How to develop a housing market from scratch

Applying lessons learned in Haiti to unlock housing markets in Africa

There are remarkable similarities between Haiti and many sub- Saharan African markets. Haiti has a very high housing deficit estimated at 1 million units in a country of only 10 million people. At the same time, Haiti struggles with an insignificant affordable housing market: mortgage penetration rates are less than 1.8% of its GDP and the average formal home in Port au Prince is priced at US$ 550,000, out of reach for the majority of the urban population. Haiti, like Liberia, Burkina Faso and many other countries struggles with weak land tenure, high levels of poverty, and income informality, making housing finance inaccessible to the majority of the population. Banks are risk averse and the few developers that do exist focus on the luxury and commercial real estate market. Informal settlements continue to grow in an unplanned and precarious fashion. Given all these limitations, how can funders develop the country’s affordable housing sector in a sustainable and efficient way?

In 2015, USAID developed and funded the Haiti HOME program to specifically address these issues and strengthen the country’s housing value chain. The Haiti Home Ownership and Mortgage Expansion (HOME) Program is funded by the United States Agency for International Development (USAID) and implemented by the World Council of Credit Unions (WOCCU) in partnership with Habitat for Humanity and the Affordable Housing Institute.

We observed that the housing market was immobilized by an inability to assess risk and underwrite the country’s large informal population. HOME decided to prime the pump by enabling and incentivizing local actors to take on more risk.

• Financial incentives push developers and financial institutions to go down-market and take on more risk.
• Technical assistance enables them to learn how to undertake these activities sustainably.

After two years of efforts, one of the most difficult housing markets in the world has finally started to generate momentum!

So how did we get it to work?  The program worked by addressing the perception of risk and supporting local market actors on both the supply side and the demand side.

On the supply side, instead of trying to create our own housing projects, we asked Haitian companies to bring us theirs.  Then we developed pay-for-performance incentives that push the developers outside of their comfort zone and into the affordable housing market.  These incentives are calibrated to cover just the amount needed to make up the ‘profitability deficit’.  When developers know they can make more money by building smaller and more affordable units, that’s what they do. The incentives lure developers away from luxury real estate and get them to focus on the affordable housing sector. Then, to get the homes to the right people, the houses must be bought through mortgages taken out by income-qualifying households.  This type of initiative could be useful in Rwanda where the government is trying to shift developers away from expat housing and towards much needed housing for civil servants.

To help Haiti’s notoriously bad environment, we’re teaching developers about the benefits, both environmental and economic, of going green – and we are getting the projects EDGE certified. HOME’s incentives encourage developers to adopt green building practices when they were previously reluctant to do so. So far two projects have received EDGE certification and another one is under review. The benefits of green building are also being promoted across Africa, specifically in Rwanda where the government is keen to develop sustainable cities.

The pump has been primed and three housing projects are currently in construction with a total private capital commitment of over US$ 10 million.  The houses range from US$ 19,000 to US$140,000- well below the Port au Prince average for formal housing. The market now has a few nascent developers who understand the business case for affordable housing and are eager to expand their operations. In fact, two of Haiti HOME’s partner developers have committed and additional US$ 10.5 million as they will continue to invest in the sector.

Villa Flora housing project in Port au Prince, developed by Chabuma and supported by Haiti HOME.

On the demand side, HOME is working with microfinance institutions, credit unions, and banks in order to increase access to housing finance.  Credit unions have been especially enthusiastic and effective: HOME’s original partnership with KOTELAM, one of the country’s largest credit unions, targeted a 75% boost in KOTELAM’s housing loan portfolio, and today the portfolio is up 191% in only nine months, while reducing its a portfolio at risk at thirty days (PAR30) to 1.91%.

KOTELAM did not stop there: motivated by this new business opportunity, its Board of Directors announced the strategic decision to launch a long-term mortgage product and will offer a new solution for low income clients, typically ignored by commercial banks. HOME is supporting the organization in accessing long-term finance that will make its mortgage products both viable and affordable.

Like in Haiti, credit unions in sub-Saharan Africa play an important role in broadening access to finance. In the WAEMU region over 70% of the working population is in the informal economy and most are excluded from receiving financing from the formal banking sector.  Working with credit unions (SACCOs in East Africa) to help them develop housing products is crucial to strengthening housing demand. A mix of technical assistance and financial incentives should be used to develop new products for households excluded from the formal banking sector.  Furthermore, banks should be trained and incentivized to underwrite informality.

Today, Haiti HOME is working with 3 financial institutions and mobilized over US$ 7 million of private capital with only US$ 240,000 in incentives, a leverage effect of 30 to 1.  Over 750 new housing loans have been issued under the HOME program.

So how did we manage to jumpstart one of the world’s most difficult housing market?

• We worked with local actors who are familiar with local constraints.
• We incentivized them to take risks and explore the opportunities that exist down-market while giving them the knowledge and tools to do so safely and efficiently.
• We impacted both supply side and demand side simultaneously. Both value chains have been strengthened and are continuing to strengthen.
• We innovated, experimented, and had permission to provide modest amounts of capital in flexible terms.
• We generated momentum in the housing market and strengthened local actors who will continue to develop after the HOME program ends.

Haiti’s problems are unfortunately not unique. We believe that if these methods work in Haiti, they may also work in other underdeveloped housing markets where high levels of informality create an inaccurate perception of risk. Flexible capital at the point of risk can prime the pump and deliver sustainable change that will continue to yield results long after our program ends.

For more information on Haiti HOME:

https://www.woccu.org/programs/current_programs/haiti/haiti_home