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Middle class problems

More people than ever are rising out of poverty, carrying with them expectations of a better standard of living. Can we build enough homes for them?

26 September 2017

Brazil’s Minha Casa Minha Vida scheme has resulted in 2.5 million new homes in just over five years. But are they in the right place?

Lise Alves, senior contributing editor, The Rio Times

Hailed as the largest housing programme in Brazil’s history, Minha Casa Minha Vida (My House My Life) has received both praise and criticism in its almost eight years of existence. Created in 2009 by former president Luiz Inácio Lula da Silva, Minha Casa Minha Vida promised to fulfil the dream of home ownership for millions of low-income families who were excluded from previous state-backed housing schemes. Concurrently, the government hoped to boost Brazil’s economy through the construction sector. At the time the programme commenced, the country’s housing deficit was estimated at more than 7.2 million units.

Funded initially until 2014 – primarily through the federal government’s PAC 2 (Growth Acceleration Programme) – the scheme initially called for at least 85% of units to be made available to families earning up to three times the minimum wage, which is R880 ($265) a month. The federal government allocates revenues to large construction companies, which build the units that are then made available to low-income families by the state-owned bank, Caixa Economica. Mortgages for families on the lowest incomes can be as little as 5% of their monthly earnings and can be as long as 30 years.

A study on the programme conducted by government-led research organisation IPEA (Institute of Applied Economic Research) found that 86% of its beneficiaries are single mothers; 96.2% of the units house a single family; and that less than 20% of homeowners’ income goes to pay for mortgage, gas, electricity, water and administration bills. The institute also found that 65% of those who live in the units identify themselves as black or mixed race.

“It was the first time in history that a housing programme was specifically directed towards the lower-income population. [Minha Casa Minha Vida], however, has some negative aspects which cannot be ignored,” says Alvaro Pereira, researcher for Rede Cidade e Moradia (City and Housing Network). The company was commissioned in 2014 by Brazil’s Ministry of Cities to evaluate the first two phases of the scheme.

Rede Cidade e Moradia’s report concluded that the biggest problem was the location of the housing. Because of the way the programme was structured, most of the logistics decisions were being made by the construction companies, who were building units on the outskirts of the urban centres where infrastructure, services and jobs are limited.

Evaniza Lopes Rodrigues, coordinator of Uniao dos Movimentos de Moradia (Union of Housing Movements), concurs: “Construction companies seek the best margins they can and purchase the cheapest land, usually on the periphery of the city. This pressures municipalities to disburse revenues to improve infrastructure, transportation and services in these areas. Revenues that many [authorities] just don’t have.”

According to Rodrigues, 97% of the federal government’s revenues for the Minha Casa Minha Vida programme go to construction companies, while the remaining 3% go to housing associations, such as hers. “What we are now seeking is a more balanced distribution between entities like ours and the construction companies,” she says, noting that since housing associations are not-for-profit ventures, they are able to build more units with better-quality materials than the construction companies.

Critics also say that a construction pattern for these units has been set without factoring in the individual characteristics of each location. “Minha Casa Minha Vida should have taken into consideration the continental dimensions of [a country like] Brazil, with its deep regional, social, economic and cultural inequalities,” the IPEA study concludes. “The program however, operates as a ‘Ford-like’ company in its large-scale production,” adds the research, alluding to an attitude of “any colour you like, as long as it’s black” among the construction companies.

From 2009 to 2014, during the first two phases of the programme, federal government data show that roughly 2.5 million housing units were constructed nationwide with around another 1.7 million already under contract to be built. Total investment for these first two phases, according to the Ministry of Cities, surpassed $79.3bn.

The third phase of the programme, calling for the construction of three million units by 2018, was announced in late 2015. But with the country's continued recession and president Dilma Rousseff’s impeachment in August 2016, the focus has shifted from new activities to simply finalising already contracted units.

The former president repeatedly stated the programme was a priority. However, new leader Michel Temer appears to have scuppered the final phase of the initiative by revoking plans and handing decision-making to the National Housing Department. 

The Indian government intends to build 20 million homes by 2022, but regulations form a barrier

Amy Kazmin, South Asia Bureau Chief, The Financial Times

Ahmedabad barber Sanjaybhai Jotangiya has struggled for years to buy a flat so he could move his wife and children out of the house they share with his parents, brother and extended family. The takings from his small salon – coupled with his wife’s earnings from giving manicures, pedicures and facials to neighbours – brought them a monthly income of over Rs20,000 ($295), putting them in the ranks of India’s lower middle-class.

But the supply of houses in their price range is limited: high urban land and construction costs, along with caps on how much space can be built on any one parcel of land, make it tough for developers to find a viable model for this class of housing. It is also tough for the couple to get a loan without payslips to verify monthly earnings.

Jotangiya’s problems are not unique. Nearly 84% of India’s non-agricultural labour force works in the “informal sector” – running their own small businesses with few paper records, or toiling in jobs that likewise come with little documentation of workers or wages. Many of these workers do have steady incomes and wish to purchase homes to give them security in the country’s fast-expanding cities. Prime Minister Narendra Modi’s government is hoping to help these millions of aspiring homeowners realise these dreams through incentives intended to stimulate the development of housing accessible to this vast potential market.

New Delhi’s ambitious Housing for All scheme aims to create 20 million homes that would be within the financial reach of families with annual household incomes of less than Rs600,000 ($8,800).

Under the scheme, New Delhi would provide an interest-rate subsidy of 6.5% to borrowers for a home loan. States are expected to provide land to developers and subsidise some of the other construction costs to bring them within reach of those on the lower rungs of the ladder. Each state would be free to set prices, which analysts say could begin at around Rs230,000 ($3,400) for the smallest unit, up to Rs500,000 ($7,350) or more.

The targeted beneficiaries are those with annual household earnings below Rs300,000 ($4,400) – and the “lower income group”, earning between Rs300,000 and Rs600,000 a year. The flats would be no-frills units, starting at a minimum size of 30m2 (323ft2).

States such as Rajasthan, Chattisgarh, Telangana and Andhra Pradesh have already announced plans for thousands of new housing units in their urban areas, most of which are expected to be built through public-private partnerships. But Indian real estate experts caution that delivering such a large stock of affordable homes will be a huge challenge, which would likely require many other local policy changes – from accelerated approvals for construction to new building standards that would allow for higher density.

At present, Indian property developments take an average of six to eight years from inception to completion, partly due to the multiple approvals required from various government agencies, which can take up to three years to collect. That process can only begin after developers purchase the land, and the cost of holding these undeveloped tracts on their balance sheets is passed on to buyers.

Affordability is also still undermined by India’s very low floor-space index – the ratio of build space to the size of the land parcel, which prevents developers from building sufficient units at a density that would make them affordable to those on the lower rungs of the economic ladder. “The biggest problem with these schemes is that the density has not been modified that much,” says Neeraj Bansal MRICS, partner and head of building, construction and real estate at KPMG in India. “The cost of construction continues to be high because you can’t build beyond a certain number of apartments.

“The norms for affordable housing have to be radically different from what is being done for luxury, or higher-segment products,” explains Bansal. “This requires a lot of changes on ground level, at the level of the local authorities.”

Ensuring adequate finance – both for the developers and for the potential buyers – would be another significant challenge, as many of those in the target beneficiary group will still lack the requisite paperwork to assure potential lenders they can really repay a home loan, even with the interest subsidy.

But New Delhi is expected to press state-owned banks to begin lending to prospective buyers of affordable homes, given the priority it is placing on the project, and new finance banks, mandated to concentrate their lending at the bottom of the pyramid, may also be willing to step in.

Overall, it would be a big stretch for India to reach the declared target of 20 million new houses by 2022 for the emerging middle class. But nevertheless, as a statement of intent it is a laudable aim, and is likely to set the ball rolling on many levels.

Let's focus on...China

The privacy of traditional housing is much desired by China’s rising middle class, but delivery is fraught

Alex Frew McMillan, Asia Editor, Modus

China’s urban population is predicted to grow from 750 million to one billion by 2030. Meanwhile, McKinsey predicts average urban household incomes in the country will at least double by 2022, against a 2012 baseline, with more than 75% of urban households qualifying as either mass middle-class or upper middle-class, which is defined as an income of RMB60,000-229,000 ($8,600-$33,000). The latter is the fastest-growing category, due to grow from 14% of urban households in 2012 to 54% in 2022. Thus, home ownership – a staple of Western middle-classes – is becoming China’s new gold rush. A typical middle-class ideal is to live in a gated, cloistered community.

“Previously, most housing was self-built or built through communities,” says Robert Ciemniak, founder of property research specialist Real Estate Foresight. “A lot of [new] urbanisation in practice is to say: ‘Let’s build a commercial housing development with good facilities and move out of things built a long time ago.’”

This is resulting in the much-lamented destruction of Beijing’s hutong – neighbourhoods of narrow alleys that were, in a way, the original gated community. Their brick-lined lanes were formed by the external walls of siheyuan, traditional homes built around a courtyard. Several generations of a family would live in four buildings, and while there may not have been a security guard, the homes were gated – and the eyes of a family member would always be on you or any intruder. They are loved by many older people, by those who have adopted the Chinese capital as their home, and by tourists. But they are not loved by developers or city planners.

Modern-day gated communities here take on most of the characteristics and use patterns of those in the West. Part of the idea is to set gated owners apart in terms of status, security and style. But China’s long history of “sealed residential quarters” has roots that describe housing for a variety of social classes – not just the rich – as two academics from Pennsylvania State University, Alexandra Staub and Qingyang Yu, note in a 2014 paper, The “New” Gated Housing Communities in China

This cites an example of former public housing in the city of Shenyang that has been converted into a community of privately owned mid-rise towers. It is an example of modern-day gated living, but only for people on the bottom rung of property ownership. Perhaps reflecting concepts dating back to the siheyuan, the entire development has surrounding walls with four entrance points. But there are no guards, and anyone can come and go as they choose. Although there is a playground and other public amenities, many residents cross over to a public park where they meet with residents from similar nearby gated communities.

There are more complex reasons behind the desire for gated communities. Some people want them to be actual communities, not just gated. Most “high-class” contemporary developments are suburban, and lose the community feel of the Shenyang estate. The street’s role as gathering place and source of community-provided services disappears. Neighbours who may look after the kids, invite the elderly over to join their grandfather, or host the block for a festival dinner are too far away. 

This legacy of sprawl can be traced back to the 1990s, when the country’s leaders envisioned very widespread urbanisation with small cities springing up all over the country. Local governments made most of their revenue from selling land to private developers, and incorporated many surrounding areas into the city limits. Now, Beijing is seeking to reverse that pattern. It ruled in late February that no new gated communities should be built in China. The central government ordered those that exist to open their roads to the public, although it is unclear how that would be enforced.

McKinsey is optimistic that China will eventually adopt urban densification rather than sprawl, and that its cities will end up phenomenally productive. The share of national GDP produced by cities will hit 95% by 2030, the firm predicts, all while China’s economy quadruples.

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