Framework for Cost -Effective Housing Programs The Problem Many countries have severe housing shortages with annual production deficits of hundreds of thousands of homes. Housing supply systems are not strong enough to meet demand especially at the low end of market where homes are needed most. Each year just a few expensive homes targeted at middle and high-income households are built because only these buyers can pay for their homes. Housing finance systems pander to wealthy buyers who do not need housing finance. Lowincome buyers who need financing most cannot get it. In developed countries over 70% of households qualify for mortgages. In developing countries less than 18% qualify. Until housing finance is widely available, developers cannot be expected to build homes for people who cannot pay for them upfront. They will only build homes for wealthy buyers. Under these conditions governments are under pressure to provide affordable housing. The default solution is to help the neediest first and gradually work up the income scale. Government programs are rolled out in phases with the greatest subsidies going to the poorest households, often slum dwellers, in the first phase. These homes are usually given away for free. Subsequent phases offer lower subsidies to higher-income households. Results show that this well-intentioned rollout sequence is flawed. In country after country, slum reclamation projects have failed because the beneficiaries simply sell their homes and create new slums. There is also the often-overlooked issue of project execution. Announcing the intention to build 100,000 new homes within two years does not assure their delivery or their occupancy. Many countries have announced such aggressive housing production targets and failed to deliver anything substantive. Others have announced the targets, brought in foreign partners to deliver the homes and ended up with tens of thousands of empty homes. Finally, partial or total subsidies distort the housing market and cause more harm than good.
Social Strife. Subsidies are little more than lotteries with very few winners and many more losers. No country can subsidize everyone that needs help. Losers complain and try to discredit the program by proving that winners must have got their homes through fraudulent means. To avoid strife governments have to continue the subsidies or abandon the project. Distortion of incentives. The government, with the best of intentions, may decide to partially or fully subsidize the value of homes. Because only a limited number of homes are available, many people will try to compromise officials managing the allocation of the homes. Depending on the level of the subsidy, inducements could run into thousands of dollars per home. Alternatively, powerful individuals or criminals could force winners to give up their homes for a small payment or nothing at all. This is no different from the forced displacement of poor people from slum areas slated for redevelopment. Destruction of Housing Market. Winners have an incentive to cash out their windfall for any amount up to the subsidy. This puts downward pressure on house prices. It is unreasonable to expect a household earning $50 a month to hold on to a $30,000 home. Homes will be sold for any amount that leaves a significant amount of cash in the pockets of the seller. For such a household $2,000 from the sale of the home is very attractive because it equals 40 months of income. Under these circumstances home prices plummet. The only beneficiaries of this program are the developers that are paid to produce these homes, and the investors who purchase the homes for pennies on the dollar. In effect a government invests its funds to force down home values and therefore wipes out household wealth where it is needed most at the low end of the household income range. This clearly is not the intent of the program. Capital Flight. The beneficiaries of most government programs are the foreign investors that come into the country to profit from the government s generosity. While many countries around the world are working hard to attract investors, investors will only come to a country if they are able to take out a lot more than they bring in. This is why investors seldom commit to building homes in countries that do not have subsidized housing programs. There are numerous examples of countries that have prepaid investors for homes that are never delivered. Whatever the intent, the result is always that the intended beneficiaries of government programs do not live in the homes they are given. Wealthier buyers end up in the homes. This should signal to governments that their programs need to be revised. It is unfortunate that governments contemplating housing programs do not learn from mistakes of other countries. The same mistakes are repeated in country after country.
The Solution Options for Homes (Options) has developed a framework that allows governments to invest in cost effective housing without compromising the effectiveness of their programs. The key to the framework is project design and execution that creates desirable communities and the implementation of a program that recovers the subsidies over time or at resale, whichever comes first. The Company Options for Homes is a private not-for-profit housing corporation dedicated to providing costeffective homeownership for low- to middle-income households. Beginning with an idea and no funding in the 1990s, the founder Michel Labbé has built a company that has completed over 2,500 homes in the Greater Toronto Area and has more than 500 homes under development at present. The total value of Options developments exceeds $639 million. Options unique nonprofit approach has also created a non-profit trust with over $65 million in assets that are used to promote the production of more cost effective housing. Options is now Canada s largest nonprofit provider of ownership housing. Our results have been achieved without government support. Philosophical Foundation The Options model is a not-for-profit housing delivery system. Options does its work for a modest fee. The surplus of our activity taken as profit by conventional developers is retained within an asset-locked trust and used to fund more housing production and economic development. No conventional for-profit developer can offer better financial results to homebuyers or governments than we can. Our outcomes are always superior because of our philosophical commitment to cost-effective not-for-profit delivery. Our non-profit focus would save governments the world over from the disastrous deals that have been structured in attempts to provide affordable housing. There would be no need for messy non-transparent equity-sharing discussions. Government investments would be protected, leveraged and recycled in perpetuity. Project Design Options takes a holistic approach to housing solutions. Our intent is to create strong resilient blended-income communities that appreciate in value over the long term. We pay attention to every aspect of the project to ensure that people will want to buy the homes and live in the community. We design the project to be built out in phases that conform to the anticipated absorption rate. We bring together mixed-income households instead of targeting low-income households or a narrow customer segment because we have learned from our experience and
from failed government programs that targeting narrow customer segments does not work. Amenities are delivered in a sequence that makes sense from a financial and communitybuilding standpoint. For example, schools and recreation centres while desirable may be difficult to deliver at the beginning and may instead be delivered after a few years. Project Execution Options uses a non-profit delivery system partnered with local contractors because we are committed to delivering cost-effective housing and not on maximizing the benefit to our company. Our philosophical commitment to cost-effectiveness allows us to take a unique approach to housing development and negotiate appropriate profit margins with private profitmaking contractors. We address as many as 14 different components of the housing production process in our efforts to reduce costs. The cost savings on each component may be modest but together they add up to significant savings over comparable conventional developments. Options is also committed to creating strong desirable communities that promote appreciating home values. Appreciating home values are essential to building household, community and national wealth. Home Purchase Financing Many government programs ignore or gloss over the financial models of their programs. A housing program has to bring in more money than is spent to be sustainable. Options designs every project to be financially sound. This is why we insist on creating mixed-income communities so that higher-income buyers can offset lower-income buyers. We have developed a Lending Club model to help potential buyers who cannot qualify for mortgages or cannot afford high interest mortgages. Combining these buyers with cash buyers allows us to make housing available to lower incomes than would be possible otherwise. Community Wealth Management Options uses a non-profit housing trust process to reinvest the surplus created in housing into making homeownership even more cost-effective over time. We do our work for a fixed fee and leave the surplus the difference between the cost of building the homes and their market value with the buyer as a down payment loan or shared ownership stake. The homeowner is required to repay the down payment assistance over a period of 20 years to a social capital pool called the Community Wealth Non-Profit Trust. A community-controlled board of directors manages the social capital pool for a country or regional grouping of countries. At least 60% of these pools should go to the sector of origin (housing in this case.) Up to 30% of these pools can be used as start-up funds within the country or region for other job creating enterprises and up to 10% for capacity building and education.
For governments with housing programs, Options can manage subsidies in the same way it manages its down payment assistance. Every homeowner that receives a government subsidy will be required to repay the subsidy on a schedule that is fair to the household. As these funds are repaid to the Community Wealth Non-Profit, they will be reinvested into producing more housing that the government can continue to offer on a subsidized basis. In time the Community Wealth Non-Profit could grow large enough that government would no longer need to subsidize affordable housing. A recoverable loan eliminates any incentive to cash out subsidies and prevents the abuses described earlier. It ensures that the government s investments in affordable housing are recaptured and reinvested in the production of more housing instead of being whittled away through discounted sales designed to cash out the subsidies. Capital Preservation Unlike massive infrastructure projects that require large equity investments from investors and specialized technical skills, housing projects can and should be implemented using in-country resources. While some external expertise may be required, it does not justify the exorbitant profits foreign investors expect. Countries that mortgage their housing to foreign money sources expose their economies to significant risks. Homeowners suddenly find that they have to pay a lot more because of a change in exchange rates. A housing program that uses domestic resources protects the country s housing market from such external shocks. Local Economic Development The pent-up demand for housing is perhaps a country s greatest economic development opportunity. The construction of a single home creates at least 5 direct jobs and many more indirect jobs and economic benefits. Options views housing development as a way to provide housing and to grow the economy. Unlike investors that favour labour-saving construction approaches and cheap imported materials to increase profits, Options deliberately uses labour intensive methods and local materials to support the local economy. If we are able to operate in a country for several years, we expect the labourers that build our homes to become homeowners themselves. We also plan to backward-integrate into production of inputs for housing construction. The Community Wealth Trust will help establish social enterprises that manufacture windows and doors, household furnishings and other products needed for home construction. This will also create numerous new jobs and businesses.
Next Steps Options is willing to share its expertise to show countries how to unlock the immense value hidden in their undeveloped housing markets. We believe all countries have the money they need to start and sustain housing development and our experience in Toronto proves this. Options is ready to build demonstration projects in countries that would like to develop a sustainable way to address their housing shortages. A government s most important contribution is to provide access to land for the demonstration project. One of our affiliates in Africa was allocated over 100 acres of land at no cost because the government recognizes the net benefit that the Options housing development activity will bring to the area. Other affiliates are negotiating access to government land on a deferred payment basis. Options is ready to discuss workable approaches to accessing government land. Demonstration projects require the commitment of governments and the support of strong champions that can protect the projects from misdirection. The Options framework would minimize problems and could therefore create successful housing programs showing local populations the competence of their current government all while building wealth in the country that will lead to vibrant growing economies. For more information or to discuss a partnership opportunity, please contact: The International Coordinator Options International 468 Queen St E. Ste 310 Toronto, ON M5A 1T7 office@optionsinternational.net