What Role Does Housing Play in African Economies?

Two of the longest-standing unanswered questions in housing are: “What does housing contribute to the economies of African countries?” and “How much does it cost to build an affordable house in Africa?”

CAHF has recently completed two studies that give us clearer answers to these two questions, and many others as well. Both studies are ground-breaking in their approaches, venturing into territories where real information is scarce, and data to build that information severely lacking. While we don’t claim to have definitively answered these questions, we have come a long way to develop replicable approaches that give us more certainty than ever before. And this, we hope, will be the foundation on which better and more accurate information will grow across the African continent. Both studies will continue over the next year, with CAHF deepening our knowledge of these methodologies, and extending the methodologies to other African countries.

As part of our larger project on Housing in the Economy, three blogs or articles consider the role of residential construction and residential rental in Africa’s developing economies, as well as on comparing the costs of producing affordable residential accommodation in fifteen African countries. In addition, we will share with you how these two studies – one viewing housing from a macro-economic viewpoint, and the other from a micro-economic viewpoint, start to combine to build a better picture of the role of housing in developing economies.

Housing in the Economy

CAHF’s first study, “The Role of Housing in the Economies of Developing Countries”, unpacks the housing economic value chain in a way that those unfamiliar with economic analysis can understand, and calculates the economic contribution of the housing value chain in South Africa. The blogs are based on work undertaken by Eloshiba Consortium, and an analysis of the economic value chain undertaken by David Gardner and Keith Lockwood. In the future, the method used to build this will be applied to quantify the housing economic value chains of other African countries, for which less readily available economic data exists. Importantly, this study takes an economic view of housing, rather than a developmental viewpoint.

This study shows how economies build housing, and how housing builds economies. Housing practitioners are familiar with the “housing economic value chain”, through which housing is created, occupied and traded. Land is identified, planned, subdivided and serviced, and then accommodation is built, either as a complete unit, or incrementally. The land and houses are then traded and occupied (whether formally or informally owned and rented), and improved over time. However, the more detailed mechanics of the “housing economic value chain” are less clearly understood. Make no mistake, there is a huge body of literature that calculates and quantifies the role of housing in developed economies. The difficulty is that in most developing economies, what we understand housing to be, how it is developed, and therefore the role it plays in economic growth is quite different to the structure in developed economies. Also, it is often difficult for housing specialists and economists to “talk housing” without losing each other. And finally, in many developing countries, sufficient data does not exist to make a reasoned estimation of the impact of housing on the economy.

The Housing in the Economy blog series unpacks the workings of the housing economic value chain. We will look at the two key housing value chains that influence the economy: the residential construction value chain, and the residential rental value chain. These value chains will be broken down into their most important parts.

Firstly, we will consider the direct economic impact of housing. That is, what – and how much – initial economic impact is created (value creation, or gross value added) during the construction and rental of houses. We will also trace the first-round economic effects that are generated directly from the ingredients required to construct or rent accommodation (that is, intermediate inputs such as raw materials, manufactured goods and services). In this way, we will show what areas of the economy are stimulated by house construction and rental activity.

Secondly, we will show the indirect impacts of this direct economic stimulus from the construction and rental of housing. These induced economic impacts arise from how wages, interest, profits and rents are used in the economy once they are created through house construction and rental.

Thirdly, we will discuss how the newly-created housing stock is added to the total existing housing stock of the country and matched to the housing demand profile in that economy.

By building this value chain for South Africa, we will show the economic contribution, and impact of housing on that economy. Through a better understanding the housing value chain, we will then be able to answer other questions. How influential is housing as an economic sector in a developing economy, and is this the same as in developed economies? Is housing the engine that fuels sustainable economic growth and an indicator of economic cycles? To what extent does housing construction and rental generate and sustain employment? How do we start to quantify the different roles played by house construction and house rental, and understand the contribution of both the formal and informal housing sectors? From this, we can start to predict the economic impact of increased investment in housing, or even from the improvement of economic or housing policies that free up activity across the housing economic value chains.

Benchmarking Housing CostsaAcross Africa

CAHF’s second study, “Benchmarking Housing Costs in Fifteen Countries in Africa” develops and implements a consistent methodology for specifying, detailing and costing a standardised house on a uniform basis in two cities in fifteen African countries. This study was conceptualised by CAHF, managed by David Gardner and implemented by our partners, the Affordable Housing Institute (AHI) with the support of local quantity surveyors in each country. The study developed a methodology and piloted this in fifteen countries: Cameroon, Democratic Republic of Congo, Ghana, Kenya, Liberia, Malawi, Morocco, Mozambique, Nigeria, Rwanda, Senegal, South Africa, Tanzania, Uganda and Zambia. The information is available in the form of a dashboard on CAHF’s website.

Housing literature and conference papers often mention “conventional housing”, “affordable housing”, “basic housing” and “building cost”, but these loose terms are seldom clearly defined. Consider a conversation about the relative costs of building an affordable house in, say, South Africa, Zambia and Nigeria. This discussion becomes almost meaningless when different cultural housing norms, policies, acceptable standards (to households, governments and banks) and modes of land provision, servicing, financing and construction are not also taken into account. The South African may have a basic, state-subsidised, mass-developed 42 square metre basic unit in mind, the Zambian, a self-built core structure on leasehold stand, and the Nigerian a private developer-built, diaspora-funded double storey ‘dream’ house! Add to this the high cost of raw land in, say, Nairobi versus very cost-effective land made available in Kigali, or municipally-provided services in South Africa versus the full on-site services required in other African cities, and one would be better served asking the rhetorical question, “How long is a piece of string?”.

The pilot housing cost benchmarking study grapples with the complexities of what a ’standard house’ is across divergent cultures, how to break this down into its component parts, and how to ensure that costing is consistent and comparable across English, French and Portuguese speaking countries and different quantity surveying and costing conventions. We designed a basic, generic House – not very big and not very small – hopefully just right to be viewed as acceptable across Africa. This 46 square metre house with a 9 square metre balcony, built on a 120 square metre stand, was broken down into a detailed bill of quantities (BoQ), covering nearly 400 cost items: land, services, construction materials, labour, profit and financing costs. This standard BoQ was sent to qualified quantity surveyors identified in each country, and was costed based on prevailing in-country costs for a notional 20-unit development in the capital city and a secondary city. This costing information has been collated, checked, consolidated and analysed.

CAHF now has an extensive database of the elemental costs of a standardised house in thirty cities across fifteen countries. We can compare the total cost of building to completion this standard house across countries and cities. We can break this cost down into broad categories (land, infrastructure, construction, other costs), sub-categories (foundations, walls, roof, finishes), or into component costs (labour vs materials, cost of cement, or timber, or steel). Finally, we have categorised the input costs according to their standard industry classifications (SIC), so that we know what economic sectors are stimulated, and to what extent, by the construction of this house. Most importantly, we can compare these things – categories, components, inputs, products, sectors – across cities and countries and economic sectors.

The Housing in the Economy blog series reports on this study, and explores the vast amounts of data we have collected, and highlight what it is telling us. We now know that the dollarised cost of building this CAHF House varies by over 100 percent between countries, and even between cities in the same country. Finally, we can demonstrate the differences that land, services, construction and other costs have on overall house costs, on a like-for-like basis. We can show that certain countries have much more expensive labour markets, and that intermediate input costs (such as steel, timber and cement) differ significantly across the continent. Join us on the journey of exploring these differences over the coming months. There is much to explore.

Simply knowing these things is useful, but not yet informative. We will explore why some of these differences exist. We dig into the impacts of land policy, planning and permitting, tax regimes, economic maturity and structure, industrial policy, municipal systems and financial markets on housing costs.

There is a lot to explore. We invite you to comment with your own experiences and ideas.

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