COMMENT: Yes to affordable housing

The two key challenges that must be tackled to enable easy home building in urban areas

COMMENT | JAN MISCHKE | From London to Lagos, “affordable housing” has become an oxymoron. In most cities, rents and home prices have increased faster than incomes, and in urban areas with robust job markets, housing stocks have failed to keep pace with demand. Some 330 million urban households either live in substandard housing, or pay more for their housing than they can afford. If current trends are not reversed, that number could grow to 440 million by 2025.

Without affordable housing, people suffer and economies stagnate. California’s housing shortage illustrates the problem. From 2009 to 2014, the state grew by 544,000 households but added only 467,000 homes. Today, amid a total housing shortfall of two million units, half of the state’s residents cannot afford to buy homes in their local market.

City governments are aware of the problem, and many are attempting to intervene. Unfortunately, many policies focus on demand and financing, rather than supply. Subsidies, low-interest loans, and rent control may bring relief to households struggling with affordability, but these measures will not solve the housing shortage. The only way to do that is to address two key challenges that have conspired to halt home building in many urban areas.

The first challenge is location; finding affordable land is one of the biggest constraints on housing development virtually everywhere. In cities like Rio de Janeiro, land costs can account for more than 40% of a home’s price; in extremely expensive markets, like San Francisco, it can be double that.

Mapping software and inventory reviews can help planning officials find cheaper solutions. In some cases, land can be provided more cost-effectively through smart zoning. Seoul, for example, allows residential buildings near transit stops to have a larger “floor area ratio,” a regulatory mechanism that encourages density. Similar approaches could be used elsewhere.

City planners should also promote better use of existing density rules. A 2016 analysis of Los Angeles’s housing stock by the McKinsey Global Institute found that 28% of parcels zoned for multifamily development were underutilised. Maximising this development potential could add more than 300,000 units to the city’s housing inventory.

Additionally, authorities can do more to encourage the use of vacant plots. Around the world, a surprising amount of urban land, including city-owned property, is undeveloped, and taxing idle or underused land could stimulate construction. Cities might also consider changing residential zoning laws to encourage owners of single-family homes to add accessory units, such as garage apartments and backyard cottages.

Once a city has identified suitable areas for construction, the second challenge is containing the political fallout that often accompanies new development. Proposals to increase housing density are frequently met by opposition from current residents, whose fears range from adverse impact on services to downward pressure on existing home values (or upward pressure and gentrification).

To address these concerns, many cities hold public hearings or put projects to a vote. Often, however, the voices of those who want to preserve the status quo are louder than those who fear being priced out. As a result, very little affordable housing is built.

The urban planning process needs to take into account the concerns of all stakeholders – including newcomers, young adults, low-income service workers, renters, and homeowners. Digital surveys and analytical tools can make the process more inclusive by reducing the influence of narrow but entrenched interest groups. And, because housing availability affects companies’ ability to attract talent, employers near proposed housing sites must also be engaged.

While critics’ concerns should be taken seriously, governments must insulate their approval processes from manipulation. In some cities, repeated lawsuits and requests for further study delay projects for years and add millions of dollars to development costs. One way to address this issue would be to adhere to “use by right” regulations, whereby projects that follow city zoning and land-use codes receive minimal review.

Moreover, implementation of blanket environmental reviews could ease approvals for future developers. Governments could also create appeals boards with the power to accelerate rulings on rejected projects.

City governments can win support for new housing by convincing constituents that population growth fuels economic growth. The alternative – allowing serious housing shortages to go unaddressed – will make it impossible for future generations to put down roots. By managing density carefully, authorities can overcome opposition and get their cities building again.

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Jan Mischke is a partner at the McKinsey Global Institute.

Copyright: Project Syndicate, 2018.