Managing the Affordable Housing Problem

The lack of affordable housing has become a serious issue across the entire world. This is primarily because of the loose monetary policies which were followed in the aftermath of the 2008 recession. The interest rates have been set at close to zero for the past ten years or so. As a result, the system is flush with a lot of newly created money. A large chunk of this money has found its way into asset classes like housing. This is the reason why this is the first time in the history of the world that there seems to a simultaneous housing bubble in most cities of the world.

Affordable housing is defined in terms of multiples of the median income. For instance, if the median income of an area is $100 whereas the median home price in that same area is $400, the ratio is 4:1. A housing unit is said to be affordable when this ratio is less than 5. In most important cities of the world, it has now become impossible to find housing units where the ratio is less than 5. In most cases, the ratio is between 7 to 10, which means that the housing unit is severely unaffordable.

Many solutions have been provided for the affordable housing problem, but none seem to work. The common solutions provided are that the size of the unit is reduced and that the unit itself be located in a far-flung locality. Both these situations are not acceptable to the masses. It does not seem like a good idea to buy an affordable house if it is not comfortable to live in or is located far away from schools and workplaces.

This creates a need to look at some unconventional methods of solving the affordability problem. The steps have been listed below in this article.

Utilizing Vacant Properties: In western countries, the zoning laws are a huge impediment to many housing projects. In many parts of the United States, the residential housing estate is outrageously expensive. This is primarily due to a scarcity of residential homes. It also causes homelessness in many cities like Seattle. At the same time, there is an abundance of motels and such other commercial real estate. Many of these motels lie vacant but cannot be used as housing units since that would be against the law. Cities like Los Angeles have recognized this problem. This is why they are allowing for motels to be used as housing units. Just retrofitting the unit with a small kitchen makes it a perfectly usable studio apartment.

Government Financing: Finance costs put a tremendous burden on the housing prices of any given location. Hence, if the government wants to reduce the price, it has to reduce the interest costs that developers pay. This can be done by extending funding at concessional rates to real estate projects. There are many cities across the world where the governments set aside a separate fund which is then used to aid private sector developers as long as they build affordable housing. This model is more popular across Europe. Cities like Hamburg and Copenhagen have been pioneers. However, the other cities seem to be catching on.

Training and Upskilling

In many places around the world, high housing prices can be attributed to high labour costs. These costs are higher because of the shortage of skilled labour which is required by builders. To overcome this problem, the city of London has started creating vocational schools. These schools train and certify young, unemployment adults in the various skills required by the construction industry. Many of these institutes also provide financing so that the workers are then able to buy the tools required to work in the construction industry. This helps the government solve two problems. It can reduce the unemployment rate while simultaneously reducing the prices of homes as well!

Cheaper Materials: Scientific developments are allowing the usage of different materials in the construction industry. For instance, an Indian research institute has developed a new material which is primarily made up of gypsum. This can replace the other construction material which is currently used in the process. The idea behind the invention is that if the land prices in a particular location cannot be reduced, then efforts must be taken to reduce the cost of construction material. After all, they are the second largest contributor to the cost of the apartment.

Income Based Housing: Lastly, many governments have come up with the idea of income-based housing. Under this plan, the government constructs certain houses within the city and then sells it only to people whose income is below a certain limit. Also, the people buying the land should not own another house anywhere else. Often times, this subsidy is provided in the form of reduced interest rates. However, the problem with subsidized housing is that it often ends up on the black market. Since the property is worth more than what the government sold it for, the buyer inevitably tries to sell it again and book a profit.

The bottom line is that soaring house prices have made it mandatory for buyers, builders, governments, and even non-profit agencies to come up with innovative solutions. In the absence of more innovative solutions, the idea of affordable housing will continue to remain a pipedream.


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The article is Written By “Prachi Juneja” and Reviewed By Management Study Guide Content Team. MSG Content Team comprises experienced Faculty Member, Professionals and Subject Matter Experts. We are a ISO 2001:2015 Certified Education Provider. To Know more, click on About Us. The use of this material is free for learning and education purpose. Please reference authorship of content used, including link(s) to ManagementStudyGuide.com and the content page url.


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