One-third of the world’s urban population could lack access to affordable housing by 2025 — a problem that also provides an opportunity for the finance sector, including mortgage lenders, according to a new McKinsey Global Institute (MGI) report.
MGI, the business and economics research arm of global management consulting firm McKinsey & Company, suggests that if current trends in urbanization and income growth continue, those in need of affordable housing could grow from 330 million households to 440 million by 2025.
At least 1.6 billion people, or one-third of the urban population, could be living in substandard housing or be so financially stretched by housing costs that they forego other essentials such as health care, the report states.
A new measure, the affordability gap, could quantify the challenge, MGI suggests. The affordability gap is defined as the difference between the cost of an acceptable housing unit (which varies by location) and what households can afford for housing using no more than 30% of their income.
The report finds that this gap stands at $650 billion a year and the problem will only grow as urban populations expand.
To replace today’s inadequate housing and build additional units needed by 2025 would require an investment of $9 trillion to $11 trillion for construction; with land, the total cost could be $16 trillion. Of this, $1 trillion to $3 trillion may have to come from public funding.
But the mortgage industry can help.
The most effective way to reduce origination costs is to reduce the risk of lending to lower-income buyers, MGI writes.
Mortgage-guarantee programs can reduce the risk to lenders and allow them to lend at lower rates by protecting them in case of default. These guarantees are well-established in advanced economies but are not in place in many developing economies.
Additionally, reducing the cost of funding mortgages can also help improve access to credit by low-income households to purchase affordable housing.
“To increase funding for housing broadly, and therefore also for affordable housing loans, governments can encourage banks to make more loans backed by core deposits and find ways to connect mortgage lenders to the secondary financial markets,” the report states.
This can be done by creating liquidity facilities — intermediaries that match the long-term instruments of mortgage borrowers with the short-term goals of investors. For example, Malaysia’s national mortgage corporation, Cagamas, helps fund mortgages by purchasing loans from banks and issuing debt securities to investors.
Covered mortgage bonds, which have been used in Europe, provide a means of securitizing mortgage debt that reduces risk for investors by giving them a claim on the underlying assets, while also offering recourse to the bond issuer.
“Securitization of mortgages — with proper safeguards — remains an important means of providing liquidity and capital for home lending and can help developing economies fund mortgages for lower-income households,” MGI writes.
Written by Emily Study