Affordable Housing Issues and Answers: Case of select countries in Asia-Pacific Region

1. Affordable Housing Issues and Answers:Case of select countries in Asia-Pacific Region By: Zaigham M. Rizvi Secretary General Asia-Pacific Union for Housing Finance Presented at: SBP Seminar on Housing March 25, 2013

2. Country Info - I [1]https://www.cia.gov/library/publications/the-world-factbook/geos/id.html [2] http://www.tradingeconomics.com/malaysia/population-density-people-per-sq-km-wb-data.html [3]wikipedia [4]http://en.wikipedia.org/wiki/List_of_countries_by_GDP_%28nominal%29_per_capita [5]ibid

3. Country Info - II [1]https://www.cia.gov/library/publications/the-world-factbook/geos/id.html [2]Dynamic Impact of Land Supply on Population Mobility with Evidence from Hong Kong, by Eddie C.M. Hui and Francis K.W Wong [3] http://en.wikipedia.org/wiki/List_of_sovereign_states_and_dependent_territories_by_population_density [4]http://en.wikipedia.org/wiki/List_of_sovereign_states_and_dependent_territories_by_population_density [5]http://en.wikipedia.org/wiki/List_of_countries_by_GDP_%28nominal%29_per_capita [6] http://en.wikipedia.org/wiki/List_of_countries_by_GDP_%28nominal%29_per_capita [7]http://en.wikipedia.org/wiki/List_of_countries_by_GDP_%28nominal%29_per_capita

4. Overview of Affordable Housing Issues and challenges: Global View • In today’s world, affordability in context with housing and housing finance is an emerging concern. Increasing number of countriesare talking about the shelterless poor from low-income segment in need of affordable housing. In a world where in some countries mortgage debt to GDP ratios are around or more than 100 percent, like in Scandinavian countries, Europe and America with MD to GDP ratios above 50%, while others are at the bottom like Pakistan at less than one percent. • While in some countries the persons per room density is around one person/room, and in some other countries like India and Pakistan it 3.5. Hence the definition and terms of affordability should logically arise country-wise, or at best region-wise, in view of particular socio-economic and demographic conditions prevailing in those countries, areas or regions.

5. Overview of Affordable Housing Issues and challenges Supply Side Challenges: • Affordable Serviced Land • Low-Cost Construction Technology • Low-Cost Construction materials • Manufacturing Scale Production • Regulatory and Fiscal Support Finance Side Challenges • Long Term Finding • Variable vs Fixed rate • Affordable Mortgages • Financial Inclusion • Regulatory and Fiscal Support

6. Overview of Affordable Housing Issues and challenges: Regional View • In EA region select countries coverIndonesia, Malaysia, Thailand, Philippines, Mongolia, Vietnam Hong Kong, Singapore and Korea. • Thecountries range from high income countries (like Hong Kong, Singapore and Korea) to middle income countries (like Indonesia, Malaysia and Thailand) to low/lower-middle income countries (like Philippines, Mongolia, Vietnam etc). • A single term to describe affordability in every country is hard to find. However countries of the region either in practice or in theory have developed some definition of affordability which is suitable for their own needs. • Affordability is needed to be defined in terms of Housing Cost and Mortgage Affordability.

7. Overview of Affordable Housing Issues and challenges: Regional challenges • First major mortgage challenge surfaced in the region when the region plunged into financial crisis of 1997. These countries however came out of this crisis in their own ways within two/three years. • Some countries, particularly the high income countries like Hong Kong and Singapore, are since long working constantly to officially provide affordable houses to their citizens. • Some other governments like that of Thailand, Korea etc are trying to meet challenges through using various models including community housing, for which these countries are providing appropriate community platforms.

8. Various Mortgage Instruments/Products in East Asia: • A cursory glance at mortgage market around the world tells about the following types of instruments: • Fixed Rate Mortgage (FRM) • Adjustable Rate Mortgage (ARM) • Price Level Adjusted Mortgage (PLAM) • Dual Index Mortgage (DIM) • Interest Only Mortgage and • Flexible Mortgage • Step-Up Payments Mortgages • However in East Asian housing markets, there is a very limited variety in financing products. While in the past one could see the prevalence of fixed rate mortgages in abundance, now after the financial crisis, one can see an obvious shift towards flexible rates mortgages in these markets. • HBFC moved from two products to eight during 2005-027, and now is literally back to tow. No othe banks however worked on Product development.

9. Housing Finance Mechanism in East Asia: A housing finance system aims at providing: • Funding support to producers/suppliers of housing as well as • For purchase or construction finance, • For Both rental and owner-occupied housing. The housing finance mechanism, as seen in different countries of East Asia, presents a broad array of informal or • By making semi-formal institutional arrangements • Contractual saving schemes, • Community based housing finance, • Self-help and informal borrowings from friends • Formal institutions specializing in housing finance. • The housing mechanism in East-Asia spreads over a wide spectrum, ranging from different financing options through informal housing finance, to housing finance from semi-formal and formal sources.

10. Definition of Affordability - I [1]The Housing Finance Sector in Indonesia, by Marja C. Hoek-Smit [2] Sustaining Housing Market, by University Teknoloji Malaysia (UTM) [3] Housing Finance Mechanism in Thailand, by UN-HABITAT [4] Community Based Housing Finance Initiatives, by UN-Habitat

11. Definition of Affordability - II [1]Housing Affordability in South Korea - www.asres2007.umac.mo

12. Current total stocks in 9 countries - I

13. Current total stocks in 9 countries - II

14. Country specific information – profile and housing: INDONESIA -I AFFORDABILITY: In Indonesia, affordability is calculated not by individual wage earner, but by the total income of a household. Interestingly, household consumption/income figures showed far less volatility during the crisis period than individual wage incomes and overall GDP. Households coped by having household members move to informal employment and by extending female labor force participation. As a result, the decline in household incomes was about half the size of the decline in individual earnings.

15. Country specific information – profile and housing: INDONESIA -II SPECIFIC HOUSING INITIATIVES: • National Movement for One Million Houses: The program’s objective is to provide affordable housing and improving quality of living environment. This program was initiated by Government in 2003 to accelerate housing supply, specifically for low-income and poor households. The movement focuses on improving coordination amongst stakeholders in housing development. This involves programs for improving access to land, housing finance system, institution building and capacity building within the sector. • Subsidized Home Mortgage (KPR): It is a housing assistance program for low income communities. The program was initiated in 1976. Initially, the scheme was known as subsidized home mortgage “KPR”. Under KPR the subsidized mortgages were distributed only through conventional banking institutions. To broaden the distribution of credit for low income households and to the faith based clients, the Ministry of Housing launched Sharia based Subsidized KPR Sharia (KPRS) schemes in 2005, to spread the scope of availability of credit to a wide spectrum of the society under Islamic principles. • For non-bankable households, the Ministry of Housing also provided the opportunity for non-banking institutions and Sharia-based cooperatives to participate in channeling housing subsidies for new construction/home improvement through the KPRS (new construction/home improvement of self-help housing loan) and Micro KPRS Sharia Subsidized program. The Subsidized Home Mortgage Program facilitates low-income community to increase their purchasing power to acquire a house from developers. The • Subsidized Self-Help Home Mortgage Program provides low income community opportunities to build or renovate their houses on self-help basis with relatively big amount of loan and for relatively long tenor.

16. Country specific information – profile and housing: MALAYSIA -I AFFORDABILITY: Affordable housing level is the ratio of the monthly loan payment on the income, in which is at the rate of 30 percent from the household monthly income. Thus, the definition and concept of the affordable housing is measured by the income and expenditures of a household to pay for the price or rental of a house. The expenses allocated for buying a house is 30 percent of the household monthly income being equal to equated mortgage installments-EMIs.

17. Country specific information – profile and housing: MALAYSIA-II SPECIFIC HOUSING INITIATIVES: • Several funds have been allocated to eradicate poverty. “AmanahSahamBhumiputera” loan scheme was launched to fund the hardcore poor (ASB-PPRT) scheme. • A revolving fund for low cost Housing (TPPKR) was launched to increase the number of affordable houses for low-income earners, to solve the critical problem of low cost housing in the major towns, to promote house ownership for the low - income earners and to upgrade the living standards of low - income earners. • Housing Foundation for the Hard Core Poor (YPUT) was established under the Trustees Act (Incorporation) 1952 in August 1994. The objective of the fund is to build low cost houses for the hard - core poor. • During the period 1996- 2000, 800,000 units of houses were planned for construction to meet housing needs, whereas a total of 859,480 units were completed, excelling the target by 107.4 per cent. • The private sector, which targeted to build 570,000 units, has completed 737, 856 units or 129.4 per cent of the target. Distribution wise, 95.3 per cent of houses as targeted in the low-cost category were completed, compared with 291.8 per cent in the medium-and high-cost category. In an effort to increase the quality of low-cost houses, new designs with a floor area of 60 square meters incorporating three bedrooms as well as washing and drying areas, especially in high-rise buildings, were introduced. • Greater emphasis was also given to R&D in the housing sector, especially with regard to production of cheaper and more efficient building materials, better construction techniques and life-costing estimation of multi -storey housing.

18. Country specific information – profile and housing: THAILAND -I AFFORDABILITY: Affordability is seen as the ability of a household to earn an amount 25% of which can be paid off for housing. The Government of Thailand once encouraged Government Housing Bank and other commercial banks to extend repayment period up to 30 years to ease the borrower’s financial burden and to increase affordability for homebuyers. But most Thai borrowers prefer to borrow for a term of between 15-20 years because the extension of the period does not help decrease the amount of payment significantly

19. Country specific information – profile and housing: THAILAND -II SPECIFIC HOUSING INITIATIVES: • Three government organizations are actively implementing government’s housing policies and programmes. These are, National Housing Authority (NHA), Community Organization Development Institute (CODI) and Government Housing Bank of Thailand (GHB). GHB was established in 1953, and since then it is playing a pivotal role in housing sector of Thailand. GHB, because of its effective role, is considered more than just a bank. It is catalyst in economic development, and it is a real estate development leader. • CODI’s activities include the following: • Finance slum-area communities • Develops community-based savings programs and organization through co-operatives • Funded from Government budget • Baan Mankong program – very successful • Since 2003, CODI has funded more than 77,000 households in more than 245 districts throughout Thailand • These organizations primarily address the middle and lower income housing sector. • Recently the Government Savings Bank (GSB) has also become involved in housing finance. It attempted to devise a new system which has been considered as to be too complicated to be economically viable.

20. Country specific information – profile and housing: PHILIPPINES -I AFFORDABILITY: The 2006 Family Income and Expenditure Survey shows that the affordable average monthly housing amortisation/rent for households in the first decile is PHP 264.78 (USD6.38); for the second decile, PHP388.71 (USD9.36); and for the third decile, PHP496.38 (USD11.96). The Community Mortgage Programme’s defines average monthly amortization of PHP100 – PHP500 (USD2.41 – USD12.04), depending on the location of the site and size of the lot, is within the range of affordable monthly housing amortisation for households in the lowest thirty percent of the income structure.

21. Country specific information – profile and housing: PHILIPPINES -II SPECIALIZED HOUSING INITIATIVES: • The National Shelter Program (NSP), which regulates housing production, regulation and financing, is the Philippines’ banner program for low-income housing provision. The NSP divides housing into ‘socialized’ (valued at less than USD 6,000, targeted at households up to the 30th income percentile) and ‘economic’ housing units (valued at up to USD 40,000, targeted at households up to the 50th income percentile). • Current housing efforts remain inadequate, with figures showing an acute housing shortage estimated at over one million units – still probably a gross underestimate. On average, the NSP has only delivered 26 per cent of its target, or less than 10 per cent of total housing need. Moreover, the housing backlog is likely to worsen, due to worsening poverty and increasing urbanisation. • More than half a million people leave in low income housing near the waterways. • The government’s approach is primarily to build “low income rental housing” projects. These would be funded by governmental and donor organizations. There was little analysis performed as to the long term costs of this housing.

22. Country specific information – profile and housing: MONGOLIA -I AFFORDABILITY: The country needs to develop all inclusive definition about housing affordability.

23. Country specific information – profile and housing: MONGOLIA -II SPECIFIC HOUSING INITIATIVES: • The Mongolia Mortgage Corporation (MIK) was established in 2003 to promote and develop primary and secondary mortgage markets and to ensure an efficient, long-term housing finance system in Mongolia. • MIK’s mission is to promote affordable home ownership and urban development. The total amount of home mortgage loans outstanding as of 2009 were UD$ 157 million, with Mortgage Debt to GDP ratio of 3.88%. This performance is quite impressive given the age of MIK.

24. Country specific information – profile and housing: VIETNAM -I AFFORDABILITY: Vietnam is a developing economy with a small mortgage market as the loans for home buyers are not very common. Because of socialist background, the affordability has not been a question here.

25. Country specific information – profile and housing: VIETNAM -II SPECIFIC HOUSING INITIATIVES: • Mortgages in Vietnam are mainly provided by foreign commercial banks. Although VietComBank, a state-owned bank, also offers mortgages. As there is lack of land ownership, the property rights (for foreigners-the leasing rights) are to be pledged to the banks. • The maximum loan-to-value ratio commonly applied is 50%. Sometimes a ratio of 60% may be applied on the conditions that there are extremely good and visible supporting financial conditions of the applicant. This ratio is relatively low when compared to ratios of 70 - 80% in other countries of the region. • Banks feel they are subject to a higher degree of risk when lending to borrowers in Vietnam, as there are inadequate forms of security to protect their interests in the event the borrower defaults.

26. Country specific information – profile and housing: HONG KONG -I AFFORDABILITY: Like the United States and the United Kingdom, Hong Kong uses the median rent-to-income ratio as an affordability yardstick for rent setting.

27. Country specific information – profile and housing: HONG KONG -II SPECIFIC HOUSING INITIATIVES: • The mortgage market in Hong Kong is one of the most developed in Asia. Housing is an important component of household assets and mortgage loans account for approximately 25–30% of bankloans. • Traditionally, the government has played an important role in the housing market. On the supply side, it runs a large public housing programme (including low-cost housing and public rental units) that provides accommodation for about half of Hong Kong’s population. In addition, land ownership and land restrictions by the government often restrict the adjustment of housing supply to changing demand. • On the demand side, the government affects the availability of housing finance via various measures, including limits on banks’ exposure to mortgage loans and maximum loan-to-value (LTV) ratios. • In1999, the government established the Hong Kong Mortgage Corporation to promote mortgage loan securitisation and to provide the Mortgage Insurance Programme for high LTV loans Nevertheless, commercial banks are the predominant source of housing finance and there is no government-run housing loan bank in Hong Kong.

28. Country specific information – profile and housing: SINGAPORE -I AFFORDABILITY: Singapore is often cited as a successful example of affordable housing production in Asian cities. As with Hong Kong, the Singapore public housing policy intervention for resident population has progressively led to society-wide enjoyment of the right to adequate housing. Some 85 per cent of Singapore’s resident population lives in public housing. More than 850,000 housing units in 23 new towns have been constructed. While the poor elsewhere are homeless, the poorest 20 per cent of households in Singapore have equal access to housing resources, albeit public housing and many are homeowners. The proportions bear witness to the realization of housing rights. This remarkable success of Singapore has provided answers to many questions generally raised in relation to providing affordable housing to all.

29. Country specific information – profile and housing: SINGAPORE -II SPECIFIC HOUSING INITIATIVES: • In Singapore the government plays extremely important role for providing houses to Singaporeans. The Government, through Housing Development Board (HDB) provides 90 percent of houses in the city-state of Singapore. • The government is not only the largest housing developer, but also the largest mortgage provider through HDB. • The government provided 60.1 billion Singaporean dollars (SGD) in the year 2000, which was much higher than the total housing loans of the private sector which was SGD 38.6 billion. • HDB provides housing loans to all eligible buyers of public housing. In 2005, the loan ceiling was 90 percent of the purchase price or market valuation. • The maximum loan maturity is 65 years minus the applicant’s age or 30 years whichever is shorter. Borrower can use provident fund saving to repay the loans.

30. Country specific information – profile and housing: REP. OF KOREA -I AFFORDABILITY: Korea is working to develop an affordability index known as “Housing Affordability Index” (HAI). HAI is calculated as follows: the mean price of raw data of the national housing price index of Kookmin Bank is used as the representative price of standard house. The mean income of working class in urban area of Korea is used as a standard income. Interest rate quoted from the weighted average mortgage rate of saving banks published by the Bank of Korea is used in working of EMIs.

31. Country specific information – profile and housing: REP. OF KOREA-II SPECIFIC HOUSING INITIATIVES: • In Korea the housing finance sector was very small while Korean economy was developing. The Korean Housing Bank-KHB, owned by the Government, was the main player in this regards. • In 1985 the KHB had 86% market share, and Mortgage Debt to GDP ratio stood at 6%, which went up to 10% in 1992. • In 1997 KHB was privatized to form Housing and Commercial Bank- H&CB. The KHB continued to play a major role in housing finance. Together the KHB and National Housing Fund provided for more than 80% of new housing credit, and Mortgage Debt to GDP ratio went up to 13% by late 90s. • By 2008 the market complexion had dramatically changed with MD to GDP Ratio reaching to 30%. • Today Banks, including Housing and Commercial Bank, have 77% of the market share, and 23% of the market is with Non-Bank Financial Institutions such as cooperatives, insurance companies, savings banks, and finance companies