Housing Affordability: Supply Side Solutions to a Global Challenge

Access to affordable housing is so fundamental to the health and well-being of people that it is embedded in the UN Universal Declaration of Human Rights.

With a global surge in demand for housing, housing stocks have not expanded quickly enough, an issue that affects households in both developing and advanced economies across the globe.

Rising housing costs are creating financial stress for urban residents all around the world. The cost of housing and rent have increased at a far greater rate than income, particularly in big, desirable cities with significant job opportunities.

A McKinsey Global Institute report released this month on housing affordability points out that the core of the issue is the substantial one-sidedness in supply and demand.

Increases in demand are being driven by substantial population growth, the persistent trend towards urbanisation and the rising global incomes. The urban population has been rising on average by 65 million people per year over the last three decades, with over 20 cities having a population greater than 10 million.

[Related reading: Affordable Housing Crisis Likely to Continue for 40 Years]

McKinsey estimate that globally some 330 million urban households currently live in substandard housing or stretch to pay housing costs that exceed 30 per cent of their income. If this trend is not reversed this number could blowout to 440 million by the year 2025.

This issue also affects economic growth, with investment in housing construction remaining at below its potential. Adding to the issue, households are having their consumption constrained due to a disproportionate share of their monthly income going towards rent or mortgage payments.

[Related reading: RBA’s Macro Measures Cool Housing Market]

Investors operating in low interest-rate environments can also magnify this global issue. Inflows of foreign capital oblige residents to significantly increase their leverage to be able to afford a home, with these trends sometimes being amplified by speculative behaviour such as land hoarding or fast-paced property flipping.

Governments across the globe often tackle housing gaps by focusing on demand and financing. These strategies often include providing housing subsidies, privileged financing or various forms of rent control to low-income households. These strategies while they do address housing affordability they are costly and are difficult to sustain, however most importantly they do not address the core issue of an underlying housing shortfall.

To achieve greater housing affordability will require a significant increase in the number of available house.

McKinsey’s report, Housing affordability: A supply-side tool kit for citiesprovides three supply-side solutions that address three challenges that all cities face: making land available, removing barriers and making the construction sector more productive.

— ONE —

Find the Land

One of the most significant constraints for housing development is accessibility to land, which also becomes one of the major drivers of cost. By using land to the fullest extent, the cost of a standard housing unit could fall by up to 20 per cent. Comprehensive citywide mapping and inventory exercise can reveal many opportunities. McKinsey Global Institute has identified 7 areas of focus in urban environments.

Prioritising transit-orientated development

Congested cities need to focus on density around transit rather than encourage a longer commute for citizens. This may involve the redevelopment of existing residential structures, permitting higher floor-space ratios, loosening height restrictions or allowing greater density in specific target zones.

These zones can be selected to support local objectives such as an increase in public transport usage or the development of mixed-use pedestrian-friendly cityscapes. Some cities are already adopting these strategies including Seoul and Hong Kong with intensified land-use around transit stops.

Getting more out of underutilised sites

Some cities may not need to increase density thresholds but take advantage of land currently under utilising their allowed density. Underutilised sites can be identified as priority for redevelopment. Incentives such as expedited permitting, relief from parking requirements, or investment in public parking can help attract developers.

The Ridgeway greenfield development at Sutherland Shire

Putting vacant urban parcels to work

With global housing demand currently under-supplied, significant amounts of land sit idle around the globe. Even high-density neighbourhoods may have viable vacant land.

Building infill housing on vacant parcels of land could help to relieve the pressure on housing supply. Taxes on idle land can also help to create incentive to develop.

Making public land available

Governments can allocate unused public land for housing development. Unused Land surrounding busy transport hubs may be owned by transit authorities, which could be better utilised for housing development. Retired sports facilities, military bases or transit hubs may also create viable sites for housing.

Low or middle-income housing is often easier to facilitate on these types of sites as the government can ensure the sale or transfer of land is subject to affordable housing development.

[Related reading: Melbourne and Sydney Industrial Rental Gap Widens to 90%]

Transforming industrial sites

Large industrial sites that are currently being unused offer significant development potential. While converting them to residential use does offer relief to housing supply, thought into the affect on jobs should be considered as well as whether surrounding commercial activity would affect the living conditions of residents in the area.

Going greenfield

Cities surrounded by undeveloped or agricultural land can benefit greatly by invest in greenfield housing projects. While greenfield developments typically involve the building of infrastructure, roads and new neighbourhoods if land is more affordable and economies of scale can be achieved it may still be cheaper than infill projects.

Despite the many potential advantages of going greenfield, if developments are built to far away from existing employment centres or transit hubs, it can fail to attract or retain residents as seen in mistakes made in Cairo and Mexico City.

Adding accessory dwelling units

Many cities are encouraging homeowners to add accessory dwelling units, include garage apartments, basement apartments or backyard cottages. Accessory dwelling units are affordable as they use existing land, buildings and infrastructure. This creates an “invisible density” that can help to address the under-supply of global housing.

— TWO —

Cities have to remove barriers

Cities need to develop governance structures that represent all stakeholders and streamline the actual execution.

Aligning for better delivery: Delivery labs and integrating housing agencies

The delivery of housing strategies involves financing, urban planning, infrastructure development, land-use regulations, building codes, delivery, contracting approaches and many more. Different participants in the process rarely collaborate creating frictions instead of focusing on the goal of creating more affordable housing fast.

The ‘Delivery lab’ model addresses this lack of coordination; bring together all people across the system for fast-paced, intensive working events. These labs are aimed to turn high-level housing strategies into detailed initiatives, implementation plans, and key performance indictors, also addressing any misperceptions and arriving at joint solutions. These labs can ensure plans are integrated across each member’s role and timelines for when each stage is delivered. The delivery lab approach has had a major positive impact on the housing market in Saudi Arabia. 

Engaging more stakeholders and overcoming NIMBYism

Existing residents may be concerned with the redevelopment of their neighbourhood. This may be due to the prospect of lower home values, congestion and over-crowding in schools. Many cities have established public hearings or ballot initiatives to address the concerns of the community, often resulting in little development of housing.

[Related reading: NIMBY v YIMBY: The Great Debate]

Cities need to take an inclusive approach to providing housing to a wide-range of people from different walks of life. People who move to a new city need employment and importantly an affordable place to live. However the concern of existing residents of the community often oppose change and drown out those who need more affordable housing.

Cities can also emphasise the role for employers in the community-input process. Housing issues play a significant role their ability to attract talent since housing affordability directly affects this.

There are many ways cities can makes the planning process more dynamic and inclusive. These include digital surveys and the use of analytical tools to track the sentiment and real world use patterns. This can ensure housing decisions reflect the actual needs of the community and minimise the influence of smaller interest groups.

housing affordability

Speeding Up

A network of regulation is associated with land acquisition, zoning and building codes. Developers are required to provide environmental studies, design approvals and public hearings, creating inefficiencies. Poor management of the approval process can result in large delays in development as well as significant cost increases. This drives up the risk premium associated with developments, raising costs for renters and homeowners as well as resulting in many developments not being undertaken.

Streamlining the approval process and permitting can create a more efficient process. Establishing single window clearance and digitising permit applications and status tracking would help begin the development of the process. Australia was able to cut the number of regulatory procedures and speed up permit approvals by more than two months while maintaining high construction quality.

Cities could establish special development zones where deviations from city zoning and land-use codes are permitted with minimal review. Environmental reviews could also cover a larger area of land clearing future development in entire zones streamlining the development process. Governments could also create appeal boards at the local level for faster resolutions of projects rejections or mitigation proposal.

Government can also develop building codes, as today the main focus is on equipment, material and design the construction companies must use. This can restrain innovation making it difficult to improve productivity through new practices developed. Cities could develop outcome-based regulations that require safe, sound results, however construction companies have the flexibility to achieve them.

[Related reading: Australia’s Housing Affordability Crisis And Private Investment: What Can Be Done?]

Scaling up and creating incentives for efficiency and innovation

Large-scale projects can affect productivity and cost of a project, making it possible to employ methods such as repeatability and off-site fabrication. Cities can support industry innovation by providing the land and infrastructure that allow for scale tendering out city-scale developments, and consolidating high-volume demand.

In a McKinsey Global Institute global survey, construction executives, suppliers, and project owners pointed to misaligned incentives and contracts as impediments.

Projects are often awarded to the lowest bidder with limited regard to quality, change orders, and claims that might arise after the fact. Detailed specifications often give limited flexibility when problems occur, risks are misallocated and contracts generally fail to account for uncertainty in the development.

The transition to value based tendering, adding contractors and owner incentives to traditional contracts, improving transparency and collaboration can add significant value. Integrated project delivery supports collaboration amongst various stakeholders to collaborate closely on a project, sharing revenue and costs while maintain their separate identity.

Cities can improve private-sector adoption and investment in cost-saving tools through mandating the use of efficient technologies and innovations in their procurement contracts. Ensuring contractors submit models in building-information-modelling (BIM) software can improve industry standards and practices.

  — THREE —

The Construction Industry Has to Evolve

Productivity in the construction sector has been low all around the world. Over the past two decades labour productivity growth averaged one per cent a year in contrast with manufacturing growth at 3.6 per cent and the total world economy at 2.8 per cent. Low levels of productivity can partially be blamed on external factors such as building codes, permitting processes and cyclical fluctuations in public and private demand.

[Related reading: ‘Ripe For Disruption’ 5 New Construction Technologies Changing The Way We Build]

At the industry level construction is highly fragmented, contracts have misaligned incentives, and inexperienced owners and buyers find it hard to navigate an dense marketplace. At the company level, there is often inadequate design processes, poor project management, a lack of investment in technology, R&D and workforce skills.

Pushing Forward with Best Practices to Boost Productivity

While cities can create more efficient environments and incentives for innovation, construction companies also need to further improve of the processes.

Onsite execution can be improved through better planning processes and pre-work being completed before construction starts on-site. Key performance indicators can be used to ensure activities are completed on time and on budget, along with holding regular performance meetings to monitor progress and to generate solutions to any issues.

[Related reading: 10 Best Construction Apps of 2017]

Digital adoption would also help to improve on boosting productivity in the construction industry. This could include BIM tools for design and analytics as well as IoT for on-site monitoring of materials, labour and equipment productivity. Cloud based control towers can coordinate large-scale project, accumulating data in real time keeping all stakeholders up-to-date on the project. Techniques and data that is readily available can produce large improvements in the accuracy of costs and scheduling as well as productivity. Advanced automated equipment such as bricklaying and tiling robots, can accelerate on-site execution.

Transitioning to Production-System Approach

Inspired by the mass-production system of the manufacturing system, construction could receive its biggest boost in productivity. This would involve more standardised elements; panels manufactured and assembled off-site, and limited finishing work conducted on-site.

The movement toward the manufacturing system has began all around the world. An example of this is VBHC, a modular-housing provider from India designs prefabrication room components that can easily convert one-bedroom units to two or three bedroom units, reducing costs by avoiding the extra aluminium framework. Such constructions techniques can be applied to a variety of different housing developments, including prefabricated single-family homes as well as detached dwellings units and modules for multifamily infill projects.

Housing affordability is an issue faced by people all around the world. Demand side strategies including subsidies and financing solutions cannot help close the gap between supply and demand alone. Cities around the globe need to significantly increase home building to improve residents quality of life, remain inclusive and ensure that the shortage in housing supply doesn’t further hinder economic growth.

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