Manuel Bueno

Misconceptions on Low Income Housing Markets and Strategic Implications for BoP Business Models

According to our publication “The Next 4 Billion” yearly expenditures on housing in the BoP market is about $331.8 billion, yet a sizeable portion of the world still live in a housing deficit situation in which they either lack housing or they have housing of very poor quality. For example, in Latin America, the housing market is estimated to comprise $57 billion. Nonetheless, the Inter-American Development bank estimates that around 20% of these households have to live in houses with dirt floors (Paraguay stands out in these statistics with more than 80% of the population being forced to live in such conditions).

This lack of proper housing has strong economic repercussions. Access to housing with good quality characteristics and attributes has two important consequences on the poor: immediate positive impact on health and well being, and improved medium term asset accumulation and income generation potential. According to a recent World Bank study (Cattaneo et al., 2007) housing quality is critical for people’s well-being, health and welfare. Replacing dirt floors significantly improves the health of young children by reducing parasitic infestations in young children (in around 78%) and reducing diarrhea in (-49%) and anemia (-81%). As a result of healthier environments, permanent flooring is associated with an increase in children’s cognitive standardized tests of between 36% and 96%. Moreover, families report fewer stress (-45%), depression (-52%) and increased satisfaction with their housing (+59%), Having proper flooring is also associated with higher housing values, asset accumulation and better future income generation possibilities, since housing is typically the main asset for lower income segments.

The problem is that the unmet need for housing is often equated with the need for new housing. However, the demand for new housing in the BoP is comparatively much smaller than the demand for home improvement, because moving to a new house not only requires incurring in a significant long term debt, a mortgage, but also often uproots many of the buyers who depend on their local social networks to sustain their incomes (especially considering that a sizeable portion of BoP markets are characterized by their informality and holding multiple simultaneous jobs). In fact, many BoP investments devoted to the creation of new housing projects for the BoP market (we have commented on a few of them here, for example: 1 and 2) are actually catering to a smaller market than they think.

Low-income households spend their incomes in housing different than middle and high-income population segments. These segments usually build their houses incrementally. This means that due to the income constraints mentioned above they build and improve the households in which they live a room at a time. Such improvements are typically informal and depend on the family’s accumulated resources. Moreover, as the housing quality of every family improves so does the neighborhood as well. The crucial material for incremental housing is cement which is required to improve floors, walls and roofs. This is the unmet need of most BoP customers in the housing sector and not brand new housing. However, serving profitable housing solutions to the BoP also poses important challenges. First, product price points need to be affordable, commensurate with lower income levels and payment options adapted to low income consumer cash constraints. Second, the product needs to be more accessible because the current distribution and logistical networks are often designed to serve middle and upper income consumers and do not reach low income consumers. As a result, BoP consumers have to incur in significant costs to gain access to these networks. It should be noted that most of the cement purchased by BoP customers is lost in the “last mile”, that is, after the customer has bought it and before it is used, due to misuse or bad storage.

In this case, adapting to the customer requires finding ways to finance purchases and, more importantly, educate customers so they are able to make the best use of the product they have purchased. This, in turn, will increase loyalty and encourage repeated purchases. One of the most successful (and popular) success stories in the housing market is Patrimonio Hoy. Although it currently offers a vast array of different products to its customers, its original success is credited to finding a microfinance approach to stimulate consumption while having very low default rates. A more interesting recent case are the “Mi Casa” distribution centers, based in Mexico. Apart from microfinancing options, these centers offer the products and technical support required to incrementally build housing. Engemix is an example of a more radical business model, since it delivers ready-made concrete to the customer’s door.

Finally, one of the most interesting recent housing models is the one developed by Doutores da Construção in Brazil. Doutores does not target the final customer, but the myriad informal construction workers that often support local incremental housing works through their small hardware stores. The firm offers free classes to these informal construction workers and teaches them management and building skills that improve the quality of their work. This support is a means of capturing their fidelity as future customers and developing the firm’s capillarity in the target market (for more details of the work they do, there is an interesting promotional video online).

Acumen Fund