"The housing affordability gap is equivalent to 1% of global GDP"
The McKinsey Global Institute take on housing affordabilityBrussels, 9 April 2019 | Social, Urban, Economy
Housing affordability is currently one of the most complex policy challenges our societies in Europe are faced with. As part of our work to identify solutions to this challenge, and in light of the launch of the 'State of Housing in Europe' 2019 report next autumn, we inaugurate a series of interviews with institutions and international stakeholders that have been looking at affordable housing, publishing influential reports and generating valuable data.
Our first guest in this series is Dr. Jan Mischke, a Partner at the McKinsey Global Institute (MGI), McKinsey’s business and economics research arm, based in Zurich. Jan leads the MGI work on competitiveness and growth in Europe, and on infrastructure broadly defined on a global basis. In addition to in-depth analyses of more than 10 countries and a series of reports on Europe, he has led global efforts on affordable housing, infrastructure, and manufacturing.
- Why would you say it’s important to look into housing affordability?
Access to decent, affordable housing is so fundamental to the health and well-being of people and the smooth functioning of economies that it is imbedded in the United Nations Universal Declaration of Human Rights. It is also an economic factor. For California, for instance, we estimate that the state loses 6 percent of state GDP due to the housing shortage from missing investment and consumption crowded out by elevated housing costs.
- Can you name one phenomenon/issue which shows a problem with housing affordability? How does this manifest in data/trends that can be monitored?
We focus on the gap between what households can afford to pay for housing out of their income vs. the cost of decent housing as primary metric for assessing the issue. On this basis, worldwide, MGI has estimated that some 330 million urban households live in substandard housing or stretch to pay housing costs that exceed 30 percent of their income. This number could rise to 440 million households by 2025 if current trends are not reversed. The housing affordability gap is equivalent to $650 billion per year, or 1 percent of global GDP. In some of the least affordable cities, the gap exceeds 10 percent of local GDP. Over time, the evolution of income vs. housing cost can serve as a very simple indicator of trends.
- If you have to choose one element as major cause of lack of affordable housing, which one would it be?
Affordability issues often start with the cost of and access to serviced land and the respective zoning rules that would allow expanding housing supply. This can make housing markets highly inelastic, with households taking up ever higher debt as house prices skyrocket without much expansion of supply. In London, for instance, house prices increased more than 5-fold over a generation from 1990 to 2015, but annual housing completions edged up only about 40 percent. Inefficient construction then adds to the problem.
- Can you name one or more solutions which could help tackling this?
Policymakers have a number of tools to increase supply, incl. transit-oriented development, or making better use of underutilized or vacant sites incl. public land. Seoul, for instance, allows floor-area ratios that are up to 20 times higher in better-connected neighborhoods than in more distant areas. Other cities can follow this approach. Analysis in San Diego, for example, found that increasing the density of residential developments in a half-mile radius around public transport nodes could expand the city’s housing stock by close to 30 percent. And our forthcoming research on modular construction suggests that this methodology, well applied, could deliver 20 percent cost savings vis-a-vis traditional on-site delivery.