ISBN: 1931003629
105 pp. 2004
English
$15.98

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This book examines the links between housing and various other sectors of the economy from a public policy perspective, and provides a framework to assess the status of the housing market in the countries in Latin American and the Caribbean. It provides a holistic view of the reforms needed and the links with other sectors of the economy that have to be considered when a reform process is started.

Housing issues should be addressed from the point of view of development and finance, the latter regarded as a part of a more general financial market development strategy. However, housing is an important economic sector. It affects, among other things, social cohesion, the family and financial and economic variables such as the valuation of assets, property rights, wealth, and employment. As a result, housing reform policies must be comprehensive and carefully consider housing?s linkages with other sectors. Moreover, policymakers responsible should be committed to implementing their part of the reforms.

This book is part of an ongoing collaboration between the Inter-American Development Bank and the U.S. Department of Housing and Urban Development (HUD). Work was undertaken by a team that consisted of professionals from both organizations who prepared this policy guide for the countries of Latin American and the Caribbean.

The publication is mainly directed to policymakers and other experts in the region. It provides a tool to understand the complexities and implications of housing reform and the importance of a comprehensive approach. This book is also a tool to facilitate dialogue between policymakers and Bank experts in their efforts to identify priority areas for Bank action. As such, it can promote and expand access to housing finance, developing mortgage instruments and increasing the access to financial services by low-income sectors overcoming the limitations of demand subsidies or barrio upgrading. In doing so, this guide would help to identify interventions to resolve the acute housing shortage and land problems faced by all the countries in the region.

Contents

Foreword

Chapter 1

Introduction: The Significance of the Housing Sector

Chapter 2

How Housing Markets Function

Chapter 3

Analyzing and Assessing a Country's Housing Market

Chapter 4

Toward Reforming the Housing Sector in Latin America

Appendix A

Secondary Mortgage Markets and Mortgage-backed Securities

Appendix B

Methods of Mitigating Risk in Mortgage Finance

Bibliography

Chapter 1

Introduction: The Significance of the Housing Sector

Across the world, "housing" has a wide range of meanings in peoples' daily lives. At one end of the spectrum of living standards, housing is simply a place to lay one's head--basic shelter. At the other end, housing can be a valuable asset--and thus a basis for a person's ability to prosper in the market for financial transactions.

This book examines the housing sector and the financial market for housing in developing countries, particularly in Latin America and the Caribbean. The book also presents the reasons and techniques for analyzing and assessing housing markets, with the goal of reforming the housing sector and thus enabling it to function more effectively as a market. With such reforms, housing represents not only social welfare in terms of providing shelter, but also becomes a source of value for more citizens.

Because housing as shelter is one of the basic commodities that societies expect to be available to all citizens, the housing sector is particularly relevant to the economic well-being of countries. Yet the significance of housing policy for meeting welfare objectives also makes it a key aspect of social policy. And given the links between housing as a valued asset to the financial sector, it is also important for fiscal and financial policies. Moreover, an effective housing market presumes the existence of a sound national institutional, legal and regulatory framework that governs housing as property--including ownership rights and transfers--that constitutes the basis for valuation. The housing sector thus has a variety of economic, social and legal dimensions. Policymakers, primarily the executive and legislative branches and any other players with the capability to substantially influence policy, need to look at the overall picture in order to introduce welfare-enhancing policies.

Social Dimension: The Need for Shelter

Across the developing world, population growth and urbanization have a major impact on housing and significantly influence the design of housing policy. The explosion of the urban population has created a sizable demand for construction and housing finance that cannot be ignored if the basic housing needs of burgeoning cities are to be satisfied. In 2000, 50 percent or more of the population in almost all emerging market countries, including Latin America, lived in urban areas. However, the need for more and better housing is not restricted to urban areas. Poor people living in rural areas have similar concerns, though they are manifested in different forms. For both the expansion of urban areas and for the rural poor, governments must develop housing sector policy to deal with these concerns.

In meeting the needs of the urban poor for shelter, housing thus is a key social factor. Yet, at the same time, countries struggling to strengthen market economies are more and more concerned with how land is taken up by housing and other uses and how property rights are regulated and distributed. The basic view--largely shared around the world--is that private ownership best serves the growth of an economy. Therefore, though housing fundamentally meets the basic human need for shelter, it also can have an economic value for individual households and the country as a whole. Yet before housing can realize its full economic value, a fully enforced system of land and property laws must function as a foundation for effective private ownership. Even in a system where private ownership prevails, the legal framework can limit the use of property in instances where there is an overriding need for the justifiable public good of shelter. In those cases, government at various levels can issue rules such as zoning, building restrictions, and other regulations that limit the full disposition of land and property.

Legal Dimension: The Foundation for Housing Markets

From a legal perspective, housing generates other effects through its relationship with land as a commodity and source of wealth. Land and housing development require a system of values and rules, based on property rights, that permits the transfer and use by various economic agents--thus creating a housing market. Property law gives homeowners the right of occupancy, use and enjoyment, the right to sell in whole or in part, the right to control the use of the property, the right to bequeath it, the right to lease any or all of the rights, and the right to the benefits derived by occupancy and from use of the property. An effective legal framework for property use, transfer rights and valuation constitutes the basis for economic activity in the housing sector. And conversely, the absence of this framework is a barrier to the development of an effective housing sector. As stated in a policy paper by the Inter-American Development Bank (IDB, 1999, p. 5): "The regulatory environment of housing markets, including land use, utilities and building regulations, often represents barriers to entry to the market or imposes restrictions that prevent supply from efficiently meeting demand."

In relation to such market forces--which will be examined in Chapter Two--these barriers can actually lead to what is known as market failures. As stated by the World Bank (1993, pp. 113-14):

Housing markets, influenced as they are by economic and social factors as well as government policies, can go part of the way toward satisfying the normative goals of a well-functioning housing sector, but they do not always do so effectively. The poor may be barred from entry into the formal housing market, and they may be forced to squat illegally on vacant land, to construct housing that fails to meet basic safety and sanitary standards, or to crowd into tenements. Housing demand may languish because there are no effective institutions for protecting private property rights, no effective system for recording ownership, and no system for providing stable long-term sources of housing finance. Housing supply may be unresponsive to demand as a result of under-investment in trunk infrastructure or because monopolies control the availability of land, building materials, or residential construction. And expansion of the stock of housing may impinge on environmentally sensitive areas, use land wastefully, and create severe urban pollution and waste disposal problems. These market failures create a legitimate role, even an obligation, for governments to ensure that the housing sector functions well.

In these cases, the social aspect of the housing sector takes precedence. Yet, by and large, effective and accepted property rights still enable a large proportion of the population to participate in housing-related economic activity. Chapter Four will give examples of how policymakers are seeking to reconcile social goals with market efficiency.

Physical and Economic Dimension

The dimension of the housing sector most apparent on a day-to-day basis is its physical and underlying economic dominance. As reported in the IDB policy paper:

Residential activities are the largest consumers of urban land and major users of urban infrastructure and services. Housing policies have significant impact over the pace and direction of urban development. Their impact on the behavior of developers and households determines, for instance, whether cities undergo horizontal expansion or whether significant urban renewal activities take place in large cities (IDB, 1999, p. 5).

The housing sector must thus be seen and managed as a key part of the overall economy. Unfortunately, in the great majority of developing countries, this perception has yet to take hold. Governments too often perceive housing solely as a welfare issue, requiring the transfer of physical and financial resources to households unable to house themselves adequately. As a result, government housing agencies...ignore most of the population.

Policymakers in developing and [industrial] economies recognize the social and economic importance of housing investment. It accounts for between 25 and 35 percent of overall investments around the world, and is the primary investment in many households. Further, mortgage markets are a critical component of financial systems, as mortgages represent one of the largest classes of low-risk assets for domestic financial markets. Housing finance markets are closely integrated to domestic financial markets, and especially to domestic bond markets. Ensuring the availability of housing and the growth of housing finance markets is a policy priority in most countries, but the realities vary greatly. In many developing countries, housing finance systems are small, unstable and fragmented. Because of weak property titling and registration systems and other factors, an excessive proportion of these assets cannot be used as collateral for housing finance. Lack of access to housing finance in turn makes housing unaffordable for much of the population. At the same time--because of the serious difficulty in gaining access to housing finance and frequent housing supply distortions leading to high housing prices--participants in these markets perceive a greater need for subsidies, while lenders face higher exposures to risk.

Poverty is both cause and effect of poor housing conditions. Lack of effective demand resulting from the low income of households is the underlying cause that prevents the private provision of houses through formal channels for most of the population and presents a challenge for governments attempting to reduce the scale of national housing problems through public expenditure. Conversely, improving housing conditions can have a major influence on poverty alleviation through improvements in the living standards of low-income families, and on poverty reduction via increased employment opportunities. Furthermore, the problems of poor housing and poor environmental conditions are closely interrelated in many cities.