Governments in developing countries have rightly promoted homeownership as a way of alleviating poverty. But, faced with rapid population growth and the prospect of millions ending up in slums, they must focus more on developing rental housing solutions. Regulating the existing rental market and guiding its expansion will be essential to attract the private investors required for the delivery of adequate and affordable housing stock.
To face the housing challenges of rapid population growth, most governments have in recent decades promoted homeownership. This form of tenure is seen as providing long-term housing security, relative autonomy for households and a solid basis for formal credit. When homeownership is effectively targeted at urban households, often through subsidies, it is credited with alleviating poverty and boosting political stability. Housing policies have promoted homeownership by improving finance systems, in particular by reducing barriers to mortgage finance, by adjusting taxation for owners and builders and by providing infrastructure for suburban homeownership to expand (Gilbert, A., 2008). In some developing countries – South Africa, Colombia, Chile, Costa Rica, Ecuador and more recently Brazil – homeownership for poor urban households has been promoted through subsidy programmes. In South Africa, fully subsidised or “free” owner-occupied homes are widespread, with more than 2.8 million created since the advent of democratic government in 1994. Although there is currently an equal number of households inadequately housed. In other countries, homeownership for the poorest has been promoted via title registration for informal settlements. Peruvian economist Hernando de Soto argues that using registered property as collateral for formal loans – for home improvement, education or family businesses – can lead to the accumulation of wealth (De Soto, H., 2000). His critics counter that there is little evidence of a formal market for such properties and therefore banks are unlikely to accept them as collateral (Fernandes, E., 2002; Bromley, R., 2004).
The limitations of homeowership
Homeownership policies are often promoted in low-density suburban settings and are criticised for failing to achieve the compact urban form sought by proponents of urban sustainability. New suburbs are located where land is available, mostly on the urban periphery, far from employment opportunities and amenities. This perpetuates dependence on cars and causes inconvenience and exclusion, especially where public transport is not provided or affordable. The titling of individual plots in informal settlements cements existing exclusion unless it goes hand in hand with state investment in infrastructure. For homeownership to succeed as a policy to increase the asset base of households, a formal property market that enables buying and selling and a move up the housing ladder must exist. Deeds registries, effective town planning and strictly implemented zoning and building regulations are required. For homeownership that is not fully subsidised, a well-developed banking system is needed to increase access to long-term mortgage finance. The World Bank has long recommended the expansion of homeownership for developing countries, but the requisite conditions are often lacking. Formal homeownership remains an elite privilege in most developing countries.
In middle-income states such as South Africa and Brazil, homeownership markets are larger than in low-income countries, and banking systems more developed. But they remain exclusionary, as illustrated in the following example. South Africa has faced insurmountable challenges in making two key institutions, deeds registry and banking, relevant to the lower-income sector. This has resulted in a skewed distribution of homeownership. In the population pyramid for income, the narrow top (upper-middle class) qualifies for mortgages, and the broad base at the bottom qualifies for fully subsidised homeownership. But this leaves much of the population stuck in the middle without access to either mortgages or fully subsidised housing. South Africa has tried to close the gap through targeted subsidies in the form of collateral support or mortgage underwriting, by promoting public transport and by unlocking rental housing acceptable to this income category. The reality is that 42% of households in South Africa do in fact rent. Much of this, however, is in inadequate, informal and unregulated rental stock.
Renting, a vital housing tenure option
While homeownership has been promoted in the developing world, few governments pay serious attention to developing or regulating rental housing. Experts argue that policies have long ignored the potential of private rental housing (Andreasen, J., 1996, Gilbert, A., 2008). UN-Habitat refers to rental housing as ‘the neglected sector’. Yet, in many parts of the world, much of the population rents (UN-Habitat, 2003). The proportion of households renting is over 80% for most Kenyan cities, and in Port Harcourt in Nigeria. In Johannesburg, despite policies promoting and subsidising homeownership, 42% of households rent (Huchzermeyer, M., 2010).
Rental housing provides flexibility and lets households move easily from one home to the next, which is especially important for households when they need cheaper housing because income becomes tight. It is more affordable than homeownership as the payment of rent generally does not depend on securing a loan or paying house maintenance costs. When rents are monthly, with a deposit paid in advance, the tenant does not need to secure a large amount. However, rental housing is not always affordable or responsive to the changing needs of households. In Ghana and Nigeria, rents are charged in advance on a yearly basis, requiring households to amass significant sums before moving in (Arku, G., Luginaah, I., Mkandawire, P., 2012). Rental housing takes a variety of forms: houses, flats, rooms or huts, on a separate plot or in shared property, in formal or informal settlements. Kenya has a large stock of public rental housing as well as private stock ranging from poorly constructed rooms in informal settlements, single rooms or apartments in multi-storey tenements, and better-equipped and spacious middle-class homes in gated developments. However, much of this stock falls outside of the regulatory framework. Many rental districts in Nairobi include sub-standard buildings of eight floors, without lifts, with 100% plot coverage, housing more than 5,000 people per hectare, possibly the highest residential densities in Africa.
Landlords tend to build as many units as possible on their land. In properly regulated systems, this results in compact building through effective design, providing convenience to tenants and satisfying landlords’ interests. But in poorly regulated markets, as in Nairobi, landlords often put their desire for profit well above the needs of their tenants. Tenants’ health and safety are compromised by over-densification coupled with a lack of basic services. Landlords often fail to maintain their buildings, with the result that much of what UN-Habitat refers to as ‘slums’ consists of deteriorated rental housing (UN-Habitat, 2003). Although they produce much of the housing stock, such landlords are not acknowledged as stakeholders in urban policy forums, nor are efforts made to regularise this form of investment (Huchzermeyer, M., 2011).
Promoting regulated private rental markets
The production of affordable rental housing requires policies that encourage landlords and developers to make long-term investments. These policies should create a banking system that provides loans to landlords and developers. They should also deliver a regulatory system that protects tenants but also allows for sufficient building densities that enable investors to make meaningful long-term returns. Nairobi lacks such a system. The result is that landlords in the tenement market often invest in a maximum number of units per plot and expect to make their return in as little as three years. If the stock deteriorates after ten years, the landlord has still made sufficient return and can afford to write off the investment, allowing it to deteriorate into a slum (Huchzermeyer, M., 2011).
Regulatory frameworks need to balance the interests of landlords with tenants’ rights. In South Africa, legislation exists to protect against arbitrary evictions. This is often violated by landlords, although in some cases litigation has led to tenant protection. One example that illustrates the problems caused by the lack of properly enforced regulation can be seen in South Africa, particularly in the high-rise centre of Johannesburg. So-called ‘hijackers’ have taken over buildings by force, extracting rent but not paying rates or taxes. In Nairobi, landlords sometimes resort to violent eviction measures, with relative impunity. Thus, in neither South Africa nor in Kenya can one speak of an adequately regulated rental market. For policy to regulate the existing private rental market and guide its expansion, land has to be made available in appropriate locations and with appropriate regulations. Incentives in terms of taxes or special development rights must be in place to ensure affordable units are built there. In land acquisitions, rental investors compete with those wishing to invest in units for sale. Increasingly, urban policies in developing countries try to shift away from the land-use separation that dominated urban planning in the post-World War II era. They now seek to mix incomes, tenure forms and land uses. Most cities in the developing world face the challenge of ageing infrastructure, in particular water supply, sewerage and electricity. Regulation of the rental market, with the extraction of fair taxes, is thus essential for the adequate servicing of new housing areas.
Another policy measure that would boost rental stock is to encourage a range of rental investors, from individuals to large-scale developers. South Africa subsidises social landlords – housing associations providing housing on a not-for-profit basis. Municipal housing stock also forms an important component of the not-for-profit sector. Not-for-profit actors in the rental market can play an important role of moderating private competition, in terms of rents charged and quality of units provided. Rental housing is a necessary component of any city’s housing stock. Where new incentives are developed and stock provided through government subsidies, provisions must be in place to ensure these reach the intended market. Down-raiding, the displacement of low-income households from adequate housing by the better off, must be anticipated and countered. This can only be done by balancing the housing supply and ensuring long-term conservation of subsidised low-income units for that target group.
In the rapidly urbanising developing world, there is clearly a role for both homeownership and rental housing. State subsidisation of homeownership and rental housing is relevant in contexts of extreme inequality. However, in both rental and homeownership, the private sector has a role to play and needs to be guided through policy. For homeownership, it is primarily affordable financing that should be promoted. For rental housing, policies must ensure appropriate investment in stock, the financing of this investment, and good management. This requires policies which guide financial institutions and investors into sustainable and inclusionary practices. Legislation and regulation are also required to curb excesses, such as exploitation and exclusion, which are the norm in unregulated markets. Changing entrenched practices and landlord entitlements is a major challenge for policy-makers. Landlords and investors must also be embraced as stakeholders in policy debates to ensure their commitment to delivering much needed affordable housing stock.
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