Framing concept: Understanding the housing asset

There are a number of framing concepts that drive CAHF’s work.  This blog sets out how we think about the housing asset, and why it is so important in the effort to address Africa’s housing goals.

Residential property is the largest and most differentiated asset within any city, and a significant part of a city’s economy, especially insofar as it relates to household wealth, livelihoods, and the prospect of inclusive growth.  As the property market grows and develops, housing can be an instrument of economic transformation, with property values growing faster than inflation and offering leapfrog opportunities to lower income households as they benefit from the appreciation of their housing asset.  This creates further opportunities to leverage property with finance, supporting the development of small businesses, so important in the context of low employment. At the same time, this activity contributes to a growing revenue base for the city, and improves its ability to invest in further growth and deliver appropriate services to the breadth of its population.

The question of market performance – the value that housing realises for both the household and the society as a whole – is important.  Housing is an asset.  For households, it is likely to be the most significant investment that they will make in their lifetimes.  In South Africa, with its national housing subsidy programme, it is also a significant investment for the State.  Beyond the subsidy programme, housing markets also offer cities substantial revenue opportunities that create the budget that enables them to deliver services.  Cities want to make sure that they get the best value out of their investment.

Much of the work that CAHF does centres around this notion of housing as an asset, and that housing markets perform, to the benefit (or detriment) of society at large.  To understand housing market performance, it is useful to think about the housing unit as an individual, private asset, and to think of a functioning housing sector as a “national asset” of sorts, that contributes to the overall economy.

The house as a private asset

As a private asset, the house brings value to the household, whether they own or rent, in three main ways.  First, there is a social value.  The house sits within a neighbourhood and is the place to which family and friends come to celebrate and share life experiences, and from which the household goes to find work or otherwise engage in society.  Where the house is, gives the household access to a wider array of networks and services – good schools, clinics, community centres; water, sanitation, electricity, refuse collection – and it is for this reason that “location” is an important factor in housing value, as it profoundly impacts on quality of life.  Critically, the house gives the household an address – an effective citizenship in the local neighbourhood and in the country, a place to be visited, from which to receive deliveries, to be found.  At the same time, the property itself is point of contact between the household and the municipality.  Whether owned or rented, the property is the destination for the delivery of municipal services to households, and the base from which households are charged for these services by the State.  Enhancing the social asset performance of housing is about improving the quality of the neighbourhood, creating spaces for families and friends to come together, and building the relationship between the resident household and the state.

The house also has a financial value: it is worth something and can be traded for money.  It can also be used to leverage a loan from a bank – the home owner can secure a mortgage loan by using the house as collateral. This can be used to buy the house in the first place, to invest further in the house over time, to start a business, to pay for education, or to make other significant investments. The house can also be passed on as an inheritance to children or other family members, and in this, operates as a form of savings that contributes towards inter-generational household wealth. When a homeowner sells their house, they realise equity, which can be used towards the purchase of the next house, and with this they can climb the property ladder.   Enhancing the financial asset performance of housing is about enabling incremental home improvements, improving property values, increasing access to affordable loan finance, and improving transaction support to ensure that households can access the financial value of their properties when they need to.

Lastly, the house can also function as an economic asset for the household.  In this, the house becomes the base from which a household might run a small business, offer accommodation for rent, or otherwise earn an income.  In the context of high unemployment, this creates an especially important opportunity for households to realise sustainable livelihoods. The establishment of home-based enterprises also diversifies land uses and creates more sustainable human settlements. A spaza shop operating from a home in a residential neighbourhood saves neighbours from taking the bus to buy milk, while creating an income stream for the shop owner.  The delivery of backyard rental accommodation supports labour market mobility by increasing the diversity of housing opportunties available. Enhancing the economic asset performance of housing is about supporting a diversity of land uses in residential areas through progressive zoning regulations, while also ensuring the provision of adequate infrastructure services.  It is about a policy, regulatory, and administrative framework that are specially targeted at the needs and the capacities of home based enterprises. And it is about the provision of financial services, business loans and other services which recognise the participation of the housing asset and the small scale nature of the entrepreneur – for example, see the work of TUHF Pty Ltd in South Africa.

The formality of the household’s rights over the property, and whether the housing unit itself is a formal structure, impacts substantially on the performance of housing as a private asset.  It is obvious that formally titled or leased properties that are well-placed within the urban context and constructed out of durable building materials that protect their inhabitants from the elements, offer stronger social, financial and economic potential than informal housing. Informal housing also has value, however.  A shack in a well-located settlement may offer the household better income earning opportunities than a formal structure that is outside an area of economic activity, or may provide better access to economic opportunity.  Similarly, an informal transaction may be worth more to the transacting parties, even if it realises less financial value, simply because it can be concluded more quickly.  Cities need to understand these dynamics if they are to improve housing asset performance for their residents, whether they live in formal or informal settlements.

The Housing Market as a “National Asset”

While housing and private property is in many ways the quintessential private good, the housing sector as a whole performs a vital role in an economy, and can therefore be thought of as a sort of “national asset”.  All supply chains associated with products and services create jobs and contribute to the economy, and housing is no exception. But beyond this, housing impacts on the economy in some unique ways. By understanding what makes housing different from other products and services we can explore the critical role for cities in shaping housing markets.   There are three dimensions to this.

First, the construction, maintenance and transacting of housing (which includes both sales and leases) contributes substantially to economic growth and job creation, which can have very tangible local benefits. In Rwanda, for example, CAHF has estimated that the housing construction sector alone contributes about 8.6% to the GDP at the national level.   The reason for this contribution has to do with the economic activity that housing stimulates – upstream demand for building materials and labour, and downstream demand for furniture, home improvements, and other housing services.  All of this economic activity also contributes towards employment.  Cities that promote housing construction can use this to stimulate job creation in their areas, further contributing to economic growth.

Second, housing constitutes a vital component of the financial system, and plays a critical role in financial intermediation, assisting the flow of money through the economy.  This is because housing is a leverage-able asset that can be used as collateral for other loans, thereby enabling private investment.  In many developed economies, housing underpins a sizeable proportion of the assets of the financial sector through the mortgage instrument.   This in turn underpins the efficacy of the money transmission mechanism in the household sector, enabling monetary authorities to manage economic growth cycles. In addition, housing consumption is in most cases, the largest share of household consumption, and often the most significant asset a household will ever have.  The house is then a fulcrum around which a household’s financial and investment decisions are made, both influencing and enabling further financial activity.  Across many African countries, the opportunity to bring lower income households into the mortgage market through well-targeted policies and products that recognise the particular needs and capacities of this market niche, is significant – and offers a very real potential for financial sector development in those economies.

Finally, the housing sector contributes to the sustainability of human settlements in several ways. The Habitat Agenda (Chapter 3b) defines a sustainable human settlement as one which (1) makes efficient use of resources within the carrying capacity of ecosystems and taking into account the precautionary principle approach; (2) provides all people with equal opportunities for a healthy, safe and productive life in harmony with nature and their cultural heritage and cultural and spiritual values; and (3) ensures economic and social development and environmental protection.  Good housing is a critical piece of the sustainable human settlements project – houses that are well built, adequately and sustainably serviced, and well-integrated in the local economy contribute to the sustainability of the neighbourhood and its ability to meet the social, economic, financial, and environmental needs of its residents.  The municipal taxation of properties is another aspect to the sustainability of human settlements, realised through functioning residential property markets: as properties increase in value, through the combined investment efforts of households, businesses and the municipal government, this value is taxed, creating a revenue stream for the municipality, enabling further investment, which further supports growth. A city’s ability to invest in long-term infrastructure, or to pursue other development goals, is fundamentally influenced by its ability to raise capital to finance the effort from its local tax base.

The interaction of homes and markets and government participation

In South Africa, while the mortgage market is well developed relative to the rest of the economy, it serves a minority of households. This is unsurprising given the high levels of inequality that characterise the country. However, there has been significant investment in housing by the State, and a significant transfer of wealth through the housing subsidy programme directly to poorer households. While several factors contribute to poorly performing housing markets, local government and urban management have a significant impact on the value of housing, its market performance, and therefore its contribution to the overall financial system.

In other countries, housing and mortgage markets are less well developed – however, where these exist, these also serve higher income earners.  With the majority of the population financing and delivering their housing by themselves, step by step, city and national governments are losing out on the potential for the housing sector to be a strong stimulate of economic growth and poverty alleviation.

A key point of focus for the city is to understand how the two asset triangles – housing as an individual asset and the housing sector as a “national asset”– interact, and the impact that the informal housing sector has on both.  Ultimately, the goal is to maximise housing market performance for the benefit of City residents, as well as for the city and the nation itself.  This requires careful attention to the extent to which households can maximise the social, economic and financial performance of their housing – and implementing measures that support them in this effort – while also enhancing the impact that the City’s work in human settlements has on its local economy, its labour market, and its overall sustainability as a city.