Is an incremental core housing strategy the way to reestablish communities in Haiti?

FINANCIAL IMPLICATIONS Dipl.-Ing. Matthias Nohn

Cost Factors Developer’s point of view Household’s point of view Vulnerability of low-income households Typical household budget for housing Characteristics of a pro-poor housing finance loan Incremental housing, incremental finance Conclusion

Cost Factors

Dipl.-Ing. Matthias Nohn | Contact: +49-151-222-86268 | +55-21-93262687 | nohn@post.harvard.edu

Major cost components of the actual project are: 1.  Land 2.  Infrastructure 3.  Housing Construction

Additional charges apply: 4.  Developer’s profit 5.  Taxes 6.  Registration fee 7.  Financial costs (interest due on loan)

Developer’s point of view

Dipl.-Ing. Matthias Nohn | Contact: +49-151-222-86268 | +55-21-93262687 | nohn@post.harvard.edu

Some Observations: 1.  Incremental housing reduces construction costs.

This is especially true for the construction of the dwelling, less so for incremental infrastructure that is initially shared on the community level.

2.  It does not reduce land cost. In fact, pooling the land cost may be more difficult with the site and services approach. For example, if the land cost is high, the traditional horizontal approach for site and services might not work. Instead, a vertical (higher density) approach might be required. Or, if land cost is not considered (i.e. if land is given for free), projects are more likely to be designed in an inefficient manner.

3.  Incremental housing reduces developer’s profit (despite the fact that it may be more time intensive).

4.  Still, we reach more households with less capital per hh.

Households point of view

Dipl.-Ing. Matthias Nohn | Contact: +49-151-222-86268 | +55-21-93262687 | nohn@post.harvard.edu

The households’ points of view is more complicated.

1.  The initial reduction leads to an additional cost reduction by reducing the developer’s profit, government taxes, registration fees, and financial cost.

2.  The total cost reduction is significant, especially when expressed in a reduction of the time of repayment: For example, a USD 1,000 loan of 5 Years @ 10% requires an EMI of USD 20. A USD 500 loan requires an EMI of USD 10 only but when paying USD 20 per month it is repaid already in 2 Years!

3.  Thus, incremental housing not only reduces the households’ vulnerability (exposure to credit default) but also augments their economic freedom (by allowing the household to make the next investment in accordance with their personal and economic situation).

Vulnerability of low-income households

Dipl.-Ing. Matthias Nohn | Contact: +49-151-222-86268 | +55-21-93262687 | nohn@post.harvard.edu

Low-income households are extremely vulnerable because: 1.  Their income is low. 2.  Their income is irregular. 3.  They lack formal (and safe) employment. 4.  Therefore, they tend to lack savings. 5.  They lack social security, including health insurance. 6.  They may be excluded from basic services, including health. 7.  They may be sick more often because lacking basic infrastructure or

because of occupational hazards.

Despite the fact that the poor’s investment in housing is desirable, any loan increases their vulnerability. This is especially true for large loans, and non-incremental housing loans are large!

Typical household budget for housing

Dipl.-Ing. Matthias Nohn | Contact: +49-151-222-86268 | +55-21-93262687 | nohn@post.harvard.edu

Note: Disposable income also depends on many other factors such as regularity of income, type of employment, distribution of income across family members, or household size.

Characteristics of a pro-poor housing finance loan

Dipl.-Ing. Matthias Nohn | Contact: +49-151-222-86268 | +55-21-93262687 | nohn@post.harvard.edu

1.  They maximize investments without increasing the vulnerability of the households.

2.  They achieve this by being convenient and safe and by promoting discipline.

An example from SEWA Housing Finance, India: 1.  Convenient collections are made in the community. 2.  Disciplined savings are frequent, at least on a weekly basis. 3.  Installments are so small that they are easy to be repaid. 4.  Prepayments are not only penalty-free but incentivized. 5.  Products are combined with a de-facto savings scheme.

Prepaid clients can skip payments and even withdraw any prepaid amount.

Incremental housing, incremental finance

Dipl.-Ing. Matthias Nohn | Contact: +49-151-222-86268 | +55-21-93262687 | nohn@post.harvard.edu

1.  Obligatory repayments are small because incremental loans are small. (De-facto repayments may be large, though, because pre-payment is desired.)

2.  Loans are incremental because construction is incremental. 3.  Construction is incremental because it reflects economic and personal

situation of each household.

Not so poor.

Poor.

Very poor.

CONCLUSION

Is an incremental core housing strategy the way to reestablish communities in Haiti?

Dipl.-Ing. Matthias Nohn | Contact: +49-151-222-86268 | +55-21-93262687 | nohn@post.harvard.edu

To be successful, it requires an enabling environment, including pro-poor financial services.

Other factors include community organization, secure tenure, and access to basic infrastructure and services.

Incremental housing (finance) is the best approach from the point of view of the poor.

Access to pro-poor finance speeds up the incremental process!

If incremental housing is correctly set-up within the larger framework, including adequate access to finance,

it is the best approach we can take.