The Next 4 Billion: "Nancy Sedmak-Weiss"
The Next 4 Billion — The Housing Market
Allen Hammond, William J. Kramer, Rob Katz, Julia Tran, Courtland Walker
Housing is one of the larger base of the pyramid (BOP) markets—larger than transportation, smaller than energy. The market encompasses major spending items—rent, mortgage payments (or imputed rents), and repairs and other services. But the BOP housing market is perhaps uniquely handicapped by informality. Both lack of legal title to housing in squatter settlements—Hernando De Soto’s “dead capital”—and lack of access to mortgage financing for the BOP limit its potential size.
Despite these barriers, both private sector approaches and policy reforms—sometimes catalyzed by NGOs—are showing how to tap this market in ways that provide significant benefits for BOP households. In Asia especially, where mortgage markets are undeveloped and land prices high relative to income, the market potential—and the need—is huge (Bestani and Klein 2006).
How large is the market?
The measured BOP market for housing in Africa (12 countries), Asia (9), Eastern Europe (6), and Latin America and the Caribbean (9) is $187.5 billion. This represents recorded annual household spending on housing in the 36 low- and middle-income countries for which standardized data exist, covering 2.1 billion of the world’s BOP population. The total BOP housing market in these four regions, including 3.96 billion people in all surveyed countries, is estimated to be $331.8 billion. Because imputed rent is a major part of household spending on housing and cannot be determined precisely, these numbers should be regarded as setting a lower bound for such spending.
Asia has the largest measured regional BOP market for housing, $86.6 billion, reflecting a significant BOP population of 1.49 billion. The total BOP housing market in Asia (including the Middle East) is estimated to be $171.4 billion, representing the spending of 2.9 billion people. Latin America has the next largest measured market, $47.4 billion (276 million people), and an estimated total market of $56.7 billion (360 million people).
In Eastern Europe the measured BOP housing market is $34.2 billion (148 million people), and the estimated total market $60.8 billion (254 million people). In Africa the measured BOP market is $19.3 billion (258 million people), and the estimated total BOP market is $42.9 billion (486 million people).
The average BOP share of measured national housing markets varies across regions. In Asia and Africa that share is 63%. In other regions it is much smaller: 39% in Latin America, 35% in Eastern Europe. Latin America has the greatest disparity between the BOP share of the population (71%) and the average BOP share of housing spending (39%).
The BOP share of housing spending also varies across countries. These differences in part reflect the prevalence of a landed middle class in some developing countries, such as South Africa and throughout Latin America. Between mid-market landowners and disenfranchised BOP communities, the BOP share of a country’s housing market is on average half that of its weight in population. Nonetheless, in countries such as Pakistan and Sierra Leone, the BOP accounts for more than 95% of the measured housing market.
In Asia one extreme is represented by Sri Lanka, Pakistan, and Bangladesh, where the BOP accounts for more than 90% of the spending on housing—the other by Thailand and India, where despite the substantial BOP population, the recorded BOP share is only 47% and 48%, respectively. In Africa the extremes are Nigeria (99% BOP) and South Africa (31%). In Eastern Europe the extremes are represented by Uzbekistan (92%) and FYR Macedonia (13%).
How is the market segmented?
Many African BOP markets for housing are relatively bottom heavy, with spending concentrated in the bottom three of the six BOP income segments. The remainder are flat, with spending distributed relatively evenly across all BOP income segments. In Asia too, most BOP housing markets are either bottom heavy or flat.
In Eastern Europe, in contrast, almost all countries have a top-heavy BOP market, with the top three segments accounting for more than half of BOP housing spending. The lone exception is Uzbekistan, where the bottom three BOP income segments account for 77% of spending. In Latin America spending tends to flatten out at the BOP1500 segment. In Brazil, for example, the top four segments each account for 19–23% of BOP housing spending.
In Latin America and the Caribbean some large national housing markets are dominated by the wealthier mid-market segment; in Colombia the BOP accounts for only 27% of the total. In Peru, however, the BOP segment accounts for nearly three-quarters of the total market (73%). Jamaica represents the extreme, with 88% of the national housing market in the BOP.
In contrast, the BOP dominates Asian markets, with only Thailand and India having slightly more than half of total housing spending in the mid market. Africa too is predominantly a BOP market: in only one country, South Africa, does spending in the mid-market segment exceed that in the BOP.
What do households spend?
BOP spending on housing reflects consistently strong demand: people are willing to spend a fairly constant share of their income on their home.
India has the largest measured BOP housing market in Asia, $62.1 billion; BOP spending accounts for 48% of the national housing market and averages $164 per household a year. In other regions the BOP market leaders are Mexico ($45.6 billion, 44% of the total market), with average annual spending of $1,280 per BOP household; Russia ($94.7 billion, 34% of the total market), with average spending of $1,268; and South Africa ($14.4 billion, 31% of the total market), with average spending of $652.
These expenditures by BOP households may not be large. But in Mexico they are large enough to fuel two significant and growing corporate efforts to tap BOP housing markets.
Where is the market?
In 24 of the 36 measured countries, BOP housing markets are predominately urban. However, it is often difficult for national surveys to accurately measure housing expenditure in poor rural areas—often rents must be imputed.
In Asian and African countries, housing markets are often predominantly rural. The Ugandan BOP housing market, for example, is 71% rural. Most Asian BOP housing markets also are predominantly rural. In Sri Lanka, for example, 77% of the BOP housing market is rural. Rural housing markets can be substantial—$9 billion in Thailand, for example. An exception to the pattern of rural dominance is Pakistan, where urban squatter settlements account for much of the imputed BOP rent and the BOP housing market is only 36% rural.
In Eastern Europe, where countries were so heavily urbanized under Soviet rule, much of the housing is in cities. In Russia just 19% of the BOP market is rural. Only two countries have BOP markets in which at least a quarter of the spending takes place in rural areas—FYR Macedonia (31%) and Belarus (25%).
In many Latin American countries reported spending on housing also occurs mostly in urban areas. In Colombia, for example, urban spending is 92% of the total for BOP housing. In Guatemala, however, the BOP housing market is 52% rural and 48% urban.
Large urban BOP communities represent huge untapped market opportunities. Mexico’s urban BOP housing market is nearly $16 billion annually. Brazil and Colombia each report urban BOP housing spending of more than $8 billion a year.
Is there evidence of a BOP penalty?
Household surveys seek to capture all sources of income, but they do not measure the “dead capital” trapped in the informal economy. For many BOP households, their dwelling and the land it sits on is their primary capital. When they lack formal title to that asset, or when they must contend with ineffective land markets or barriers to transferring title, housing becomes dead capital. Under these circumstances BOP households face a significant BOP penalty—one that artificially curbs their potential purchasing power and often their access to services.
The problem extends to the multitude of enterprises in the informal economy. These businesses, operating outside the formal legal system, cannot easily leverage their assets into working capital. The dead capital trapped in houses and businesses together is enormous: a recent study showed that informal properties and businesses in just 12 Latin American countries are worth as much as US$1.2 trillion (ILD 2006; IDB 2006). Worldwide, the figure is estimated to be at least US$9.3 trillion, and is probably much larger (De Soto 2004).
Informal home ownership also poses a barrier to service delivery. Many governments require proof of title before a household can receive social benefits. And municipalities often are unwilling to connect undocumented homes to water, sewer, and electricity networks, since they have no legal recourse to collect un-paid fees from a home that—in the eyes of the government—does not exist.
Economist Hernando De Soto (2003) has suggested that one way out of this informality trap is to make extralegal ownership more formal—for example, by offering home owners official title to their home. A different strategy, in Pakistan, has focused on providing lowcost mortgages that enable low-income families to buy new homes with secure titles.
Allen Hammond is a member of Ashoka’s Leadership Group and Full Economic Citizenship initiative. Recently he was Vice President for Innovation and Special Projects at the World Resources Institute. William J. Kramer is founder and president of The Global Challenge Network, and previously was Director of Education and Training for the Markets & Enterprise Program at the World Resources Institute. Rob Katz is a Knowledge & Communications Associate with Acumen Fund, and previously he was an Associate with the Markets and Enterprise Program of the World Resources Institute. Julia Tran was a Research Analyst with the Development Through Enterprise project of the World Resources Institute. Courtland Walker was a Research Assistant with the Development Through Enterprise project of the World Resources Institute. Reprinted with permission from the World Resources Institute. The Next 4 Billion: Market Size and Business Strategy at the Base of the Pyramid. Washington, DC: World Resources Institute and International Finance Corporation, 2007.
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