The Unassuming Economist

From Shaping the Future of Construction: Insights to redesign the industry
by Richard Koss

“Overview

Attracting private capital into programmes for affordable housing has been a long-run challenge in both developed and developing countries. In general, the problem is that purely private capital is incentivized to devote its resources towards the development of high-end properties for upper-income households.

Purely public forms of capital can be brought to bear to support affordable housing construction, but cost control can be a problem without the profit incentive. In addition, public resources are limited, in particular in emerging markets, and can fall far short of the public need. What we see then is the development of many forms of public regulation and partnerships with the private sector in order to meet the affordable housing challenge. While still in early changes, a great deal of institutional and technological innovation is just now being brought to bear on this issue that offers considerable promise in this area, particularly in emerging markets.

Regulation and government-sponsored enterprises

Traditionally, higher-income countries have dealt with the issue of affordable housing via a variety of regulations on financial institutions and public support of income targeted at housing. In terms of regulation, the idea is that financial institutions, notably banks, receive public support through features such as cheap funding through taxpayer-insured deposits. In exchange they should be directed to allocate capital towards affordable housing projects that are expected to be profitable, but not so much as the development of costlier units. In the United States, one such mechanism is the Community Reinvestment Act.

Another approach is the formation of government agencies or government-sponsored enterprises (GSE’s) which support liquidity and affordability to loans directed at lower income homeowners and to developers who build high-quality rental units aimed at lower-income communities. They do so in part by designating balance sheet directly towards these mortgages. In addition, they also set standards and share risk with the private sector through the issuance of mortgage-related securities (MRS). In the US these entities include agencies such as the Federal Housing Agency and the Veterans Administration as well as the housing GSEs Fannie Mae and Freddie Mac. GSEs are tasked to support lower-income housing through sweeping regulation known as the Affordable Housing Goals and the Duties to Serve. Other nations have housing agencies, notably Japan and Canada.

The UK has an innovative programme called Help-to-Buy that allows lower income households to purchase a share of a home (usually 25% – 75%) and pay rent on the rest.

Another affordability policy is income support for lowerincome housing. In the US there is the Low Income Housing Tax Credit Programme (LIHTC).

Another approach which is more local in nature is the requirement that developers who are given rights to build on a piece of land set aside a certain number of units designated as affordable housing. Such programmes are very popular in California where affordability is particularly problematic.

Financing vehicles

Another set of responses to the affordable housing financing challenge can be characterized as “financing vehicles”. These are generally partnerships between private, philanthropic and public entities that bring the efficiency of private capital to bear with credit enhancements provided by government and charities. In general, the returns to private capital are somewhat less than for purely private projects, but the experience is that many private developers are willing to participate in these programmes out of a sense of civic duty and reputation enhancement. There are many classes of such investments that are targeted at different segments of the market. These include below-market debt funds, private equity vehicles and real estate investment trusts (REITs). The Urban Land Institute provides a useful summary of these efforts.

In many cases, the public funds come from regional entities (generally states in the US). These are known as Housing Finance Agencies (HFA’s). The US Treasury lends support to more distressed local communities through entities known as Community Development Financial Institutions (CDFI’s). All-in-all there are many hundreds of such vehicles and structures, revealing great innovative thinking that can be targeted at particular needs in distinct communities. There are far too many to list here, but an example that has received attention is the JP Morgan Partners in Raising Opportunity (PRO) programme that provides funding to CDFI’s across the country.”

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A new White Paper from the World Economic Forum says that:

“While most other industries have undergone tremendous changes over the past few decades and have reaped the benefits of process, product and service innovations, the construction sector has been hesitant to fully embrace the latest innovation opportunities and its labour productivity has stagnated or even decreased over the last 50 years.

This mediocre track record can be attributed to various internal and external challenges: the persistent fragmentation of the industry, inadequate collaboration between the players, the sector’s difficulty in adopting and adapting to new technologies, the difficulties in recruiting a talented and futureready workforce, and insufficient knowledge transfer from project to project, among others.

In the context of the Forum’s Future of Construction initiative, over the past year six Working Groups comprised of industry leaders, academics and experts met regularly to develop and analyse innovative ideas, their impact, the barriers to implementing solutions and the way forward to overcoming obstacles and implementing modern approaches in the construction and engineering industry.

This white paper presents the outcome of this work in the form of insight articles proposing innovative solutions on how to address the construction sector’s key challenges in the following fundamental challenge areas:

1. Project Delivery – Creating certainty of timely delivery and to budget, and generally improving the productivity of the construction sector
2. Life cycle Performance – Reducing the life cycle costs of assets and designing for re-use
3. Sustainability – Achieving carbon-neutral assets and reducing waste in the course of construction
4. Affordability – Creating high-quality, affordable infrastructure and housing
5. Disaster Resilience – Making infrastructure and buildings resilient to climate change and natural disasters
6. Flexibility, Liveability and Well-being – Creating infrastructure and buildings that improve the well-being of end-users”

A new IMF report “quantifies the effect of gender inequality in Morocco on growth, compared to groups of faster growing countries. It also estimates income losses due to low female labor force participation. The results highlight that closing overall gender gaps would help Morocco close its GDP per capita gap with benchmark countries in other regions by up to 1 percentage point. Simulations also show that gradually closing gender gaps in the labor force participation rate could lead to significant income gains over the long term. Policy recommendations to promote gender equality include investing in secondary education for women and in infrastructure, and reforming gender-discriminatory tax policies and laws.”