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Lack of access to decent affordable housing is a global issue in both rich and poor nations that affects the well-being of people and economies. Low-income families without sufficient housing often have higher unemployment and academic truancy levels. High housing costs also impact middle class families.
According to the McKinsey Global Institute (MGI) and an article featured in the Harvard Business Review:
If current urbanization and income growth persists, the number of urban households living in substandard housing could grow to 440 million. This would affect 1/3 of all urban dwellers, about 1.6 billion people.The affordable housing gap is around $650 billion per year. There could be 106 million more low-income urban households by 2025.To replace or refurbish the world’s current substandard housing and accommodate these low-income urban households can cost up to $11 trillion. After factoring in land costs, this estimate is closer to $16 trillion.The Good NewsMcKinsey senior consultants state that fortunately, the world’s housing crisis does not need a revolutionary solution. While some subsidies and other government measures are needed particularly in the world’s poorest nations, they predict that 80% of the funding needed to close the affordable housing gap should come from private investment. This provides a $200 billion per year opportunity for the global construction industry.
McKinsey proposes “four levers” of approach to reduce the housing-affordability gap by 20 to 50%. The following could make housing affordable for households earning 50 to 80% of median income.
1. Unlocking Land SupplyThis is the most critical step in reducing the affordability gap because land prices often range between 40 to 80% of property costs. Even in the biggest global cities, there is a lot of unoccupied or underused land.
Solutions to unlocking land include incentivizing private development through density bonuses, releasing unused public land, inclusionary planning, and developing housing around rapid-transit routes.
2. Reducing Construction CostsIn many places, residential housing is constructed the same way it was half a century ago. Developers can make use of value engineering, lean construction, procurement excellence, in-situ manufacturing-like practices, and by moving critical construction processes off-site. These methods can reduce project costs by about 30 percent, and completion schedule lengths can be reduced by about 40 percent.
3. Improved Operations and MaintenanceThis portion comprises about 20 to 30% of housing cost. Improving energy efficiency, reducing maintenance costs, and improving asset management will cut overall costs in this area by 10 to 15%. In the US and UK, government subsidized energy-saving retrofit programs (i.e. insulation, windows, efficient heating and cooling) have cut energy costs by 20 to 30%. Setting standards and supporting homeowner groups can also improve the quality of operations and maintenance activities. The infographic below explains how green affordable housing benefits low-income families.
Maintenance costs can be reduced through seeking economies of scale in a highly fragmented industry through pooling demand for such services. This practice helped the UK social housing buying consortia achieve 25% savings across these services. Scale improvements are incentivized by listing certified maintenance and repair services to give purchases a way to select better vendors. This also simultaneously encourages vendors to improve services to draw customers.
4. Lowering Finance Costs for Buyers and Developers.Three ways to improve financial access for low-income households:
In addition, de-risking, guaranteeing, or subsidizing developer financing can also lower the cost of affordable housing.
To read the full report from MGI, access it here.
Impact of Existing Investment Management Companies
To access an interactive map of America’s rental housing crisis, click here.