Housing matters to the livability of cities and to the productivity of their economies. The failure of cities to accommodate the housing needs of growing urban populations can be seen in the proliferation of poorly serviced, high-density informal settlements. While such settlements are not new in the history of rapidly growing cities, their persistence results as much from policies as from economics and demographic transition. Slums have attracted most of the attention on urban housing in developing countries, and the Millennium Development Goals have given prominence to their reduction. However, urban housing issues transcend conditions in slums and are linked closely to economic activity. City economies influence housing demand, and in turn the flexibility of housing supply affects economic activity and city growth.
Housing strategies to deal with rapid urban growth have varied over time and at different stages of urbanization. Renaud (2004) points to the dissimilarity of East Asian strategies at the early stages of their urbanization: underinvestment in housing in Japan and the Republic of Korea,1 large-scale public investment in Singapore and Hong Kong SAR, China, central planning in China, and a noninterventionist approach in Taiwan, China. The strategies in these countries have evolved with urbanization and economic development.
Starting in the early 1990s, housing policy advice was enshrined in the concept of “enabling markets to work.” A 1993 World Bank policy paper defined this concept, elaborating on the enabling approach that had been adopted in 1988 as part of the UN Global Strategy for Shelter to the Year 2000. At its most simplistic, the policy paper emphasized limiting the role of governments to a set of policy instruments and reforms that would allow housing markets to operate effectively. This was as much a reflection of the prevailing consensus on public and private sector roles as it was a reaction to the inefficiencies of public housing production in developing countries.
The concept of an enabling role for government has its roots in the dominant policy advice of the 1970s, which argued against government programs of direct housing production and slum removal. Instead, governments were urged to take on interventions to facilitate the informal process of self-help housing by reducing development standards and providing infrastructure and tenure for low-income groups. Unlike the earlier enabling approach to self-help housing, the market-oriented view framed the housing policy discussion in the context of the economic effects of good and bad housing outcomes, including for the poor. It drew attention to how policy and institutional arrangements affect housing outcomes by shifting the debate away from targeted low-income housing interventions and toward policy instruments that affect how housing markets function.
On the demand side, it emphasized policy action in property rights, housing finance, and subsidies. On the supply side, it emphasized serviced land supply, land and housing regulations, and the organization of the sector. These areas of emphasis represent the building blocks of a housing system. By shifting the debate toward policy instruments and away from targeted intervention, the market approach implied that interventions were not needed beyond getting the policies right. It was also largely silent on the direct problems of housing for the lowest income groups. While the approach may appear abstract and prescriptive in its reforms and views on the role of government, its focus on market processes has highlighted the importance of understanding housing market performance when designing reforms or specific interventions. The policy environment not only influences outcomes but also constrains the scaling up and sustainability of targeted interventions. The debate often appears to be over a singular focus on targeted interventions, on the one hand, and policy, regulatory, and institutional reform, on the other. Yet a mix of both is required.
The World Bank’s recent urban strategy suggests that the market approach was “far too sanguine” about the difficulties of creating well-functioning housing markets with private construction and financial sectors that respond to low-income housing demand. It instead argued for a more pragmatic view that includes interventions through measures such as land
readjustment, a return to sites and services, upgrading, and subsidies to the poorest.2 There is, however, no consensus on the sequencing and content of policies and targeted interventions. One view, recently put forward by the 2009 World Development Report on economic geography, suggests that land use regulatory reforms and targeted interventions should take place at advanced stages of urbanization.3 Addressing the causes and outcomes of poor housing sector performance at such a late stage is likely to be costly, given the durability of housing. As Martine and McGranahan (2010) warn about Brazil’s poor performance during its urban transition, “the unwillingness to prepare for massive growth has not only made Brazil’s urban transition unnecessarily traumatic but also left a legacy of social and environmental problems that prevent the country from benefiting from all the inherent advantages offered by urbanization.”
The housing sector’s performance continues to present challenges, even in middle-income countries that are well past their urban transformation. The debate on housing market performance has been limited by inconsistent data on and definitions of slums that indicate a billion slum households. While one may argue about definitions and quantities, the existing data clearly signal that urban housing markets are under pressure—not only in the least urbanized (but rapidly urbanizing) regions but also in the most urbanized developing country regions. This, however, does not imply that the main response should be to focus solely on “solving” the problem of slums without addressing the policies that influence housing system performance and give rise to slums.
This paper provides an overview of the policy and institutional building blocks that determine housing sector performance, drawing on studies from both developed and developing countries. It focuses on property rights, including tenure choice, housing finance, and subsidies. It also reviews the factors that affect supply: the availability of serviced land, as well as land and housing regulations. While these elements have been standard tools of housing policy, they are still the subject of considerable debate over their sequencing, policy content, and priority. There 4 has been a great deal of emphasis over the last two decades on demand-side measures to improve property rights systems, develop housing finance, and even to introduce new subsidy systems. All these developments are important, but as this paper argues, less progress has been made in understanding and addressing the factors that constrain supply, which often thwart improvements on the demand side.