Makeshift homes in Rio de Janerio's Nova Tuffy slum. Reuters/Pilar Olivares

Some 330 million urban households worldwide are financially stretched by housing costs.

The century of cities brings with it great promise, but also great problems. While some countries’ rapid urbanization has led to the creation of economic, cultural and political meccas, others have become slums.  

The greatest wave of urbanization in world history is occurring during our lifetimes, which means that providing quality, affordable shelter for the billions of people streaming into global cities is among the most pressing challenges we face.

A study released today by the McKinsey Global Institute (MGI) details the extent of the problem and proposes a series of innovative solutions.

MGI finds a considerable global housing affordability gap, defined as the difference between the cost of a city's acceptable standard housing and what households can afford to pay for it using no more than 30 percent of their income. The report pegs this gap at  $650 billion per year—a full one percent of global GDP. As much as $16 trillion will be required to close it by 2025, from a combination of private and public sources.

Some 330 million urban households worldwide currently live in substandard housing or are financially stretched because of housing costs, according to the report. In the developing world, 200 million households are located in slums; in developed countries like the U.S., the EU, and Japan, more than 60 million are financially stretched.

The global housing affordability gap varies widely from city to city, as the chart below (from the report) shows. More than two-thirds of the affordability gap is concentrated in the world’s 100 large cities, represented by the larger circles.  And the gap is greatest in cities located in low-income countries, shown in light blue on the chart.  

(MGI)

More troubling: The gap is growing. The report estimates that by 2025, 440 million urban households or as many as 1.6 billion individuals worldwide will face crowded, substandard housing.

The report suggests that this gap represents both a problem and an opportunity. The majority of the new investment required to close the housing gap, between $9 and $11 trillion, could come from private investment, as the chart below shows.

(MG()

The report outlines for four strategies for solving the urban housing crisis.

Unlocking Land: First, it advocates unlocking land in the right locations. As the report notes, “Land cost often is the single biggest factor in improving the economics of affordable housing development. It is not uncommon for land costs to exceed 40 percent of total property prices, and in some large cities, land can be as much as 80 percent of property cost.” Smarter land policy also entails formalizing land registration systems and releasing public lands that are underused or not used efficiently.

Making Housing Construction More Efficient:  Second, a modern, industrial approach to housing construction and delivery is needed to build housing quickly, efficiently, inexpensively, and in a scalable fashion. The report notes that in several affordable housing developments, such methods have helped slash costs by 30 percent and delivery times by up to 50 percent. While industry can take the lead here, the report notes that government “can play a key role in encouraging industrial construction through public procurement efforts, uniform building codes, and design standardization guidelines, which could encourage innovation in construction and building materials.”

Improved Operations and Maintenance:  Third, additional savings of 10 to 15 percent can come from improved maintenance and operation of housing, which together make up 20 to 30 percent of housing costs, depending upon the city. The two major ways to achieve such savings are by increasing energy efficiency (through better insulation, heating and cooling) and by pooling repair and maintenance services.

Improved Financing:  Finally, there is much to be gained by improving financing for housing low-income cities around the world. The report notes that housing faces a huge financing gap, for developers as well as individuals, and that this gap is greatest in the places with the most severe housing shortages. In too many places around the world, there is little in the way of housing finance, leaving low-income people and neighborhoods essentially “unbanked." In these places, housing continues to be built informally.

The report outlines three main ways to close this housing finance gap: leveraging collective savings to reduce rates; reducing the costs involved in funding mortgages; and reducing the cost of obtaining a loan in the first place. (Its more detailed recommendations are in the graphic below.)

(MGI)

All housing finance markets, the report cautions, require careful design and planning in order to manager participants’ risk. Additionally, MGI emphasizes how vital a stable overall economy is to a healthy housing financing system and housing market, which can be a challenge for developing countries.

Building prosperous, inclusive, and sustainable cities is the grandest of the grand challenges we face. As billions of people surge into cities across the world, providing them adequate affordable shelter is a key step in addressing that challenge.

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