Housing Finance

The purpose of financial resources is to mobilize savings. In most cases, these savings are generated by households and are utilized by the business sector. However, in some cases, savings generated by the household sector are required by other participants of the household sector. The biggest example of this is the housing sector. In most countries of the world, there is a dire shortage of housing. As a result, the prices of housing are skyrocketing in urban sectors. This means that there are very few people in the world who can afford to pay the cost of a home upfront. As a result, there is a great demand for housing finance since people want to borrow money upfront and pay back in installments later.

In this article, we will have a closer look at the statistics which explain the need for housing finance. We will also have a closer look at why commercial banks are not able to meet this need, making setting up housing finance companies imperative.

The Need for Housing Finance

There is already a huge shortage of housing units all over the world. According to a United Nations report, more than 66% of the population of the world stays in urban centers. This is a problem since it creates a shortage of houses in these centers and leads to skyrocketing prices. According to the same report, the number of people in urban centers will double over the next twenty years. Hence, if more housing is not created immediately, there will be a severe impact on the economy as a whole.

In most countries of the world, the housing problem is not evenly spread out. There are four of five urban centers in every country that account for close to 50% of the urban finance provided there. As a result, there is no development of real estate in rural areas. In many parts of the world, slum pockets have come up. This has created an unhygienic and unsafe living environment in these big cities. There is an urgent need to provide finance and enable these slum dwellers to move to better housing units where they are safe from diseases, crime as well as other social evils.

Why are Housing Finance Companies Necessary?

The problem of lack of housing finance is evident in most parts of the world. However, still, banks do not prefer to lend to individual homebuyers. Commercial banks generally like to do business with industrialists. This is because the loan ticket size is huge, and the transaction size of these loans is large. Hence, there are economies of scale due to lower transaction costs.

In contrast, if banks provide housing finance, they have to find several individuals who want smaller loans, they will have to incur higher transaction costs. Also, housing loans are typically long term in duration. This means that the bank's money is tied up in long term assets. Banks do not want this as they do not have the expertise to correctly gauge the changing valuation of the homes as well as their risk exposure.

However, one of the biggest reasons why housing finance companies exist is the fact that governments all over the world give them tax advantages. Affordable housing is an election issue in many parts of the world. As a result, governments and political parties have created housing finance companies to implement their vision and create affordable housing for the masses.

Activities Performed by Housing Finance Companies

Housing finance companies are an important component of the financial system since they undertake many important activities. Some of these activities have been listed below:

• Housing finance companies enable the distribution of government benefits. If governments want to provide subsidized housing loans to a certain section of the population, then this is done via housing finance companies. It is these companies which act as the distributors of the national government

• Housing finance companies are instrumental in providing finance to housing boards which are engaged in the process of building satellite towns near important urban areas. By building satellite towns, these organizations help to decongest urban areas and provide better housing facilities at affordable prices.

• Housing finance companies also provide other facilities, such as lease rental discounting. This helps real estate investors to liquidate their money without selling their property. Instead of selling their property, investors can give it on a long term lease. They can then discount the lease proceeds and get the present value right now.

• Housing finance companies are known to provide finance to people who cannot meet the stringent requirements of commercial banks. For instance, in many cases, prospective buyers do not have the money to make a downpayment on their housing loans. In such cases, the housing finance companies provide loans with less downpayment. In order to cover their risks, they make buyers purchase additional insurance.

Hence, to sum it up, housing finance companies are found in several parts of the world. Since the field of housing finance is so large, these companies only focus on housing needs. Also, governments want the housing sector to be booming since it creates employment in other sectors as well.