Multifamily Trends - Summer 2004 - Inside ULI

Becoming Urban: The Hidden Opportunity in Housing

by John K. McIlwain

The Economist recently listed what it considers the top ten issues in global development, carefully chosen from a larger list compiled by Denmark’s Environmental Assessment Institute, and then whittled down by a panel of nine leading international economists. All of this was done so that this spring The Economist and the Environmental Assessment Institute can ask these economists the following question: “Given that resources are limited, what should come first? Where, among all the projects that governments might undertake to make the world a better place, are the net returns to their efforts likely to be greatest?”

The issues are: climate change; communicable diseases; armed conflicts; education; financial instability; governance and corruption; malnutrition and hunger; population and migration; and sanitation and water. Surely, few would question the importance of these issues to future life on the planet.

The odd fact is, though, that significant as these issues are, they do not include perhaps the most historic event of this decade, and possibly of this century—namely, that as of 2007, according to the United Nations, a majority of the world’s population will be living in urban areas for the first time in history. Furthermore, all of the world’s population growth in the years ahead—from today’s 6+ billion people to the 10 to 12 billion expected by the end of the century—is projected to be in urban areas, while rural populations are expected to decline. In short, the world has become urban, and is becoming more so every day. Yet, cities virtually are invisible on the policy landscape, both here and abroad.

Although the majority of Americans have lived in urban areas since the 1920s, it has been decades since any federal administration has given serious thought to our cities, or even to the suburbs surrounding them—despite the fact that these metropolitan regions are the economic engines that drive the U.S. economy and are competing globally for survival. The failure to take cities seriously has resulted in housing virtually disappearing as a federal issue—except, that is, during a campaign when an incumbent President claims credit for a historically high U.S. homeownership rate, despite his lack of involvement in the outcome, at a time of record foreclosures. In Washington, D.C., where housing prices are skyrocketing, housing is one of the hottest issues and affordability is one of the public’s greatest concerns. And for those worried about traffic congestion, just look where the most affordable housing is located: miles and miles away from jobs.

At the global level, the invisibility of cities has led economists and development experts to overlook the extraordinary opportunity presented by the need to house another 4 to 6 billion people in the world’s exploding cities. Stated simply, building and furnishing 2 to 3 billion homes can provide remarkable economic growth in developing countries—depending, that is, on how one looks at housing.

When housing development is viewed only as the act of governments and international nongovernmental organizations providing housing for poor rural populations and urban migrants, it is a hopelessly costly demand on scarce resources. Looked at another way, however, building billions of low-cost homes that are affordable to working families of even modest means is an exceptional opportunity for businesses, both small and large, and for millions of men and women with all levels of skills. The huge economic stimulus this can provide developing economies can spur growth and economic stability. This happened in the United States during the Great Depression and the years following World War II. During this period, Federal Housing Administration (FHA) and Veterans Administration (VA) mortgages for the first time financed the purchase of millions of small homes in Levittown and other suburbs throughout the country.

Realizing this opportunity will require that issues on The Economist’s list be addressed—governance, corruption, and financial instability. In addition, a radical redesign is needed of the types of homes the private sector is building in much of the developing world, and mass production technologies—long tested and proven in the United States and Europe—should be used. Continued development of housing finance systems also is necessary.

Unfortunately, this opportunity may never rise high on the global agenda if the role of cities in the world today is not understood. Urbanization is as much an opportunity as a challenge. A private sector that builds widely affordable housing for working families, while not an answer to all the world’s ills, is one powerful way to stimulate developing economies and add to, not drain, scarce resources. As cities and their suburbs are where most people live—in the United States and, soon, in the world—they should be high in priority on every list of top ten issues facing governments and policy makers if their challenges are to be met, and, most important, if the extraordinary opportunities they present are to be realized.—John K. McIlwain, senior resident fellow, ULI/J. Ronald Terwilliger Chair for Housing