In this article the focus is on the financing of large scale affordable housing transactions. There is also a focus on how government can support wholesale affordable housing  finance transactions. The suggestions in this article will however  also be relevant to Development Finance Institutions.

The problem

Although experience varies from country to country and within countries, Statistics from the IMF IMF Global Housing Watch  and other organisations continue to show  an overall picture that  housing affordability has been declining over many years in many markets. Dealing with this should be a priority for governments.

On an individual level, the lack of affordability relates to an individual’s lack of  ongoing income to support rental or mortgage payments, and, in the case of housing purchases insufficient equity contributions to satisfy mortgage lenders’ requirements.

 Factors that will impact affordability

Key factors that will influence  housing affordability are the capital cost of housing, household income, rents , operating and financing costs, and expected returns.

How governments can assist in the financing of Affordable Housing

There are a range of approaches to the wholesale  financing of housing , as opposed to financing of individual properties for owner occupiers. There are also different models for financial social housing.

As governments will have financing costs that are lower than individuals , the lower cost can be used to enhance credit quality, as well as passing on benefits from lower cost of funding to occupiers of “affordable housing” e.g. lower rents/ mortgage financing costs/matching a borrower’s savings towards a housing purchase

Some general principles in providing government support for the financing of wholesale Housing Finance transactions

In general, support measures that enable borrowers to purchase housing  on higher than normal income multiples/ minimal equity contributions ( e.g., help to buy mortgages requiring small owner equity contributions) will reduce affordability to as it means more borrowers competing for available supply and therefore most likely increase prices.  Financing support for government should therefore focus on individuals currently unable to obtain mortgages from private sector lenders on “normal mortgage terms” or to afford a “market rent” in a location for housing appropriate to their needs.

Support should also focus on those most in need….more support for fewer people rather than a broader approach . Also, if an individual’s income rises any credit support should reduce.

What financing support from government  for Housing Finance transactions can help to improve housing affordability?

Some of the support mechanisms include

1. Variable levels of credit support for wholesale Housing Finance transactions, so that lenders have access to housing finance related debt instruments with a range of credit ratings.

Guarantees of the entire amount of a debt issue should be avoided, as the aim of any credit support is to maximise the benefits of any credit support. As a generalisation , credit support should be of an amount that would cover expected losses in a default based on stressed historic experience plus a margin e.g. . if an expected loss would be 2% of a portfolio for a transaction with a low investment grade rating, a 5% guarantee would leave significant room for “unusually high losses”

2. Subordinated debt provided by government agencies

3. Contingent subordinated debt and / or equity

4. Take equity in housing investment vehicles, so that government will benefit from any rise in housing values . That benefit can be potentially used to support the provision of affordable housing, and / or shared with housing occupiers so that they can build deposits needed for mortgages from private sector lenders

5.Credit support that reduces over time based on the credit performance of the relevant financing

6.Credit pricing to reflect risk

7. Use of PPP and sharing of benefits of re- financing gains

What are your suggestions?

For me, as would guess, rising levels of unaffordability of even “basic housing” is a problem that needs to be solved . With a positive mindset I believe that the needs of governments, home occupiers and private sector investors ( debt and equity) can be met to a large extent whilst reducing housing unaffordability.

Above are my thoughts on how governments can assist through the support of wholesale Housing Finance transactions. What are your suggestions? I’d very much like to receive your comments.