Speech of the World Bank Vice President Philippe H. Le Houérou at the Conference on Rural Housing in Tashkent

Dear Mr. Chairman,

Distinguished guests, ministers, your Excellency ambassadors, and participants of the conference.

It is an honor for me to talk to you today about the development challenges surrounding rural housing and how various countries around the world have addressed these challenges.

3 billion people, or about 40 percent of the world’s population, today, are in the need of basic housing infrastructure and related services.  Fulfilling this need requires not only capital, but also more importantly a delivery mechanism that ensures appropriate targeting and does not distort the housing market. The housing market functions well when there is an adequate supply of affordable housing, and suitable financing options that help increase ‘effective’ demand. The government has a role in regulating this market.

In many developing countries, the scarcity of housing provision affects lower-middle income groups the most. In these countries, the private sector caters to the top 10-20 percent highest-income households. The bottom 20-30 percent is often targeted by government or donor programs. There remains a significant gap for those in the middle, those who either cannot find affordable housing options, or are too “rich for subsidies”. This group also includes families who could purchase or upgrade their house if they had access to affordable housing and financing.

Recognizing this, globally, many governments have taken actions to fill this housing ‘gap’; some have been successful, while other programs have produced mixed results.

Dear conference participants,

An important lesson learned from global experience suggests that housing and finance are interdependent.

A well-functioning housing market requires:

• A menu of both housing and housing finance products that increase the supply of housing to meet the demand for all income segments;
• A policy that encourages the private sector to be more responsive to the (latent) demand of the lower income groups, including middle income;
• A focus of the Government’s limited resources on the neediest population groups.

An important point here is that interventions are required to make the housing market work, which are just as important as subsidy programs for the lowest income groups. Here are some examples of countries where governments have chosen to focus on housing finance as a means of intervening in the housing market to improve supply of housing to the lower income group.

In Romania, for example, Home Improvement Loans are designed for low-income households that do not typically qualify for long-term housing mortgages available through commercial banks. Housing loans offered under this program also provide technical assistance for construction, and are priced to cover operational and financial costs of the microfinance program. As of July 2004, the housing microfinance program in Romania had achieved a repayment rate of over 99%.

In Mexico, a similar project began as a pilot program to support community banks and provide health services to the newly arrived workers in the assembly plants. It was targeted at clients who earn between 2 to 8 times the minimum wage. The loans can be used to complete or renovate, or to re-build a home; loans range from 510 US Dollars to 590. During its first 10 years, the project made loans of 8.2 million US Dollars to more than 5,300 low-income families. This project’s success is based on a simple, streamlined three-step process that includes technical assistance, innovative use of partners, and necessary safeguards to minimize credit diversion and misuse of funds.

India is also a case where supportive government policy has helped spur the private sector into the construction of lower income housing. Today there are more than 30 large developers who have launched housing schemes targeted at low-income households – less than 10 years ago there were none.

The low-cost housing project in Karjat is among India’s largest housing projects targeting lower income households. While it has some complications, the project builds around 15,000 affordable basic housing units over 18 months. Typical beneficiaries have an income between 250 and 375 US Dollars per month.

In South Africa, on the other hand, the government’s subsidy program has had the unintended effect of further exacerbating the lack of supply of housing for middle and low income households. The program mandates the construction of ‘free’ houses for the poorest. These houses need to be cross-subsidized by the developer in order to turn a profit: therefore, the unsubsidized houses are now even more expensive because of the cross-subsidy. This means there is now a gap in the market for households who do not qualify for the subsidy and cannot afford the ‘market’ priced houses.

In summary, the typical situation in most developing countries is as follows. The formal housing supply tailors to the highest income groups who typically buy homes with cash or have secure incomes in the formal sector and can obtain mortgage financing. In many countries lower-middle income groups are able to access only informal housing using their savings or micro-credit. The poorest households may have access to government subsidies.

To address this situation, government should move the market-based formal housing supply down-the-market, with a range of housing and housing finance products that meet the needs of various income groups. The government then can realistically focus its financial assistance to the poorest, mostly in the form of subsidies.

We highly appreciate that tremendous efforts have been made by the President and the Government of the Republic of Uzbekistan for rural housing development.  I am sure that participants of the conference can learn lessons from the positive experiences of Uzbekistan.

With these remarks, I’d like to thank you for your attention and wish that all the participants have a stimulating discussion at the conference sessions.