The more we pursue our mission of ending global homelessness, the more problems we discover along the way. We define problems as anything standing in the way of families having access to safe, adequate housing. These problems are our opportunities.
They are often interrelated, but if there’s one persistent obstacle that impacts all aspects of the community building process, it’s this: financing the solutions.
For the past quarter, our team has had ongoing conversations with industry experts to learn more about the sector’s financial access issues. This article addresses the current problems of financing affordable housing solutions by explaining the relationship between five main parties making up the market.
Low-income families do not have access to affordable housing solutions.
New Story has always built communities for the most vulnerable families — those at the base of the wealth pyramid. But regardless of who you build for, there must be accessible financing. Since most of these families lack a formal income and live on informal land, parties need to innovate affordable ways to bridge the housing gap.
Simply put, the affordable housing market must function properly for the families at the base of the pyramid to address the housing crisis.
From our experience, we have found there to be five main parties working to end global homelessness. Each of these teams plays a pivotal role in affordable housing, and they also experience unique financial obstacles. But to end global homelessness, all five of these parties must collaborate throughout the entire building process, beginning with financing.
After working with and learning from these five main parties, here are our key findings around financial obstacles in affordable housing.
Problem: Families are unable to secure low-cost financing for housing.
In Mexico alone, 45% of the workforce is part of the informal economy. These families lack a formal income, with many of them also living on informal land. With no proof of a consistent income and no collateral, financial institutions refuse to grant long term loans with reasonable interest rates.
The probability of getting a mortgage loan increases when households are granted a subsidy, own land, have a high income, work in the formal sector, and have programmed savings accounts. These factors leave families in the informal economy with little access to financing for a home.
Many families then resort to self-building — currently, 64% of families in Mexico self-build. With a lack of access to financing, it is the most accessible solution, but it is also slow, costly, and unsafe without the proper techniques.
Families slowly buy construction materials as they can afford them. Since they are paying for one supply at a time rather than buying in bulk, they are not efficiently paying for the very house they’re building. These families are also taking out small loans, one after another, with interest rates between 100%-150% through micro-finance institutions.
Because of this expensive and ineffective process, experts estimate incremental building takes anywhere from 7-25 years, and the process repeats when natural disasters destroy poorly constructed homes.
As families incrementally build, their supplies quickly become their form of “savings.” Rather than saving small amounts in their local banks, families choose to keep their money on them. A cultural trend of unbanking and predatory lending has weakened trust between many families and financial institutions.
Problem: Local financial institutions experience too many barriers and lack incentives to serve low-income families.
Financial institutions are profit-driven. They are in the business of making the quickest dollar, which usually happens through short term loans. Short term loans work well for them because there is an incentive for families to pay it back quickly and receive another loan. Many families resort to these loans because it is the only option, reinforcing institutions that there is no need to offer long term loans.
A minority of local financial institutions have housing microfinance loan products, but they are designated for incremental self-building, meaning smaller amounts of money with quick payback rates. Also, financial institutions perceive long term loans to these families as a risk because it allows for more possibility of something disrupting the families’ cash flow.
Financial institutions’ lack of risk appetite creates a cycle that works for families higher up the wealth pyramid, but it leaves low-income families out of the economic equation. Short-term loans with incredibly high-interest rates make it nearly impossible for families to secure a loan they can afford.
Problem: Developers also experience too many barriers and too few incentives to build for the most vulnerable families.
Housing developers’ lack of financing restricts them from building more affordable units. These developers cannot secure cheap enough funding that allows them to go lower on the wealth pyramid.
For instance, if a developer can only receive a 12-15% interest rate in addition to the 18-25% operations fees, it forces them to build for families with higher incomes to receive a high enough repayment rate to pay off the loan. The higher the interest rate received, the higher the family income has to be to pay back for the housing.
A lower interest rate would allow developers to build for lower-income families, but this also exposes an opportunity cost the market can’t ignore. Why would a developer choose to serve the base of the pyramid if their profit margin can be much higher to build luxury units, where there is also a higher demand?
Financial institutions won’t lend a lower interest rate to developers because of their perception of it being a risky investment. When it comes to developers and financial institutions making a profit, there are not enough incentives to work with the most vulnerable families. As a former Senior International Development Bank leader told us, it’s perceived as “not a smart business to be in.”
Currently, there are not enough affordable housing developers to tackle the issue at scale. Our source went on to say, “There are only two to three housing developers in Nigeria that could manage a 10M investment. And in Nigeria, there’s no developer that’s producing more than 500 home units.”
So far, there is a lack of proven successful models of developers securing cheap enough financing to serve the base of the pyramid. The examples we do have are only small projects that don’t allow for rapid expansion.
We need to work on innovating collaborative solutions that prove a scalable, successful business model is possible. But the model is not possible without government cooperation.
Problem: While governments have a critical role in the affordable housing market (policy, subsidies, regulation, funding), they rarely provide housing solutions at scale for the base of the pyramid.
Governments rarely have funds fully available and designated for affordable housing. Subsidies have proven helpful, but they also leave small, unequipped teams to cover the rest of the costs.
The typical structure of government parties can also be harmful in affordable housing markets. Many teams are motivated by quick wins. It costs less time, energy, and funds to further help families higher up the pyramid. These initiatives create easy metrics they can then leverage in campaigns to further their career. Since many of the informal communities lack voting power, government initiatives tend to ignore their needs.
With leadership changing every 3-6 years and misaligned municipal, state, and federal political timelines, agendas and budgets shift as well. The continual rotating of personnel slows work and forces other teams to change their strategies repeatedly.
Since these are usually entire teams coming in and out of a system every few years, it also encourages them to work in silos. Lack of focused partnerships leads to inefficiencies, poor quality construction, and lack of accountability.
Problem: Housing is too expensive and complicated for most NGOs to address at scale.
Again, homelessness is an expensive problem to solve. Beyond building the homes, acquiring land and gaining direct access to water, electricity, and sewage is costly and difficult to coordinate without government support.
Since NGOs are not trying to maximize profits, solutions are usually not scalable or sustainable. These solutions tend to be more human-centered, which we believe is great and necessary, but they also come with a higher cost of time and funds.
Many teams are also not structured at a level to address the ongoing, evolving problem. Since they’re operating with little to no margin, they often resort to sticking with traditional methods rather than innovate new solutions. We need more teams building differently.
New Story has always set out to pioneer solutions to end global homelessness. These solutions must touch every aspect of the building process, including financing. We’ve spent the past quarter with experts learning about financial access issues, and we’re working towards creating replicable solutions, but there is still much to learn.
We recognize that this is a complex, global issue. No single solution will solve the entire sector’s finance access issue. But we believe there is a massive opportunity to build and share a sustainable financial model that allows the lowest income families to have greater access to funds.
We cannot solve global homelessness on our own, not even the financial access issues within the crisis. Our goal is to create solutions so attractive that it catalyzes other institutions to create similar solutions and governments to create policies to help guide a viable market that provides affordable housing and financing options for families at the base of the pyramid.
Interested in sharing your ideas for creating greater financial access within affordable housing? Please reach out to [email protected]