McKinsey senior consultants state that fortunately, the world’s housing crisis does not need a revolutionary solution. While some subsidies and other government measures are needed particularly in the world’s poorest nations, they predict that 80% of the funding needed to close the affordable housing gap should come from private investment. This provides a $200 billion per year opportunity for the global construction industry.
McKinsey proposes “four levers” of approach to reduce the housing-affordability gap by 20 to 50%. The following could make housing affordable for households earning 50 to 80% of median income.
1. Unlocking Land Supply
This is the most critical step in reducing the affordability gap because land prices often range between 40 to 80% of property costs. Even in the biggest global cities, there is a lot of unoccupied or underused land.
Solutions to unlocking land include incentivizing private development through density bonuses, releasing unused public land, inclusionary planning, and developing housing around rapid-transit routes.
2. Reducing Construction Costs
In many places, residential housing is constructed the same way it was half a century ago. Developers can make use of value engineering, lean construction, procurement excellence, in-situ manufacturing-like practices, and by moving critical construction processes off-site. These methods can reduce project costs by about 30 percent, and completion schedule lengths can be reduced by about 40 percent.
3. Improved Operations and Maintenance
This portion comprises about 20 to 30% of housing cost. Improving energy efficiency, reducing maintenance costs, and improving asset management will cut overall costs in this area by 10 to 15%. In the US and UK, government subsidized energy-saving retrofit programs (i.e. insulation, windows, efficient heating and cooling) have cut energy costs by 20 to 30%. Setting standards and supporting homeowner groups can also improve the quality of operations and maintenance activities. The infographic below explains how green affordable housing benefits low-income families.
Maintenance costs can be reduced through seeking economies of scale in a highly fragmented industry through pooling demand for such services. This practice helped the UK social housing buying consortia achieve 25% savings across these services. Scale improvements are incentivized by listing certified maintenance and repair services to give purchases a way to select better vendors. This also simultaneously encourages vendors to improve services to draw customers.
4. Lowering Finance Costs for Buyers and Developers.
Three ways to improve financial access for low-income households:
Reduce loan origination costs and underwriting risk.
Reduce cost of mortgage funding.
Leveraging collective savings.
In addition, de-risking, guaranteeing, or subsidizing developer financing can also lower the cost of affordable housing.
To read the full report from MGI, access it here.
Impact of Existing Investment Management Companies
Calvert has invested $59 million into affordable housing, contributing to the development of 1,567 housing units that have housed over 4,400 people.
Pax has partnered with Chicago-based community development bank ShoreBank to make loans to low and moderate income families in Chicago, Cleveland, and Detroit. Shorebank has invested over $3.5 billion to finance the purchase and renovation of over 52,000 units of affordable housing and the creation of 11,000 new jobs for their clients.
Domini allocates 10% of its assets directly to community-focused investments, including affordable housing, small business development, community revitalization, etc.
To access an interactive map of America’s rental housing crisis, click here.