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November 5, 2014

The global affordable housing crisis

By Barbara Speed

Next in “no one can afford houses anymore” news: a report has revealed that city-dwellers in the world’s 2,400 largest cities are paying out $650bn more than they can afford, just to put a roof over their heads.

That’s a huge amount – 1 per cent of the global GDP, in fact – and it doesn’t mean city dwellers are slightly overpaying for lovely flats with a view. In fact, in A blueprint for addressing the global affordable housing challenge, the McKinsey Global Institute estimates that by 2025, a third of all urban households – around 1.6 billion people – will be living in “crowded, inadequate and unsafe housing” by 2025 due to a lack of affordable housing.

“Affordable housing” is, of course, a somewhat slippery concept: in London last month, plans for 98 “affordable” flats were unveiled on the site of the Mount Pleasant mail sorting office which would cost up to £2,800 a month to rent. McKinsey’s more sensible definition is any home whose costs would only hoover up 30 per cent of an average household income, and which met the local community’s expectations of a “basic socially acceptable standard housing unit”. (Suffice to say the Mount Pleasant flats wouldn’t qualify.)

For each of the 2,400 cities analysed, researchers then calculated the gap between what residents earning 80 per cent or less of the city’s median income would pay to live in affordable housing, and what they were actually earning. They then added up the results to find each city’s “affordability gap”.

This visualisation plots city population against the affordability gap as a percentage of GDP:

Lagos had the highest as a proportion of its GDP (15 per cent); Dhaka and Mumbai come in second and third.  

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These are the cities with the largest affordability gap by total value (also represented by the size of the circles in the diagram above):

As the report notes, access to safe, affordable housing is “imbedded in the United Nations Universal Declaration of Human Rights”.  Some 200m households worldwide already live in slums – and that number is rising.

So what’s the solution? As promised by its title, the report contains a “blueprint” for creating more affordable housing. Unfortunately, it estimates that to build the 440m affordable units needed by 2025, cities would need funds totalling between $9 trillion and $16 trillion, depending on land prices.

The researchers say that some of this sum could be raised through “market-based approaches” – which basically means convincing investors that finding housing solutions for the world’s middle-waged and poor is a profitable endeavour.

Freeing up land could also help: in London, 45 per cent of land with permission to be developed remains idle. A recent Centre for Cities report found that we’d only need to develop 12.5 per cent of the green belt (a ring of countryside around London, conserved to control urbanisation) to build 3.4m homes.

Finally, McKinsey suggests improving both building efficiency and the efficiency of homes once built. This could bring down the price of construction, but also of bills and maintenance – all of which are included in the monthly costs that dictate a property’s affordability. 

Even once you’ve done all that, though, closing the gap would still require hefty public funding (represented by the orange arrow on chart’s far right):

Let’s hope city officials have a spare couple of trillion to hand, then. 

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