Building affordable homes isn’t enough to solve a housing crisis

Living in Los Angeles, housing is always a hot topic. Whether the conversation is about homelessness, rent, homeownership, or another fancy new development without enough parking spaces, the cross cutting problem seems obvious: There simply aren’t enough affordable homes. 

And Los Angeles is hardly alone. 

Housing affordability, availability and accessibility has become a concern across cities, countries, and continents. The manifestations and causes differ, but the conventional response tends to be similar: We need to build more affordable housing.

But, what if simply building more affordable homes isn’t enough? 

Building homes is certainly part of the answer, but while researching Nigeria’s housing challenge recently, it became increasingly clear that building more affordable homes doesn’t solve the problem if millions of people (nonconsumers) still can’t access them. 

What is nonconsumption telling us?

Roughly 87 million Nigerians live in poor housing conditions (7 million people in Kano, 3.8 in Lagos, and 4 million in Kaduna) and housing deficit estimates vary from 17 million to 28 million units. Furthermore, mortgage penetration is under 1% of GDP, and housing loan rates range from 20 to 32% per year. By comparison, mortgage debt alone equals roughly 47% of GDP in the US and around 38-40% in Germany, financed at interest rates a fifth to a sixth of Nigeria’s.

These statistics illustrate both a housing supply and housing financing problem. Yes, Nigeria needs millions more homes, but just building homes doesn’t turn these millions of nonconsumers into consumers. If a household earns income informally, can’t qualify for a mortgage, can’t afford a completed house upfront, or can only save in small increments then just increasing the inventory of conventionally financed homes doesn’t necessarily make that household a participant in the formal housing market. 

In other words affordability isn’t just about the final price of a house, it’s also about whether someone has a viable way to consume it. What does that look like for a nonconsumer? What would housing look like if it were designed around how today’s nonconsumers actually earn, spend, and live? 

Change what people can buy

We tend to think of housing as a single product, but for many families, housing is already a process. Someone may build a foundation this year, walls the following year, then add a roof, flooring or another room when income permits. This process isn’t something to judge, it actually just reflects a consumer’s cash flow. And it lets us approach the housing crisis with better framing. 

Instead of making an entire finished house cheap enough, what if we make each step toward adequate housing affordable and accessible? 

EarthEnable provides a useful case study. The company trains local masons to sell and install an affordable earthen floor. This business model has impacted over 200,000 lives, developed over 35,000 housing solutions, and created over 1,000 jobs in East Africa, with EarthEnable masons earning 2-3x the median income. The company demonstrates something important about nonconsumption and market creation: the solution doesn’t always have to be the complete product in the way we’ve come to understand. 

Change what people can pay

Another innovation useful to the housing crisis, but applicable to other sectors as well, is around finance. We’ve previously written and spoken about financial innovation: crowding in capital for market creation. 

Conventional housing finance tends to evaluate borrowers through things like salaries, documentation, credit histories and predictable monthly repayment capacity which excludes millions of independent workers who participate in economic activity but don’t have a conventional paycheck to show it. Therefore a cheaper house financed through inaccessible financial products can still be unattainable. 

But it doesn’t have to be. 

Habitat for Humanity’s MicroBuild Fund has demonstrated an alternative solution. The fund helps low-income families improve and build durable homes through microfinance institutions by providing lending and technical assistance to financial institutions serving lower-income households. The technical assistance includes market research, housing-product design, staff training, and consumer education.

Initially, Microbuild’s philanthropic and impact partners put in 10 million dollars of early, risk-absorbing equity. Because that capital took the first risk, the U.S. government added 90 million dollars in long-term debt. Every 1 dollar of catalytic capital drew in 9 dollars more, turning 10 million into 100 million. 

The goal of financial innovations shouldn’t necessarily be to finance every house (or other applicable development project) forever, but it should be to demonstrate that customers previously considered “unbankable” can actually be a viable market. 

Affordability is a system

Just like building more affordable homes isn’t enough to solve a housing crisis alone, neither is changing what people can buy or what people can pay, alone. Cheap components don’t create adequate housing if there isn’t a system of capable builders or financers that allows nonconsumers to buy and build them. Housing becomes affordable when the product, financing and production systems evolve together to create an inclusive market. 

The particular solutions to global housing crises will look different in Lagos, Los Angeles, or anywhere else. Land regulation, income, infrastructure and housing stock differ enormously, but the lesson is transferable: Don’t measure housing affordability by what it costs to build, but by whether the people who need housing can actually enter the housing market. And if they can’t, then leaders must ask themselves how to get them in.