing finance represents an important asset class in the financial sector—an asset class that could help develop a long-term finance market for other industries, including infrastructure development. And private sector lending for housing would free scarce government resources for other social and economic needs. Mortgage finance contributes to financial sector growth and accounts for a sizable part of a liberalized financial sector. In the context of the global financial crisis, it became clear that housing finance is critical to economic stability; and the sector requires careful focus and prudent development. South Asian countries have low levels of mortgage debt outstanding (ranging from 0.1 percent to 7.0 percent), relative to all other regions globally (figure 1.1) (World Bank 2008a). The low penetration implies room for growth. A number of countries in the South Asia region are developing reform agendas that would strengthen their housing finance systems. As a result, additional data, more information on good practice in housing finance reforms, and country-specific examples are in high demand.