PROVIDING LONG-TERM FINANCING FOR HOUSING: THE ROLE OF SECONDARY MARKETS
Housing is a major aspect of human development. As noted by the World Bank (1992),
housing investment typically accounts for 2% to 8% of GNP, and the flow of housing services
for an additional 5% to 10% of GNP. Residential real estate represents around 30% of world
wealth, greater than both bonds (27%) and equities (19%). Residential construction is a major
employer often accounting for more than 5% of total employment. Housing is an important
economic sector with linkages to the real and financial parts of the economy.
Housing is a major good. Households typically spend between 20% and 50% of their
income on housing, with a typical ratio of around 30%. In many countries and cultures,
homeownership represents the ultimate dream – control over one’s existence. Housing is the
major portfolio asset of most households and thus a major component of wealth. However,
housing is quite expensive: The price of a house is typically two to four times the annual income
of the household. The expense, along with the fact that housing is a durable good providing a
flow of services over time, means that most households seek long term loans to build or buy their
own home. This also applies to landlords who seek finance for rental housing.
Housing is a highly visible, key indicator of social welfare. Access to decent housing has
important environmental, health, and employment effects. The property tax, which is mainly a
wealth tax on housing, accounts for 25% of all local government revenues.
In developing countries, housing is a major economic, political and social issue. As
populations continue to grow and urbanization accelerates, the necessity of providing adequate
housing mounts. Renaud (1998) has captured the relationship between urbanization, housing
investment and national wealth (figure 1). He points out that the world’s rate of urbanization is
reaching a peak, in particular in China and India, and as a consequence the need for additional
resources for this sector is increasing. This raises the logical question: where will these resources
for housing come from?