The knowledge of how to bring the average home to market has been developed over the years to the point where this process can now run efficiently and without much coordination between the various stakeholders. When there is a demand on the market, developers respond and hire their team of engineers and architects to build the homes. Commercial banks have their established mortgage products that work for customers. Assuming the economy is stable, governments and institutions play a minimal role and the private sector functions independently. This is a bit of an oversimplification, but it is necessary to make the next point.
The model in the affordable housing narrative is quite different, especially when your target customers are in the Bottom of the Pyramid economic segment. In these cases, the demand is huge (McKinsey estimates the demand for affordable housing to have reached 330 million urban households), but there is simply a lack of supply of affordable homes. Why is this?
This is usually when the whole room turns to the developers to place the blame squarely on their shoulders. Sure, the developers play a major role, but the affordability challenge is much more complex than to simply be solved by increasing the supply of lower cost homes. Developers have the knowledge and technology to build incredibly affordable homes, but something is stopping them. Developers of low cost housing need assurance that low-cost homes will get bought quickly in order to compensate for their lower margins. When margins are so thin, it is critical that the supply and demand are completely in sync. So, perhaps there are inefficiencies in the demand for low-cost housing that are preventing developers from taking on the extra risk.
We take for granted that in developed markets, there is a service that allows home buyers to pay off their purchase incrementally in the form of a mortgage. These kinds of products and services are not available to BoP clients and for good reason. These customers often do not have credit histories, do not have a steady source of income, and many work in the informal sector. Commercial banks do not want to take on the risk of working with these clients and the microfinance sector is still so nascent that many banks have not developed the capabilities to provide housing finance products. But, these housing finance products are absolutely essential to solving the affordability puzzle and so they need to be developed.
That is the purpose of this blog series: to document the strides that are being made in the housing microfinance sector and to study the cases that have successfully brought affordable housing finance to the BoP. What we will discover in this series is how important cross-sector cooperation is in solving the affordable housing challenge. Developers and microfinance institutions must communicate to align their products to the same affordability target and governments must understand the limitations of these stakeholders and provide additional support as needed. We invite you to continue reading to discover the cases we found inspiring and encourage you to share your own.