ULI - Urban Land

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Urban Land - May 2008 - Dialogue: Affordability

The challenge and opportunity for the private sector is to provide millions of new moderately priced urban homes.

Housing Challenges in an Urban World

By John McIlwain

The world is becoming urban for the first time in human history; more than 50 percent of the world’s population now lives in urban areas, according to the United Nations (UN). The UN also reports that:

“The world urban population is expected nearly to double by 2050, increasing from 3.3 billion in 2007 to 6.4 billion in 2050 . . . . Virtually all of the world’s population growth will be absorbed by the urban areas of the less developed regions . . . .”

The numbers are staggering. According to UN projections, the urban population of the more developed regions will grow by 80 million people to 990 million by 2025. This will occur almost exclusively in the United States, Canada, Australia, New Zealand, Ireland, and the United Kingdom. Populations are expected to be flat or decline in the rest of the European Union countries, Russia, and Japan.

In the less developed regions, urban populations are expected to increase by 1.21 billion dwellers to 3.59 billion in 2025. This explosive growth of urban populations will occur mostly in Asia, followed by Africa and the Middle East.

The opportunity. Urbanization is a largely positive trend. It is kinder to the Earth’s ecology to house large populations in compact urban areas than to spread them out across the countryside; for one thing, the average carbon footprint of an urban dweller is far smaller than that of someone living in a rural area. For another, fertility rates decline as populations become urbanized, providing hope for stabilizing the world’s population before the Earth’s carrying capacity is exceeded. Cities are also where wealth is created—no country has ever become wealthy through a rural development strategy.

The challenges. That said, great human suffering has been caused by the failure to develop urban infrastructure needed to support the rapid growth of urban populations, especially in the developing world. Not the least of the challenges is housing.

The number of new homes needed is daunting, even without adding in the need to replace and upgrade existing housing and the demand for second homes from the wealthy.

It should be noted that most of the projected 1.9 million new residences in the world will be built in the United States, which needs 1.2 million new homes per year to meet household growth alone. Add replacement and second homes and the total annual U.S. demand is 1.5 million. At present, U.S. production is below 1 million homes a year; once the current excess inventory has been worked off, production rates will once again rise.

Maybe. The challenge for the U.S. housing industry is to build homes affordable by a middle class whose incomes have not risen for decades in real-dollar terms. Meanwhile, the growing number of lower-income households needs government subsidies to obtain decent, affordable housing at a time when these subsidies are inadequate and declining. There is, in other words, a growing tension between demand for housing and effective demand, i.e., between demand and affordability.

The rest of the developed world is facing much the same challenge. Despite the great wealth of the developed world, the number of poor households is growing rapidly while the middle class’s ability to afford market-rate housing is declining. The ratio of median home prices to median incomes must be restored to affordable levels.

In the United States, this may mean that Americans will learn once again to live in modest-sized residences. Today, the size of the median American home is more than double EU standards.

Meeting the demand for urban housing in the developing world is more challenging still. The vast majority of new urban residents are poor and they are moving into cities with inadequate resources to meet the demands of hypergrowth.

Nor is the developed world—i.e., institutions such as the World Bank and the International Monetary Fund—helping effectively; at present, most developed world resources are targeted at improving rural housing in developing countries. The real need is to replace the massive informal communities surrounding the developing world’s cities and to provide decent housing for the growing urban middle class. There is a vast gap in housing stock between wealthy neighborhoods and housing in the rest of the urban area; in other words, there is no housing ladder as there has been in the United States (rickety though it may be today) that enables people to move from slums to modest middle-class housing and then to better housing as incomes and wealth grow.

The challenge and opportunity for the private sector is to provide millions of new moderately priced urban homes. This will create not just housing but also jobs, businesses, and wealth. To do this, significant barriers need to be removed. These include the lack of systems that easily provide clear title to land, the dearth of efficient and honest bureaucracies, and the paucity of efficient mortgage finance systems. The many efforts that have been made to remove these barriers have resulted in little progress to date.

The growth of the world’s cities presents a vital opportunity to balance the world’s environment. To do this will require a far greater investment of global resources than has been available, both in the developed and developing world. Urban infrastructure needs to be developed to make growing urban areas healthy places in which to live. Incentives need to be provided to encourage well-designed compact development connected to efficient transportation and infrastructure. Billions of dollars of financing are needed to support the development of urban housing, and in the developing world government systems need to be upgraded to provide effective legal and regulatory schemes.

The challenges are daunting, but cities are where the action will be in the coming century. The challenge to the world, to paraphrase the U.S. National Housing Act of 1949, is “to provide a decent home and a suitable living environment for every household” in a rapidly urbanizing world.

John McIlwain is a senior resident fellow at ULI and the ULI/J. Ronald Terwilliger Chair for Housing. He can be reached at jmcilwain@uli.org.