Housing Development as a catalyst for Economic Growth

June 19, 2013

By Laura Aguilera: Consultant for Urban Development and Housing projects, Inter-American Development Bank

Recently, I watched a piece about the real estate bubble in China. I was struck by the amount of dwellings and cities that are currently empty, like a scene from a ghost town in an old western movie. China’s focus on urban development has not only focused on housing, but also the construction of entire cities (shopping malls, townhouses, office buildings, roads, and highways)—investments that have reached annual spending of about USD2 trillion (CBS). This made me wonder about some of the risks and benefits of investing heavily on housing as a way to spark economic growth in developing countries.

Studies show that affordable housing or rent can have significant positive effects on citizens’ economic development and personal well-being; access to health and education (Lubell and Brennan 2007) are examples of this phenomenon. In addition, these positive effects can be extended to the community, through increased local spending and employment opportunities, which creates an important revenue source for the city (Center for Housing Policy, 2011).  According to the Center for Housing Policy, the construction of 100 new housing units for low income families can lead to the creation of 80 jobs as a result of construction, 42 positions generated as a result of local spending, and 30 additional jobs created from households moving into new homes.

China, one of the fastest growing countries in terms of GDP and the world’s second largest economy, offers an interesting case study for housing-led growth. In 2008, after the global financial commotion, China injected USD 580 billion as stimulus package to help withstand the global financial crisis. As the economy was growing, the urban population and disposable income were also expected to grow. In fact, in the last 30 years 470 million people have moved to the cities, growing from 20% to 50% in 2010.

McKinsey & Company conducted a study regarding the urban population in China in 2007-2008, finding that if the current trend continues, the country’s urban population will reach one billion by 2030, with some cities reaching 350 million people (more than the entire population of the United States). All these factors provided strong support for expanding the housing market for an increasing urban population (Milken Institute, 2012). Nevertheless, the units built in the new Chinese urban developments are not necessarily serving rural migrants or low income families; new housing is purchased and owned by people from an emerging middle class looking for options to invest their money (note that prior to 1998 Chinese citizens were not allowed to own real estate). Gillem Tulloch[1], a Hong Kong based financial analyst, told CBS that many people have spent all their savings on property investment, purchasing 5 or even 10 apartments. Tulloch suggests that the Chinese government might have encouraged over-development, and now housing that is too expensive for immigrants’ budgets. An apartment costs between USD$50 to $60,000, more than 45 times the average annual working class salary.

Embedded video to CBS news story: http://www.cbsnews.com/video/watch/?id=50142079n

The Chinese real estate market presents interesting questions for Latin America, a region that is now one of the most urbanized in the world, with nearly 80% of the population residing in urban areas, many without proper provision of affordable housing and associated infrastructure services (UN Habitat, 2012). Based on recent experiences in China, it is worth asking: How can governments and policy makers ensure that growth policies are reaching the right segments of the population? What kind of housing is needed in Latin America, and for whom? While each market might present different issues, and appears that there is no exact answer, it is clear that understanding the socio-cultural structures within urban sites, is key to design programs and strategies that will help to ensure these programs include the excluded, (IDB, 2010).
 

Links.

  1. Lubell and Brennan, 2007 http://hawaiihousingalliance.com/docs/pubs/Housing%20and%20Quality%20of%20Life/Framing%20the%20Issue%20-%20The%20Relationship%20Between%20Housing%20and%20Education.pdf
  2. Center for Housing Policy, 2011 http://www.nhc.org/media/files/Housing-and-Economic-Development-Report-2011.pdf
  3. McKinsey & Company  http://www.mckinsey.com/insights/urbanization/preparing_for_urban_billion_in_china
  4. UN Habitat, 2012  http://www.unhabitat.org/pmss/listItemDetails.aspx?publicationID=3386
  5. Milken Institute http://fic.wharton.upenn.edu/fic/papers/13/13-05.pdf
  6. IDB, 2010 Guidance Note on Socio-Cultural Analysis. http://hawaiihousingalliance.com/docs/pubs/Housing%20and%20Quality%20of%20Life/Framing%20the%20Issue%20-%20The%20Relationship%20Between%20Housing%20and%20Education.pdf
 

[1]Managing Director at Forensic Asia, Financial Services; independent research firm regulated by the Securities and Futures Commission.http://www.forensicasia.com/

 

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