Ira G. Peppercorn and Claude Taffin Financial and Private Sector Development/Non Bank Financial Institutions World Bank May 31, 2012

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1 Ira G. Peppercorn and Claude Taffin Financial and Private Sector Development/Non Bank Financial Institutions World Bank May 31, 2012

For those that do not have enough income or whose income is informal Limits percentage of the population that can quality for mortgages Opening too wide the access to

2 For those that do not have enough income or whose income is informal Limits percentage of the population that can quality for mortgages Opening too wide the access to homeownership can be dangerous, especially if outside normal underwriting standards. Vibrant rental markets are necessary for workers mobility. Home-ownership can produce larger urban sprawl.

3 Cultural biases in favor of home-ownership Negative perceptions of rental housing Legal framework, especially in relation to tenant s rights and evictions Low rate of risk adjusted return Lack of incentive for investors Lack of adequate finance Lack of formal property management

4 Workers in urban areas Young professionals Students who live in dormitories; Those experiencing transitional events in their life Families who cannot afford or qualify for a mortgage, some of whom might be living in poor housing conditions; People who simply do not want to own People sharing space with relatives

Individuals who own a single or a small number of rental units House or apartment owners that rent a room in their homes Providers of social housing including governments and NGOs Companies that

5 Individuals who own a single or a small number of rental units House or apartment owners that rent a room in their homes Providers of social housing including governments and NGOs Companies that provide housing for their workers Medium scale owners that own from 10 to 100 units Institutional owners and investors, for whom the ownership of rental housing is a significant line of business Property management companies Builders, contractors, materials suppliers, utility companies, security firms and others who provide services to the owners of rental housing.

6 Is there a shortage of housing? Is this in the overall number of units, in the quality of the existing units or both? If there is a shortage, is it primarily in certain urban areas? What is the relationship between rental housing prices and the wages at particular income levels? Is the housing affordable? Who are the potential investors and what incentives do they need? Is the legal framework fair enough? Are there major imbalances in the fiscal system that discourages investors? Is there financing available to develop and/or improve the housing? Are governmental subsidies available and, if so, how and for what income levels?

7 Countries Cities Africa Owners Renters Others Owners Renters Others Egypt Cairo South-Africa Johannesburg Asia China India Thailand Latin-America Bolivia Brazil Uruguay Developed Countries France Germany The Netherlands Switzerland United Kingdom U.S.A Beijing Bangalore Bangkok Santa Cruz Sao Paolo Montevideo Paris Berlin Rotterdam Geneva London New York

8 Eviction process uncertain, cumbersome or tenant biased Return/risk ratio favors other investments Rent control Taxation Lack of cost-effective professional property management

9 Tenure insecurity Unfair or no dispute resolution Poor conditions Lack of formal contracts Affordability constraints

10 Demand: Targeted but expensive Housing assistance payments Vouchers Housing itself Supply: Not ongoing; not deep enough Construction or up-front subsidies Direct payments to landlords Tax incentives Land and infrastructure

11 Illegal rental units Poor and unsafe conditions Lack of registration Property tax avoidance Pressure on public sector for subsidies and units Poor property management systems

12 Policies recognize rental is an important sector Perform an assessment of the rental sector Review the legal framework Review the tax system Favor access to long-term capital Provide targeted, effective subsidies

Compare household characteristics and housing conditions of tenants and owners. Ask tenants their reasons for renting and the type of landlord. Evaluate the balance between supply and demand.

13 Compare household characteristics and housing conditions of tenants and owners. Ask tenants their reasons for renting and the type of landlord. Evaluate the balance between supply and demand. Evaluate conflicts and the conflict resolution process. Compare the costs of renting and owning (including obstacles to access to credit). Compare rental return and risk with alternative investments (after and before tax).

14 Ensure that the rights of landlords and tenants are balanced Balance between stability for tenant and flexibility for owner Duration & termination of the contract Rent setting & rent increase Solving conflicts: Fair dispute resolution

Level the playing field between rental and other investment / ownership Rental income & capital gains often unfairly treated Consequences: negative impact on the rate

15 Level the playing field between rental and other investment / ownership Rental income & capital gains often unfairly treated Consequences: negative impact on the rate of return; disinvestment or informal renting A good tax model should include: - Main expenses deductible - Economic depreciation - Losses offset taxes on other income

16 Small owner incentives, such as capital for expansion and renovation Medium to long term capital availability, both debt and equity Support from the public sector - Direct lending - Guarantees for private loans - Partnerships.

Demand-side subsidies most effective, but - Entail heavy fiscal commitments - Require the collection and update of information on beneficiaries.

17 Demand-side subsidies most effective, but - Entail heavy fiscal commitments - Require the collection and update of information on beneficiaries. Supply-side subsidies may be given in several forms, including tax rebates, soft loans, and guarantees. - Soft loans most efficient (leverage effect) - Avoid long-term non-capped commitments, - Governments should obtain social commitments in exchange and control owners

18 We do not advise governments to put the emphasis on rental instead of ownership; rather to add a rental component to their housing policy; If they are willing to do it, they will have a number of measures to take, most are difficult, some are expensive; And they should be taken in the right order: assessment legal tax finance subsidies.

19 Contacts: Ira Peppercorn The World Bank xxx-xxxx Claude Taffin Dinamic

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