Many housing projects, sponsored by both the government and private sectors, abuse the phrase ‘affordable housing’ to imply that the units under development will be cheap upon completion. Promises are made that there will be no difficulties whatsoever in affordability, often to mislead the public on the real, targeted buyers and tenants of these houses.
City and town populations all over the world, grow at such rapid rates, that they will perhaps never be satisfactorily managed or absorbed using existing infrastructure and services. Building good-quality housing, for example, is complex and capital-intensive. The supply of housing will, therefore, always respond slowly to increase in demand and might take decades to reach equilibrium.
Housing – A Game of Musical Chairs
Households and individuals decide to relocate to urban areas, often following the promise of employment or in pursuit of better amenities and living conditions. This often raises the demand for quality affordable homes, versus a somewhat inelastic supply. As a result, households and individuals are forced into bidding wars with others who may have also relocated to a particular area.
This can be for the available quality housing units, as well as other related infrastructure and services. The most immediate outcome of this bidding war is an irregular increase in rent and prices. In the case of housing in particular, spatial equilibrium has proven difficult to attain by simply matching supply to demand.
Governments and private developers construct new housing in response to public need for quality housing and attractive property markets, respectively. However, new construction in such periods of scarcity still have to meet certain market and financing conditions. Thus, even when labeled ‘affordable,’ housing often remains feasibly unaffordable for many befitting households in the short term.
Market Forces That Bring Affordable Housing
Over the medium to long term, a market’s housing supply gradually increases, reducing excess demand and, as a result, market rents and prices.
However, in the short term, the biggest consequence and manifestation of a housing crisis is the establishment of slums across major cities. Crime rates are also high in neighborhoods with housing inequalities. This attracts investors and strategic government interventions to an extent.
There are questions about who sets and governs market rents and housing costs.
Many individuals mistakenly believe that landlords and developers are the ones to decide and set market rates.
Minimum Rental and Selling Prices
Developers, lenders, and financing institutions use the concept of required rent for rental housing developments to determine the minimum amount of rent they must be able to achieve, in order to justify investing in building a housing unit.
This often has to be sufficient to cover both the financing and construction costs. For example, land costs, material costs, statutory costs, and design costs must be paid upfront in order for a development project to proceed to completion. The majority of such costs are market-set, and there is not much that can be done to lower them in order to promptly increase home affordability.
However, some expenses may significantly decrease through long-term policy strategies and government interventions. Technical development and advancements in construction technology also make building cheaper over time.
Populations have been rapidly growing across the globe and will continue to do so in the foreseeable future. The proven approach that sustainably reduces the strain on existing housing and amenities toward affordability is building more.
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