According to global consultancy firm McKinsey & Company, the projected cost of providing affordable housing to 330 million households around the world currently living in substandard accommodation is $16 trillion USD. The firm's latest report, A Blueprint for Addressing the Global Affordable Housing Challenge, assesses critical pathways for providing housing to families across a range of socio-economic backgrounds and nationalities. According to the report, adequate and affordable housing could be out of reach for more than 1.6 billion people within a decade. The comprehensive report examines everything from income to cost of heating, boiling down the data into four key mandates aimed at solving the global housing crisis.
The proposed solution is one of ascending goals, similar to Maslow's hierarchy of needs, with a four-tiered plan targeted towards households earning 80% or less of the median income for any given region. The program is designed to meet McKinsey's 2025 Housing Challenge which aims to provide housing to a projected 440 million households worldwide within ten years through community engagement, gathering funding, appropriate delivery of housing models, and creation of governmental infrastructure to sustain housing.
Find out the four steps to solving the global affordable housing shortage after the break
Step 1: Improve Access to Land
In urban centres, finding low-cost property at an ideal location can be a formidable challenge when faced with high density and desirability. San Francisco has the highest property cost of cities polled, with land accounting for up to 80% of unit cost, while property in Johannesburg only accounts for 36% of total unit cost. Affordable housing is not beyond reach in urban centres, and can be tackled through transit-oriented development, use of publicly-owned land, development of vacant land, assemble or readjust to create new properties, establishing new settlements, and favourably reforming land-use regulations for affordable accommodation.
As urbanization thrives and property values rise, so does disparity between income and adequate housing. Unlocking land at the "right" location is therefore identified as the most crucial step, requiring governments to take stock of existing housing to maximize economic efficiency. This initial step provides a launchpad from which the entire plan can begin, creating preliminary housing for those who need it most while gradually elevating the quality of housing across the board. As the report notes, location is the driver for success: "In the right locations—where residents are within reach of jobs, schools, and vital services and where they can become part of the diverse fabric of the city—affordable housing can truly fulfil its promise as the foundation for a decent standard of living."
Step 2: Streamline the Cost of Development and Construction
"The prospect of trying to fill a gap of 440 million housing units that will be required by 2025 may seem daunting to policy makers, but it could represent a massive opportunity for the private sector," says the report. Second to land costs, construction accounts for the most expensive component of affordable housing costs. Suggested changes in construction and development could find efficiencies to eliminate costs at all levels, simultaneously providing incentives to the private sector to develop more affordable housing.
Productivity is the key cost-raising factor in the construction of affordable housing. The pace of construction worldwide has stagnated for the last several decades, but if increased significantly, positive ripple effects would result in unanimous cost decreases. Through the application of new models of development and inclusion of new technologies, lengthy constructions could be replaced by high-speed assemblies. McKinsey plans for the reduction of construction costs worldwide to a meagre $150 per square metre, with a goal to standardize building methods to increase productivity and decrease costs. Steps to decrease construction costs include providing additional training to the labour force, improving logistics infrastructure, perfecting industrial processes, and addressing shortcomings of structural technology.
Step 3: Increase Efficiency of Existing and Newly Built Housing
Highly efficient management of affordable housing can minimize costs and increase longevity of pre-existing structures, says McKinsey. Efficiency is crucial in cases of minimal funding where new builds remain out of the question: "Buildings can be designed (or retrofitted) to run more efficiently—requiring less energy, for example—and maintenance can be delivered at far lower costs by bringing scale benefits and clarity to what has been a highly fragmented and opaque market." Operations and management costs account for approximately 20-30% of affordable housing costs, representing a large flexible sum with potential for heavy reduction.
Citing New York City as a primary example for subpar accommodation, the report outlines antiquated public housing facilities with substantial maintenance fees due to poor management and lack of upgrades. Outdated facilities drain operations budgets and can create severely undesirable housing for potential occupants, therefore invalidating their existence. Two methods exist to lower overhead maintenance and operations costs: improving energy efficiency and the introduction of better maintenance infrastructure on a global scale.
Step 4: Reduce Financing Costs for Buyers and Developers
The final step in the process, finance, is crucial to maintaining the entire system. Availability of appropriate means of financing for homeowners assures the continuity of affordable housing and addresses the targets established by the 2025 Housing Challenge. Finance and affordable housing programs must be harmonized in order to maximize success and availability to the largest number of users. "Housing programs should be designed to address needs across all income segments and account for changes that will occur in the circumstances of residents and in the economics and demographics of the city over time," says the report.
Major inequalities exist between existing financial infrastructure in developed countries and that of developing countries. In order to expand availability of affordable housing worldwide, basic financial processes must be implemented in each country to allow potential owners to investigate the viability of housing. Beginning with the improvement of global financial infrastructure, the report outlines many guidelines for creating a higher availability of financial options: reducing cost of loans, effectively funding mortgage portfolios, and reducing rates by leveraging collective savings, among others.
The 212-page report goes into considerable detail on each step, providing tangible models for their implementation. China, India, Russia, Brazil, and Nigeria are identified by the report as nations requiring immediate housing attention due their quickly growing populations of low-income households worldwide. These areas of opportunity will serve as incubators for McKinsey's four-tiered plan, providing clarity on the plan's applicability in different economic and cultural environments. The plan is startlingly simple, yet uniquely challenging due to its looming deadline: will 440 million households be able to live affordably by 2025?
Download and read the report in its entirety or listen to the abridged version in a podcast published by the McKinsey Global Institute in October 2014 here.