NextBillion - An Initiative of the William Davidson Institute at the University of Michigan

The following post is the second installment of NextBillion’s monthly-long series on Housing for All in partnership with Ashoka. This special series coincides with two upcoming Ashoka publications on best strategies to achieve Housing for All, Ashoka’s initiatives using its Hybrid Value Chain framework to leverage changes in the affordable housing sector in Brazil, Colombia and India. The post launching the series may be found here.

Most of us know that many poor people lack the security and safety of a proper home.

What is difficult to comprehend is the magnitude of the challenge.

Some numbers may help. To close half of a very conservatively estimated housing deficit in the next ten years, our world would need to:

• Train for seven million masons;
• Create and operate housing finance institutions the size of 22 Grameen Banks;
• Grow the construction businesses to serve a $36 billion annual market!

How did we come up with these numbers?

With over 1 billion people currently living in inadequate housing, among them 835 million in urban areas,[1] we can conservatively extrapolate a need for close to 167 million housing solutions (both new homes and home improvements) for average families of five people who currently live in slums or equivalent informal urban zones.[2] If current population growth and migration, resulting in 7 million additional slum dwellers per year, continue at today’s rates, they would increase that figure in the next 10 years will to a (very conservative) need of 180 million urban housing solutions by 2020.

What would it take to address only half of this need, with 50 percent of the 180 million required homes remaining unfit because the residents cannot afford to improve them or buy a new home?

We based the following estimates on what already works, i.e. the best practices for new homes and home improvements seen during the course of our joint study with Ashoka on housing for the poorest. These assumptions are admittedly simplified and do not capture the nuances of the affordable housing market. These basic assumptions are, however, conservative in nature and serve a purpose. They illustrate the enormity of our collective challenge in addressing and capturing this market, before we even begin to address the nuances.

Assuming that twice the number of people buying a new home will have the opportunity to improve their existing home, this would translate in the following 10-year period in the following:

1. 45 million new homes (25 percent of the 180 million homes needed by 2020) will be built at a price of $6,000 per unit[3], each requiring the equivalent of one fulltime construction worker for one year (or a team of four for three months)

2. 90 million home improvement projects will be carried out at an average cost of $1,000 per project[4], each requiring the equivalent of one fulltime construction worker for three months. Assuming each home will have benefited from tw improvement projects, this would translate into 25 percent of homes being improved.

Taken together, these would entail cumulated construction expenditure of USD 360 billion. Assuming this construction is spread over ten years, it would create a USD 36 billion market for construction and financing services.

The human resources required are enormous. Building or improving these homes would require training close to 7 million masons over 10 years[5]. Assuming housing microfinance were available to meet these demands, extending finance would require the equivalent of roughly 280,000 loan officers[6], the equivalent of creating 22 Grameen Banks[7] disbursing USD 29 billion in new loans every year!

Despite the very conservative assumptions we have made, these numbers are awe inspiring. We can safely say that succeeding in addressing roughly half of the global urban housing deficit would require infinitely more than the scaling up of all existing programs. And additional models and resources would be needed in rural areas, not included in the estimates proposed here. This is thus about the building of an entire construction industry.[8]

To achieve this, all actors will need to collaborate, requiring:

? Construction material companies to find new supply processes that will help more poor dwellers to improve their homes;

? Real estate developers to find creative ways to lower the cost of their units and collaborate with finance organization who accept to work with the poor;

? Finance organizations to adapt their processes to provide loans to informal workers;

? Citizen sector organizations to help the private sector liaise with future BoP clients and to support them along the whole construction/acquisition process, as well as to help select and train BoP housing workers;

? Public authorities to implement property rights and create an appropriate legal framework, especially regarding financing solutions for housing;

? Universities and trade schools to reach into BoP for specialized training and skill certification that will support the huge human resource need for such an industry to emerge.

The magnitude and gravity of the challenge that faces the affordable housing community goes far beyond what we can loosely quantify, much beyond any single organization’s capabilities. Only increased collaboration and concerted efforts across multiple players, as described above, will allow us to make a dent to the global housing deficit.

[1] UN Habitat 2010 estimates that in 2010, 828m people lived in slums, and that this number was rising by 7 million per year, which means 835m people living in slums in 2011.

[2] As solutions seen in this report only address urban housing issues, the estimations below are only focusing on the size of the urban housing market.

[3] Includes labor and materials costs

[4] Includes labor and materials costs

[5] Assumes 4.5m new homes requiring 1 man.year and 9.0m home improvements requiring 0,25 man.year

[6] Assuming 30 new home loans (of 80 percent of USD 6,000) per loan officer or 70 home improvement loans (of 80 percent of USD 1,000) per loan officer, corresponding to USD 100,000 average loan disbursement per loan officer

[7] Grameen Bank has approximately 13,000 loan officers among its 23,000 staff

[8] The challenge of producing the corresponding building materials appears less formidable: assuming 10 percent of the affordable housing market is spent on cement, this would represent a USD 3.6 bn (or 72 m tons) market opportunity for cement manufacturers, less than half what Lafarge produces alone and approximately 2.5-3 percent of the world demand.