The Unassuming Economist

Global Housing Watch Newsletter: March 2018

Nora Libertun de Duren is a housing market expert at the Inter-American Development Bank. In this issue of the Global Housing Watch newsletter, de Duren looks at the developers’ rationale for building social housing in the urban periphery, the cost of living in the periphery and cost of densification, and other housing issues in Latin America.

On social housing in the urban periphery

Hites Ahir: You have a new paper on: Why there? Developers’ rationale for building social housing in the urban periphery in Latin America. What did you find? Any surprises?

Nora Libertun de Duren: This paper examines some of the mechanisms behind the location of privately developed affordable housing in peri-urban areas of Goiania, Brazil and Puebla, Mexico. It shows that developers choose peripheral locations based on three factors: the time required by the approval process, the cost of land and infrastructure, and the number of units they can accommodate on the site. The surprise was that economies of scale – and not cheap land prices– explain developers’ preference for building in peripheral areas. Large lots –which are available almost exclusively in urban peripheries – enable developers to achieve significant cost savings because these large lots allow developers to build more than 500 units.

Hites Ahir: Could you talk a bit more about what you find in terms of the costs of land, infrastructure, and services?

Nora Libertun de Duren: Developers establish a “land-plus-infrastructure” cost parameter that should not exceed a third of total housing costs. Within that parameter, the trade-off between land and infrastructure costs allows for many different project locations to meet the standard. For example, in the case of Goiania, land for central developments accounts on average for 17 percent of the investment, while infrastructure expenses average below 15 percent. Conversely, land in peripheral developments accounts on average for about 6 percent of the investment, while infrastructure expenses average some 30 percent. That is, the lower cost of peripheral locations is offset by the higher cost of the onsite infrastructure required.

Figure 1
Land and Infrastructure Costs as Percent Shares of Total Housing Costs

Source: Libertun de Duren, N. (2018). Why there? Developers’ rationale for building social housing in the urban periphery in Latin America. Cities, 72, 411-420.

Hites Ahir: In your paper, you note that developers are much more regulated in terms of construction quality than in terms of location of their products. Why this is the case?

Nora Libertun de Duren: This has to do with several dynamics. One is that programs that subsidize affordable housing construction are regulated by the national government, while land use plans are determined by municipal authorities. National programs have a legal limitation on how much they can change local land uses. Another one is that national housing programs have quantitative targets -numbers of units built- and disregard qualitative ones. Last, and in close connection to the former point, the policy has a strong bias towards promoting housing ownership at the expense of attending to housing location.

Hites Ahir: Typically, a household decides on the tradeoff between housing amenities and housing location. But you are saying that this trade-off decision between housing amenities and location has shifted from households to developers. What are the consequences of this?

Nora Libertun de Duren: Current housing subsides do not allow households to participate in the main urban real-estate market but stimulate developers to produce ad-hoc housing units at below market prices. Thus, shifting the trade-off decisions between amenities and location from households to developers. For low income households, this implies choosing between a housing unit built by the informal economy but well located or a housing built by the formal market in faraway locations. Besides the negative impact on households, this pattern of development has negative externalities in terms of urban productivity, congestion cost, and environmental pollution.

On the cost of living in the periphery and cost of densification

Hites Ahir: You have another paper on: The social housing burden: comparing households at the periphery and the centre of cities in Brazil, Colombia, and Mexico. How does the findings of this paper fit in with the previous one?

Nora Libertun de Duren: That paper analyzes how living in the periphery affects the livelihoods of low income households, through cases in mid-size cities in Brazil, Mexico and Colombia. The magnitude of the impact of housing location is staggering; households living in the periphery spend twice the money and three times the time in commuting than those who live in central locations. In addition, their property depreciates – market value of a peripheral housing unit is about 40 percent less than for a similar unit in the center; and their social capital declines as they stop seeing their relatives. These impacts are a serious policy concern since the programs that sponsor these housing projects are meant to improve the material conditions of low-income households, who are a captive market with very limited housing options.

Table 1

Hites Ahir: You have also written about the cost of densification (here and here). What do you find? 

Nora Libertun de Duren: We find that municipal spending on public services -water, sanitation, electricity and trash collection- is strongly and non-linearly correlated to population density. The per capita expenditure on these services is lowest when population density is close to 9,000 residents per square kilometer. In our study of about 8,600 municipalities of Brazil, Chile, Ecuador and Mexico, 85 percent of all municipalities are below this ideal density level. This implies that, from the perspective of municipal expenditures, there is an argument for promoting density. Having said that, we should be aware that, similar density levels could be achieved through different configurations and that there may be many reasons -besides expenditures- that should be considered when planning a good city.

Figure 2
High quality municipal service coverage per capita on urban population density, by type of service (data from Brazil, Mexico, Ecuador and Chile)

Note: Non-parametric fan locally weighted regression, conditional on regional fixed effects and country specific time trends.

Source: Libertun de Duren, N., & Guerrero Compeán, R. (2016). Growing resources for growing cities: Density and the cost of municipal public services in Latin America. Urban Studies, 53(14), 3082-3107.

On Latin America

Hites Ahir: Can you tell us a bit about the condition of housing in Latin America?

Nora Libertun de Duren: In the last ten years, Latin America has improved in terms of the percentage of households with access to adequate housing. However, 55 million households -about 45 percent of the Latin American population- are in a housing-deficit situation. Of the households with deficits, 75 percent are subject to a qualitative deficit (overcrowding, lack of basic services, substandard building materials or lack of secure tenure), and the remainder is subject to a quantitative deficit (makeshift housing or two households under one roof). This situation is attributable to the shortcomings of the mortgage market, the high level of labor informality, and the relative high cost of housing units mostly due to the scarcity of urban lots with municipal services.

Hites Ahir: Slums tend to be closer to the city and amenities. Are there subsidies for upgrading the slums—making them a better place to live?

Nora Libertun de Duren: One of the main ways in which national government deal with slums is through neighborhood upgrading programs. These programs have been around for more than 30 years, one of the most famous ones is Favela-Bairro in Rio de Janeiro, Brazil. These programs fund the improvement of the physical environment by supporting household access to water, sanitation, electricity and by building and upgrading public infrastructure such as roads, sidewalks, and community facilities. Interventions may also include direct home improvements and support for land titling. Lately, such initiatives have tended to include activities for improving social interaction and local education. But these programs are remedial and cannot replace good planning, since their cost is three to seven times higher than the cost of formal urbanization. In addition, establishing an effective system of governance for the long-term maintenance of upgraded neighborhoods remains a challenge.

Hites Ahir: What about support for rental housing?

Nora Libertun de Duren: Programs supporting rental housing for low income households are scarce in the region. Experiences of the state as a landlord have not worked well, and private landlords are reluctant to participate in as much as they perceive legal procedures as slow and onerous. In addition, there is a culture that prizes homeownership, particularly in a context of high economic volatility. The good news is that recently, we are seeing some interesting developments when it comes to younger households. They strongly favor housing location over area and are open to new models of housing tenure.

Hites Ahir: Typically, how much funding is allocated to housing programs?

Nora Libertun de Duren: Latin American countries spend significantly in housing programs, national budgets allocation has typically ranged between 1 and 2 percent of their respective GDP. By comparison, the United States allocates about 0.55 percent of its GDP to support housing programs, and member countries of the OECD allocate an average of less than 1 percent of their GDP. Currently, expenditure on social housing programs in Mexico and Brazil amounts to about 1.7 percent of their respective GDPs. The contribution of these funds to increasing the housing supply is considerable. In Brazil, the flagship national program Minha-Casa-Minha-Vida, has been responsible for about 30 percent of the annual housing production in the formal sector. In Mexico, about 70 percent of the housing mortgages filed each year are linked to national programs for social housing.