Global Urbanization

Chapter 14. Financing Housing and Urban Services

C h a p t e r 1 4 Financing Housing and Urban Services Kyung-Hwan Kim Bertrand Renaud (1987) said that cities are built the way they are financed. The financing of housing and of urban infrastructure and services is crucial to the functioning of cities. Housing finance and urban finance share several characteristics. First, both are instruments that can be used to increase the overall standard of living. The ultimate goal of housing finance lies in improving the overall housing standards of the society and possibly contributing to financial sector development, and that of urban finance lies in providing high-quality urban infrastructure and recurrent services to the residents and businesses. The demand for housing finance derives from the demand for housing, especially owneroccupied housing, and the demand for urban finance comes from that for urban services. These demands are influenced by changing demographics , income, and prices of housing and urban services, respectively. The second shared characteristic concerns their macroeconomic dimension. Price stability is a precondition for well-functioning longterm mortgage markets, and the stability of housing finance systems affects the stability of housing markets and thus the wider economy. Mismanagement of subnational finance may impair the soundness of public finance and hence macroeconomic stability. Third, in recent years technology has improved the efficiency of both housing finance and urban finance. The widespread use of credit-scoring techniques and automated underwriting systems facilitates the mortgage loan origination process, while GIS (geographic information system)-aided tax cadastre and mass appraisal help administration of property taxation. Finally, financial discipline is important in both housing finance and urban finance. The recent U.S. subprime mortgage crisis has demonstrated that the consequences of over-indebtedness of the household Financing Housing and Urban Services 235 sector can posit a systemic risk for the entire financial system and the macroeconomy. Large fiscal deficits and the debts of state and local governments can become a drain on the whole economy. Beyond these similarities, it is also clear that the operations of housing finance and urban finance are closely interrelated. The combination of decent housing finance and inadequate urban finance may lead to housing development without adequate urban services. Improved housing finance makes homeownership feasible for more people, and the increase in owner-occupied houses leads to a larger property tax revenue base that can, in turn, be tapped to maintain and upgrade urban services. This chapter looks at the current state of housing finance and urban finance, keeping their close linkages in mind.1 We begin with a common framework for housing finance and urban finance and apply the framework to address the following questions: What is the context in which housing/urban finance operates? What do we know about a well-functioning housing/urban finance system? How do actual practices compare with an optimal or ideal state, and how do they vary across countries and cities? What should be done, and what barriers need to be overcome, to improve the current situation? Housing Finance At least two important factors can be identified as defining the context of housing finance. The first concerns the socioeconomic dimension of housing demand. It varies from country to country: the growth of population and household formation remain strong in developing countries, while the aging of the population is proceeding rapidly in many developed countries. The overall growth of income in developing countries will increase the demand for housing of better quality, while changes in income distribution toward a greater concentration of highincome households in particular cities will affect the composition of housing demand. The second factor concerns the fundamental changes that housing finance systems have been going through. Financial deregulation has led to an increase in the number of institutions providing housing finance, and to a wider range of loan products being made available to borrowers. Specialized housing finance circuits have become less important in the housing finance market, as it becomes more closely integrated into the overall financial system. The growing integration of global financial markets and the expansion of cross-border finance have enabled some housing finance institutions to tap international capital markets, though in a limited way. 236 Urban Governance and Finance Some Basic Points Access to credit is more important than the terms of credit. The reason is simple: if one is denied credit, the terms of credit such as interest rate or loan maturity are irrelevant. This point is most relevant...