CHAMBER OF REAL ESTATE & BUILDERS' ASSOCIATIONS INC Pomjof!Mjcsbsz! www.ecreba.com A Proposed LGU Program for Affordable Housing Presented at the CSHFI/DILG/HUDCC-LGU/Private Sector Housing Conference Manila, 30 July 2004 By Nathaniel von Einsiedel Principal Urban Management Adviser CONCEP, Inc. There is no question that the need for affordable housing in Philippine towns and cities are rising rather than declining, especially in recent years of seemingly unbounded urban population growth and housing price inflation. As the population in our towns and cities continue to rapidly increase, the gap between housing needs and supply, particularly for low- and moderate-income families, is widening and reaching alarming proportions. The reason housing in our towns and cities are in painfully short supply hinges on the simple disconnect between supply and demand. While urban areas gain large numbers of new households every year, only a very small number of affordable housing units are being built. A host of factors are driving up housing prices and holding down construction of more housing units; high land and construction costs; slow-moving bureaucratic processes for review and approval or denial of construction permits; complex and often inflexible codes and regulations; the absence of residentially zoned land for affordable housing; and limited government funds to subsidize construction of low- and moderate-income housing. Yet, in the midst of this housing crisis, residential construction continues. The problem, however, is that such construction are often either a) for upper-income groups, in the case of medium-rise or high-rise condos in urban centers; or b) too far away from centers of employment and livelihood, even if the housing units may be lower in price. For both cases, the challenge of affordable housing should be viewed not only in terms of the price of a housing unit but also its location
relative to centers of employment and livelihood where a large number of lowand moderate-income households derive their income. To address the issue of affordable housing in Philippine towns and cities, a program of INCLUSIONARY HOUSING is needed. INCLUSIONARY HOUSING is a critical part of comprehensive efforts to meet the growing need to address the problems that accompany rapid urbanization. It addresses the concern for not only housing price but also of location. Inclusionary housing involves local ordinances that either encourage or require residential developers to incorporate affordable units in market-rate projects as a condition of project approval. It is similar in objective to the 20% socialized housing requirement for subdivision projects under the Urban Development and Housing Act (UDHA). However, the UDHA requirement is applied to residential subdivisions which are almost always developed in urban fringe areas that are often far away from employment centers. There is no equivalent requirement for urban centers where a large number of low-income households find their means of livelihood. In other countries, affordable housing advocates are increasingly succeeding in persuading local governments to adopt inclusionary housing programs. Cities that have adopted such programs have enacted laws that encourage or require residential developers to incorporate affordable housing units in market-rate projects as a condition of project-approval. Many cities all over the world administer inclusionary housing programs, and an equal number are involved in negotiating inclusionary agreements with developers on a case-by-case basis. Those cities where inclusionary housing programs exist have enacted laws requiring local governments to plan and enforce zoning ordinances in a manner that will provide a fair share of low-income housing to meet housing needs. The experience so far shows that inclusionary zoning can help expand the stock affordable housing and can generate projects profitable enough to get developers to participate in the programs. However, the experience also shows that these programs have their fair share of problems. The most frequently asked questions are: Why is it legally sound to require developers rather than the city government (and the community at large to shoulder the burden of providing low-income housing units for needy households? How do such programs avoid raising prices of market-rate housing and undermining the economic feasibility of residential projects? Predictably, the answers are mixed, supporting both sides of the issue. To reduce the objections to inclusionary housing and zoning ordinances, several approaches can be adopted. First, inclusionary housing ordinances should allow property developers to make a reasonable return on a proposed project and 2
receive some form of regulatory relief, such as density bonuses, that partially or wholly compensate for the affordable housing units required. Second, cities should prepare a compelling case for adopting mandatory programs. It should demonstrate that construction of private, market-rate housing units have impacts on specific community interests that are addressed by the inclusionary requirement for example, that new market-rate housing creates a need for workers who can afford only lower-cost housing or that it displaces low-cost housing needed for existing residents. The cost impacts of inclusionary housing would depend on the relative desirability of the community in the metropolitan housing market. In a highly desirable community such as cities which are regional trading centers, for example, developers could raise unit prices to provide at least part of the subsidy. In a less desirable community, constraints on housing price increases would force developers to absorb the cost of affordable units except that in time as developers factor subsidies into their pro-forma calculations, they would pay less for housing sites, in effect passing the cost back to property owners. The significance of economic impacts becomes almost moot, if an inclusionary housing and zoning program provides incentives that largely offset cost subsidies, such as density bonuses, fee waivers, reductions in code standards for subsidized units, and expedited approval processes. These contributions to reducing development costs, while not always making up for all the cost differences between market-rate and lower-cost units, can allow developers and builders to make sufficient profit to warrant housing production. For most rapidly growing cities, which are highly desirable housing markets, builders should regard inclusionary requirements as a cost of doing business, and that builders can make such projects profitable. From an economic standpoint, each inclusionary project must be considered as a whole whereby cost and income trade-offs relating to the number of units of all types, land and site development costs, sales prices and rents, and other factors combine to generate a bottom-line financial picture. Developers and local governments need to work out feasible incentives for inclusionary programs. This should produce positive results. The pros and cons of the legal and economic issues raised by inclusionary housing will likely not be easily resolved. But everyone concerned with crafting workable inclusionary programs can make certain the following principles guide program administration. 1. Linking inclusionary housing to comprehensive development programs. Inclusionary housing programs should be viewed as one of the battery of mutually reinforcing housing programs that make up a comprehensive and community-wide, public non-profit/private effort to construct and improve 3
affordable housing. Local government units (LGUs) can use existing housing finance programs of the national government (such as PAG-IBIG and the Community Mortgage Program) to subsidize low-income housing construction and redevelopment programs. They should also encourage and support the work of non-profit housing groups (such as Gawad Kalinga and Habitat for Humanity) and take the initiative to form hosing trust funds and community land trusts to assist in housing production and improvements. 2. Make requirements and procedures transparent and predictable. Inclusionary programs should be carefully crafted to create a zone of comfort for developers and builders required or encouraged to create affordable housing. Requirements should be clearly spelled out in local ordinances and administrative guidelines. Staff should be trained to work with applicants to design appropriate projects. Developers will want that inclusionary programs should establish expectations that all builders are expected to meet, giving them a level playing field for competitive development. 3. Provision of incentives. Inclusionary programs should provide incentives such as density bonuses, expediting zoning and building permits, fee reductions and tax holidays that go at least partway toward compensating developers for incorporating low income units in their projects. Developers can be encouraged to participate in these programs if they can work with local government staffs who are willing and able to make cost-cutting design and procedural decisions to keep a project moving forward. For example, spelling out specific incentives help developers estimate development feasibility. 4. Establishing community support for affordable housing. Inclusionary programs are best initiated and sustained as a result of long-term efforts of local political leaders and non-profit housing groups to address a lack of affordable housing. This means having the city or municipal council involved and passing the appropriate local ordinance to give these efforts the legal framework. Such programs can assemble a valuable constituency that can support inclusionary projects and assist in overcoming occasional political and technical hurdles. They can create housing trust funds and other programs that can benefit inclusionary projects. 5. Defining the market. Determining the desired income range of households to be served by affordable units is one of the critical decisions for any inclusionary program. If public subsidies for low or very low income households are in short supply, program may need to be aimed at producing units that moderate-income households can afford to rent or buy. Appropriate household income levels will vary from one community to 4
another. Establishing financially feasible income and price/rent levels for projected units to be created by private market forces is a key to successful inclusionary programs. 6. Shaving cost of design and development. It is possible to whittle down development costs to make inclusionary projects feasible. Slight design alterations and efficient approval processes can help projects measure up to financial expectations. When developers and local government staff work closely together to identify and secure approval of design options, waivers, variances, and special funding sources, development costs can be brought in line with projected sales and rental income levels. To ensure that an inclusionary housing program is sustainable and effective, it will need to be backed up by an ordinance adopted by the city or municipal council, together with appropriations for a dedicated office to manage the program. This office can also serve as the technical secretariat of the City/Municipal Housing Board which is required of all LGUs under the Urban Development and Housing Act (UDHA). If qualified staffs are in short supply, this office can initially be manned by staff seconded from other departments and supported by external consultants who can advise as well as train the staff. Inclusionary programs are not a panacea to overcome affordable housing needs, nor are they easy to create and administer. Nevertheless, the cities and towns of the Philippines, can find them beneficial as part of comprehensive efforts to meet the growing need for housing, especially of the large number of low income households. Nathaniel von Einsiedel is an Urban Management Specialist as well as a licensed Urban Environmental Planner and Architect in the Philippines. He has over 30 years experience in urban development planning and management in government and the private sector as well as in technical assistance programs in developing countries. His government experience includes urban development policy, land use planning, housing for low-income families, and capital investments programming. His private sector projects have involved master-planned mixed-use communities, residential, institutional, and recreational developments. He also has served as an urban development consultant to international development agencies such as the Asian Development Bank, World Bank, USAID, UNCRD, and UN-ESCAP. From 1990 to 2003, he focused on capacity building for urban management as the Regional Coordinator for Asia-Pacific of the United Nations Urban Management Programme. He has been conferred the status of Fellow by both the United Architects of the Philippines (UAP) and the Philippine Institute of Environmental Planners (PIEP). He has a bachelors degree in Architecture from the University of the Philippines, a masters in Urban Planning from Columbia University (New York, USA), and a PhD in Public Administration from the Pacific Western University (Hawaii, USA). He is past President of CREBA for 2 terms. 5