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McKinsey - Affordable Housing Challenge PDF

214 Pages·2014·3.89 MB·English
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M c K in s e y G lo b a l I n s t it u t e McKinsey Global Institute A b lu e p r in t fo r a d d r e s s in g t h e g lo b a October 2014 l a f fo r d a b le A blueprint for addressing h o u s in g c the global affordable h a lle n g e housing challenge The McKinsey Global Institute The McKinsey Global Institute (MGI), the business and economics research arm of McKinsey & Company, was established in 1990 to develop a deeper understanding of the evolving global economy. Our goal is to provide leaders in the commercial, public, and social sectors with the facts and insights on which to base management and policy decisions. MGI research combines the disciplines of economics and management, employing the analytical tools of economics with the insights of business leaders. Our “micro-to-macro” methodology examines microeconomic industry trends to better understand the broad macroeconomic forces affecting business strategy and public policy. Current research focuses on six themes: productivity and growth, natural resources, labor markets, the evolution of global financial markets, the economic impact of technology and innovation, and urbanization. Recent reports have assessed job creation, resource productivity, cities of the future, the economic impact of the Internet, and the future of manufacturing. MGI is led by three McKinsey & Company directors: Richard Dobbs, James Manyika, and Jonathan Woetzel. Michael Chui, Susan Lund, and Jaana Remes serve as MGI partners. The partners of McKinsey & Company fund MGI’s research; it is not commissioned by any business, government, or other institution. For further information about MGI and to download reports, please visit www.mckinsey.com/mgi. The McKinsey Infrastructure Practice Infrastructure is a cornerstone of a stable and productive society. The right approach to delivering and maintaining transport, housing, energy, water, and communication infrastructure is essential to create a strong and competitive economy and provide social services. Infrastructure presents unique challenges and opportunities for the public and private sectors. The McKinsey Infrastructure Practice helps clients to determine what to build, how to do so more quickly and cost efficiently, how to invest in infrastructure, and how to enhance the value of existing infrastructure. The practice serves infrastructure planners, builders, owners, investors, and operators. Over the past four years, the team has advised private companies and public entities on more than 850 projects. The practice is active in all geographies, asset classes, and project stages from planning and financing to delivery and operation. Worldwide, more than 70 consultants work closely with colleagues in practices including those relating to travel, transport and logistics, the public and social sector, corporate finance, and operations. The McKinsey Public Sector Practice In an increasingly complex environment, government must do more with fewer resources. Macroeconomic vulnerability and uncertainty mean the state is an increasingly important market player. Demographic changes in advanced economies and urbanization in developing economies put new demands on public services. Globalization requires increased collaboration across governments, agencies, and international institutions. Digitization raises citizens’ expectations for transparency and productivity. The McKinsey Public Sector Practice works with the world’s leading public-sector organizations to address such challenges. Our work spans economic development, education, health care, public finance, energy, the environment, and security. We have served organizations in more than 85 countries and have completed more than 1,500 engagements in the past five years. Copyright © McKinsey & Company 2014 McKinsey Global Institute October 2014 A blueprint for addressing the global affordable housing challenge Jonathan Woetzel Sangeeth Ram Jan Mischke Nicklas Garemo Shirish Sankhe Preface Providing decent housing for citizens is a perennial challenge for nations around the world. From slum residents in the developing world to middle-income households in expensive global capitals, hundreds of millions of people struggle to find decent housing that they can afford without severe financial stress. The economic and human toll of the housing affordability gap is enormous. We estimate that 330 million households are affected around the world and, under current trends, by 2025 the number of households that occupy unsafe and inadequate housing or are financially stretched by housing costs could reach 440 million—or 1.6 billion people. In this research we identify ways to narrow the affordable housing gap in the next decade. This will require clear aspirations by policy makers to improve housing affordability and the use of four levers that we identify to unlocking land at the right cost in appropriate locations, reducing construction and operations costs, and improving access to low-cost financing. Together with an integrated and city-specific delivery approach, these measures can put housing within reach of households making 50 to 80 percent of their city’s median income. The levers also can make housing more affordable and improve housing outcomes for households earning less than 50 percent of median income. This research is a collaboration between the McKinsey Global Institute, the firm’s business and economic research unit, and the firm’s Infrastructure and Social Sector practices. The work was led by Jonathan Woetzel, an MGI director in Shanghai, Jan Mischke, an MGI senior fellow, and Sangeeth Ram, a partner in Dubai. The research team was led by Aditi Ramdorai and Ayoub Semaan and included Stephanie Brown, Nicola Chiara, Ashwin Hasyagar, Ryo Ishida, Jhonny Jha, Dina Shalaby, Shashwat Shukla, Maximilian Stoiber, and Richard Sun. Valuable guidance was provided by Nicklas Garemo, a director in Abu Dhabi; Shirish Sankhe, a director in Mumbai; and Jorg Schubert, a partner in Dubai. We are grateful for the advice and input of many McKinsey & Company colleagues, including Tobias Baer, Albert Bollard, Killian Clarke, Tony D’Emidio, Mikhail Dmitriev, Jakub Fast, Lucia Fiorito, Tony Goland, Johan Hesselsoe, Ivan Jelic, Szabolcs Kemeny, Antti Koulumies, Oscar Lingqvist, Rachid Maalouli, Murdock Martin, Vadim Pokotilo, Björn Sass, Sebastian Schneider, Yakov Sergienko, Sapna Sharma, Venkataramamoorthy Sreeramagiri, and Raghuram Talluri. Geoffrey Lewis provided editorial support, and the team would like to thank Marisa Carder, MGI senior graphic designer; Julie Philpot, MGI’s editorial production manager; Rebeca Robboy, MGI external relations manager, Kay Scott, Infrastructure external senior communications manager; and McKinsey’s geospatial analytics team. We also thank our external contributors who helped us in specific areas. Friedemann Roy, global product lead housing finance access, International Finance Corporation, co-developed the financing chapter of this report. Christian Prilhofer, an expert on industrial production of buildings and president of Prilhofer Consulting, gave us valuable input on industrial approaches to construction. P S Jayakumar, managing director of Value & Budget Housing Corporation, shared his unique perspective on India’s affordable housing challenge. We are indebted to the many experts from industry and academia who have contributed to this work. In particular, we thank Richard Barkham, global chief economist, CBRE Group; Luca Bertalot, secretary general of the European Covered Bond Council. Alain Bertaud, senior research scholar at the New York University Stern Urbanization Project; Inga Björk-Klevby, former deputy executive director, United Nations Human Settlements Program; Thomas Davidoff, assistant professor, Strategy and Business Economics Division, Sauder School of Business, University of British Columbia; Nader Elhajj, director for the Middle East, Africa, and Europe, FRAMECAD; Liu Thai-Ker, senior director, RSP Architects Planners and Engineers, chairman of the Centre for Liveable Cities advisory board, and former chief executive officer, Housing and Development Board of Singapore; Christophe Lalande, leader, housing unit at UN-Habitat; Charles S. Laven, founder, Forsyth Street Advisors; Benjamin T. Metcalf, deputy assistant secretary, US Department of Housing and Urban Development; Jerry Speyer, chairman and co-CEO, Tishman Speyer; Rafael Tuts, chief, Urban Environment and Planning Branch, UN-Habitat; and Simon Walley, coordinator, Housing Finance Program, Capital Markets Practice, World Bank Group. We also thank our academic adviser, Martin N. Baily, the Bernard L. Schwartz Chair in Economic Policy Development at the Brookings Institution. Richard Dobbs Director, McKinsey Global Institute Seoul James Manyika Director, McKinsey Global Institute San Francisco Jonathan Woetzel Director, McKinsey Global Institute Shanghai October 2014 Contents Executive summary 1 1. Affordable housing is a global challenge and opportunity 23 2. Narrowing the affordability gap 39 Using an analytical approach to set aspirations across a housing ladder 41 Four levers can substantially narrow the affordability gap 47 Unlocking land supply at the right location is the most critical step in providing affordable housing 50 An industrial approach is essential to deliver housing quickly, on a large scale, and at the desired cost 76 Efficiencies in operations and maintenance can reduce costs and preserve sound housing stock 100 Expanding access to lending and reducing financing costs can help buyers and developers of affordable housing 108 3. Creating the right delivery platform for each city 133 4. Diagnosing city performance in affordable housing 159 Appendix A. Calculating the affordability gap 185 Appendix B. Detailed list of sub‑levers for affordable housing programs 188 Bibliography 195 IN BRIEF A blueprint for addressing the global affordable housing challenge Access to decent, affordable housing is so fundamental to the health and well-being of people and the smooth functioning of economies that it is imbedded in the United Nations Universal Declaration of Human Rights. Yet in developing and advanced economies alike, cities struggle with the dual challenges of housing their poorest citizens and providing housing at a reasonable cost for low- and middle-income populations. In this report, we look at the dimensions of this problem—and how it will grow over the next decade—and offer a set of solutions that can narrow the affordable housing gap. Among our key findings: ƒ We estimate that 330 million urban households around the world live in substandard housing or are financially stretched by housing costs. Some 200 million households in Asia, Africa, and Latin America live in slums; in the United States, the European Union, Japan, and Australia, more than 60 million households are financially stretched by housing costs. ƒ Based on current trends in urban migration and income growth, we estimate that by 2025, about 440 million urban households around the world—at least 1.6 billion people—would occupy crowded, inadequate, and unsafe housing or will be financially stretched. ƒ The housing affordability gap is equivalent to $650 billion per year, or 1 percent of global GDP. In some of the least affordable cities, the gap exceeds 10 percent of local GDP. ƒ To replace today’s substandard housing and build additional units needed by 2025 would require an investment of $9 trillion to $11 trillion for construction; with land, the total cost could be $16 trillion. Of this, $1 trillion to $3 trillion may have to come from public funding. ƒ We identify four ways to reduce the cost of delivering affordable housing by 20 to 50 percent: unlock land at the right location (the most important lever), reduce construction costs through value engineering and industrial approaches, increase operations and maintenance efficiency, and reduce financing costs for buyers and developers. ƒ These largely market-based measures can benefit households in all income groups and, with some cross subsidies, can reduce costs sufficiently to make housing affordable (at 30 percent or less of income) for households earning 50 to 80 percent of area median income, in all but the costliest cities. ƒ Affordable housing is an overlooked opportunity for developers, investors, and financial institutions. Building units for 106 million more poor urban households by 2025 could require more than $200 billion a year and account for 7 percent of mortgage originations. The over-arching message from this research is that standard approaches to affordable housing will yield only standard—and inadequate—results. Cities need to think more broadly and creatively about a housing ladder that includes affordable housing but accommodates citizens of all income groups and their changing needs. For the poorest citizens, the ladder may start with very basic housing that places people in decent accommodations and connects them to employment and society. And, rather than despair over budget constraints, cities and housing agencies need to collaborate with the private sector and find more funding options.

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people globally within a decade, leaving more than a third of all urban dwellers in unsafe or inadequate housing or financially stretched by housing costs. The four levers that we lay out in this report, combined with effective local delivery, can bring decent homes within reach of hundreds of mill
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