Affordable housing is not just limited to the cost of buying a house, it is an all-encompassing feature including the costs for operations and maintenance and accessibility to social infrastructure. A large part of house affordability is related to house purchase price.
The shortage of housing in Pakistan is not a result of overpopulation, rather it is due to the massive income and wealth inequality in the country, rapid urbanisation, and massive rural to urban migration during periods of calamities like natural disasters and wars. Ninety-nine per cent of housing in Pakistan is beyond the buying power of 68 per cent of the population (IIED, 2018). When people come to cities looking for better opportunities and living conditions, it becomes increasingly difficult to provide housing to these poor people. It requires access to public and investor confidence through efficient regulatory and governance measures. An integrated and inclusive approach to housing that interlinks education, employment, health, and basic social services through collaboration among governments, civil society organisations, major interest groups, and the private sector will go a far way in making affordable housing a reality. Affordability is not only the cost of buying a home, it also needs to account for operation and maintenance costs. Accessibility of work and social infrastructure also matter. Pakistan must provide its urban population with affordable housing to mitigate the harmful effects of rapid urbanisation and reduce urban poverty.
The Iqbal Institute of Policy Studies in this article explains how to make affordable housing a reality.
What is Affordable Housing
Affordable housing is not just limited to the cost of buying a house, it is an all-encompassing feature including the costs for operations and maintenance and accessibility to social infrastructure. A large part of house affordability is related to house purchase price. House price is determined on a variety of different factors, not limited to but including, cost of land, infrastructure, building materials, labour, and profit. As a majority of the population does not have enough savings to invest large amounts of money towards building a house, the ability to finance down payments towards mortgages is also an important factor in measuring the affordability of houses. The number of available funds, existing debts, and loan amounts all add to the affordability of a house. In terms of the costs incurred to keep the house, major considerations are house occupation cost and financing of service loans. Land lease, home insurance, property tax, building maintenance costs, interest rates, loan tenure, and income and non-housing expenditure are among the major factors which affect the affordability of a house. Therefore, making housing affordable is a task that involves improvements in many sectors. There is no universal standard of affordable housing because ideas differ by region and culture. (WEF, 2019)
Measuring Affordability and Housing Deficit
Three approaches are commonly used to measure the affordability of housing. The median multiple methods consider housing as affordable if the median house price is less than three times the median annual household income. Another approach is the housing cost burden method which considers housing to be affordable if households spend 30 per cent of their income on housing. Finally, the residual income method subtracts the costs of meeting necessities from household income and uses the remaining “residual” income as the household’s capacity to spend on housing. This approach is famous in the banking sector when evaluating mortgage applications. Subsequently, housing deficits can be qualitative or quantitative. Qualitative defects stem from poor construction materials, lack of proper engineering and urban infrastructure, or building in precarious locations. Quantitative deficits result from demand for housing exceeding supply, which may be due to scarcity of land for development, growing urban populations, or the attractiveness of housing as an investment opportunity relative to other asset classes. (Yglesias, 2015)
How to Make Affordable Housing a Reality
Effective strategies are needed to address the supply and demand-side challenges of affordable housing. Governments have to define their long-term plans for increasing the supply of affordable housing by balancing their need to minimise urban sprawl with limits of building denser and taller. Political considerations that could hold back the development of new affordable housing must be addressed. Ways to improve the situation of those living in informal housing is also important along with creating a strong regulatory enabling environment for the private and non-profit sectors. Private sector players must stay updated with emerging solutions in construction techniques and materials while working alongside governments to ensure an adequate flow of skilled labour. This should be accompanied by new solutions in financing and innovative tenure models.
Affordable housing remains a challenge for major cities around the world. With growing populations, rapid urbanisation, and rural to urban migration, it is becoming increasingly difficult for governments to provide formal settlements to their populations. This not only affects the standard of living of city residents but also adds to the poverty equation by squeezing more people into squatter settlements. The affordability of housing depends on a large number of factors, but the two main areas are costs to buy the house and costs to keep the house. The purchase price, ability to finance down payments for mortgages, house occupation costs, and ability to finance service loans are additional factors that weigh in on affordable housing.