Concept of Pricing, Affordability, Cost Recovery
A house can be seen as a bundle of multi-dimensional attributes that combine gather to give a certain price. It can also be viewed as an economic commodity that can be bought and sold. The possession of a house involves rights which people want for various reasons and for which they often are willing to pay substantial sums of money. The fact that they are wanted and have values extending into the future gives them an attractive investment potential.
Most economists identify the economic value of property with the going exchange value or market price of property. In this sense, economic value or price depends upon the interaction of the forces of supply and emend. It represents the worth of a given property in a given market at a given time and place. Adam Smith associated economic value with the cost of producing an economic object. This concept has some validity since the market price of a product must equal or exceed its production costs over time if its producers are to have an incentive to continue production.
It is usually impossible to break up the house into its components and market them individually. If information on the prices of houses that correspond to the attributes of the house can be obtained, it should be possible o derive the implicit market price. House price reflects the purchaser’s valuation of the particular set of attributes of each house unit. No two houses are alike, due to their heterogeneity; house prices differ according to a wide variety of attributes, such as location and physical attributes.
Econometric methodologies could be employed to construct a model that the relative significance of various characteristics are defined and their influence on price levels from one time to another, or between one region and another, are allowed for simultaneously. This is the concept used in the demonic pricing model. Once the exact mathematical relationship between the house price and the house attributes is determined, it should be possible to derive the market price of a house.
The hedonistic approach has gained wide acceptance in dealing with changes in the qualitative characteristics of houses under comparison. The physical attributes of the dwelling, the social and ecological amenities in the neighborhood, access to urban centre housing supply constraints and institutional arrangements are all vital determinants that would affect the price of a house. House Price Index (HIP) Inhales are oaten uses to compare changes In living costs Tort one year to another Dye comparing the average prices of a “basket of goods” between the two periods.
In the property sector determining a reliable index is not easy due to the difficulty of grouping the similar properties in a basket, since no two properties are homogeneous. The main objective of a house price index is to indicate how much the house price changes over time, as a result of inflation, holding other attributes constant. HOUSING AFFORDABILITY Despite the contested nature of the concept of housing affordability, definitions have en employed throughout various policy settings (Gabriel et al. , 2006).
In this regard, discussion surrounding housing affordability is plentiful, however, there is no universally accepted definition, thus, making housing affordability as a concept at best ambiguous (Lineman and Muskellunge, 1992). This notion is illustrated by Hancock (1993) who suggests that even though the term “affordability’ has gained currency in housing policy debate, it is yet to be defined, and professionals seldom debate the meaning and use of housing affordability as a problem definition (Helsinki, 2005). Similarly, Bramble (1994, p. ) in early writings attests that “the lack of official clarity on definitions reflects inherent ambiguities to the housing affordability concept as well as political caution or expediency’. At its most fundamental, Stone (AAA, b) observes housing affordability to be “an expression of the subjective social and material experiences of people, constituted as households, in relation to their individual housing situations”, a perspective upheld in earlier writings by Field (1997) who elucidates affordability to involve normative Judgments about the proportion of income a family should pay for rent or monthly ownership sots.
Moreover, Paris (2007) suggests that affordability may be best understood as a microcosm relating to the circumstances of individuals of households, and should not be benchmark to particular dwellings at a particular price or rent level, or at the national or regional housing market level as a whole. To this end, affordability is perceived to express the challenge each household faces when balancing the cost of its actual or potential housing, on the one hand, and its non-housing expenditures, on the other, within the confines of its income (Stone, AAA, b).
Therefore, interpretations of individual experiences are mediated through analytical indicators and normative standards of housing affordability that transcend unique individual experiences (Stone, AAA, b). In this regard, affordability is very much seen as an issue of percentage income spent upon housing, a function of housing debt as a percentage of household income. Affordability could also mean the ability and capability of household to meet their periodic mortgage obligations without jeopardizing their health or reducing their family nutrition intake.
In the Canadian context, the Canada Mortgage and Housing Corporation (2003) determines a household to be below its “affordability standard” if it spends more than 30 per cent of its income on housing costs, Judging housing to be unaffordable if its cost exceeds 25-30 per cent of the net income of lower income households. This is furthered by HON.. (2004), which comprehends affordability to be a complex issue, wanly Is Test scarred slung a Denmark AT noosing stress.
I nee syndicate opted to label affordability as when a household in the lower 40 per cent income bracket pays more than 30 per cent of their gross income on housing costs, whether renting or buying. The US experience has by all comparisons been more advanced than the simplistic measures applied in other countries. The US Department of Housing and Urban Development index measures the ratio of the median family income to the income required to qualify for a conventional loan based on median valued houses sold.
The National Association of Realtors index discerns affordability to be the ratio of 25 per cent of median monthly income to monthly repayments based on a fixed rate mortgage on a median house at the current interest rate. Finally, the National Association of Home Builders measures affordability as the percentage of dwellings old that could be purchased by the median household using an upper limit of 28 per cent household income.
Similar approaches are also used in the Australian context where the foremost indices measure the median loan repayment to income. Nonetheless, in both the US and Australian cases they primarily concentrate on and emphasis repayment affordability. In contrast, within the I-J, there has been considerable criticism of definitions which focus on housing costs and arbitrary effects upon income to the exclusion of other factors such as the ability to borrow and the interaction of planning and social policy Freeman et al. , 1997).
As a result, the I-J Office of the Deputy Prime Minister (2005) define affordability with focus on lower income households as the ratio of lower quartile house price to incomes. This highlights the complexity of defining affordability as this approach pivots on access to the market, and not entirely income affordability as this is of little relevance for cohorts already within housing. There are two principal strands to defining affordability; the ability of First Time Buyers’ to purchase a property and the capacity of households to sustain home-ownership wrought repayments.
A rather different aspect of the debate has emerged as a result of macroeconomic conditions, whereby, particular groups can be victims of cyclical shortages and embryonic changes in the economic setting and housing market which increase price-to-income ratios. This is identified by the HON.. (2004) which suggests that affordability is not merely a calculation of housing costs and income. Indeed, it is recognized as the ability to obtain housing and to maintain homeownership, but also have sufficient residual income to purchase basic necessities. MEASURING AFFORDABILITY
Burke (2001) suggests that to get a handle on the issue of measuring affordability, questions pertaining to what the measures are used for need addressing to provide an absolute measurement of affordability. A wide range of affordability measures have been developed and used in different contexts throughout the international arena. As a result, different approaches emphasis different elements of the concept at different scales. Babbles (2009) stipulates that there is no consensus about what housing affordability nearness and much of the discussion about affordability is based on sustainable tattletales Ana measures.
Most quantitative measures AT noosing affordability are regarded as a relationship between house prices and household incomes. Therefore, an accurate assessment of affordability conditions for accessing and remaining in the private housing market depends unilaterally on the accuracy of specific measures of home prices and household income (Lineman and Muskellunge, 1992), which are the formal foundations of affordability paradigms, however; there are a variety of opposing approaches to measuring affordability and the lack thereof.
Lineman and Muskellunge (1992) suggest that housing affordability s influenced by the levels and distribution of house prices, household income and the structure of financing costs. The ability to afford property ownership depends on household income and the mortgage repayments, sisters Paramus, the higher the household income and/or the lower the mortgage interest rate (MIR), the more affordable the property (Eng, 2000).
HOUSING MARKET AFFORDABILITY This concept of “threshold” affordability refers to the ability of households in being able to purchase private market housing which is expressed as a function of income and mortgage rates, indicating that the proposed buyer is merely able to access the racket. In a similar regard, Kitty (2007) suggests for owner-occupiers, changes in affordability have been related to amendments in mortgage costs. As further acknowledged by Imagine et al. 2008), it is important to consider the social circumstances that are related to both the standard of living and the economy. To that end, housing affordability is the personal troubles experienced by individual households, both in accessing the market and the sensitivity to market fluctuations. COST RECOVERY & REPEATABILITY OF HOUSING PROJECTS Cost recovery nearness the recruitment of project costs from beneficiaries. Many governments in developing countries have been undertaking innovative projects in the housing sector for several years.
The concept of repeatability as a major consideration of project design, dates from the time when international agencies, especially the World Bank, became involved in the housing sector in the early asses (Cohen, 1983). It was envisaged that if unit costs could be reduced to levels which low-income households could afford, the burden of subsidy would be reduced and it would be possible to repeat projects to the level required, within existing budgetary resources.
Yet, as Raked has observed, “the achievement of repeatability is dependent on the extent to which the technical, financial and social measures adopted in the projects to improve the supply of land, utilities and services, and housing finance, and facilitate the construction and improvement of housing, are appropriate and sustainable” Repeatability depends not only on political commitment, but the institutional capacity to design and deliver these components at the scale required. The recovery of investment by the public sector in the new development, ownership of property changes hand at a price.
In the case of improvements to existing areas or neighborhood, cost recovery is usually through levying of taxes and rents for the services provided such as roads, provision of public water, central retunes Lassos depots e. T. C. In Nigeria, studies nave snow Tanat success in cost recovery which may lead to Repeatability of projects will ultimately be determined by the cost effectiveness of design, choice of building materials, pricing of the housing units, level of subsidy, effectiveness of strategies and machineries of cost recovery in public housing programmer (Alternator and Gabon(1992).
However, the major problem confronting the government in low-income housing project is to reconcile the need for minimal injection of subsidy into the delivery of public housing and at the same time ensure affordability. An overview of the Nigeria housing sector in the pre-1980 era shows that it witnessed tremendous activity during the period. A performance evaluation of the different government programmer reveals a mixture of success and failures. Between 1962 and 1979, noticeable program lapses include the mismatch between target and actual accomplishments.
It is observed that in this erred only 1% of the proposed housing unit was met (New Nigerian, 1997) while performance on official schemes in the 1975-1980 period fell below 10% (ILL, 1980). For instance India(1993) has observed that there was no relationship between the total capital allocation and the overall actual expenditure in the 1970-1974 plan period. During this period, only, EYE,672,990 of the planned IEEE,028,800 was actually disbursed representing only 29%. Also, only 28,000 (23. 2%) of the 126,000 housing units planned by the FAA between 1974 and 1978 were completed.
Also, the programmer of this period were marred by low pace of construction, high costs, gadgetry shortfalls, poor coordination, use of realistic standards. In the 1980-1985 period, a total of IN . 59 billion was allocated to the housing sector and the federal government launched its first National low income housing programmer to cover the entire nation. Like many other programs of direct construction, the low cost housing scheme also represents another unsuccessful attempt by the government to ameliorate the problem of the low income group.
First, the scheme fell short of target as only 23,000 units of the 160,000 targeted were completed at the end of phases in June 1983 (Sufferer, 1994). The second phase was abruptly terminated resulting in only 20% achievement on a program over which an estimated 600 million naira was expended. The programmer was also marred by allocation problems. It was observed that only 14,262(54%) of the 26,702 units were allocated by 1982. Out of these, only 6526(44. 4%) were occupied across the nation.
The scheme was further marred by poor design, poor infrastructure services, remoteness of the location of the units and the use of equity principle that did not reflect differences in need to demands in the distribution of the house across the nation. Today, the contribution of the above robbers has left over 80% of the completed low costs unit in their various stages of dilapidation across the country. The evidence suggests that repeatability has been more difficult to achieve in shelter provision projects than in upgrading projects.
This is not to deny that some projects have been substantial in themselves and have been expanded into long term programmer. The Dander project in Nairobi provided 6000 new serviced plots and formed the basis for further projects funded by the World Bank and other agencies. Yet, it took more than seven years from project inception to plot allocation. This reduced the rate of supply to an average of about 850 plots a year at a time when the city needed about 14,500 a year (China, 1984: 20-21).
In Colombia, the project approach is held, not only to have failed to address the strategic constraints restricting noosing supply Tort low-income groups, out to nave diverted attention away from them (Atria, 1990: 93-4), Furthermore, projects have been designed according to norms and standards more appropriate to the needs of middle-income, rather than low-income households. It is thus the middle-income households that have benefited most from housing projects in Colombia (Atria, 990:95). In Turkey, squatter-prevention projects like Estate were replicated throughout the country.
Yet, they were eventually abandoned as ineffective, since there was no cost control or effective project management (Tokomak, 1990: 19). However, projects tend to be restricted to situations where public land is available and/or where land acquisition is easy and cheap (Tokomak, 1990: 27). In Zanzibar, the Quadrant project met 36 per cent of Hare’s total official housing waiting list for 1981/82 (Minutia-Amazing, 1990: 52). This, however, overlooks the total period during which the project was being prepared and implemented. On this basis, its contribution is more modest.
Even this achievement was short-lived and on balance the project approach “has dismally failed” to cope with low-income housing demand (Minutia-Amazing, 1990: 3). One reason for this failure is that public-sector allocations for low-income housing are declining and that private-sector finance institutions, such as building societies, have not yet succeeded in expanding their operations sufficiently to fill the gap. Although the idea of partnerships between public- and private-sector agencies has been accepted, this has yet to be translated into practical strategies.
Another factor inhibiting repeatability in Zanzibar is that standards of infrastructure provision are very high. This has pushed the cost of housing above levels that the intended beneficiaries can afford (Minutia-Amazing, 1990: 68). Increasing subsidies in order to improve affordability would only reduce the prospects for achieving repeatability still further, given the declining resources available to meet ever increasing shelter needs. If the repeatability of the project approach in Zanzibar is to be improved, much will depend on the ability and willingness of the building societies to increase lending to low-income households.
Although no building society has so far replicated the approach of the Skew-Gut project, the experience gained in lending for self-help housing projects has encouraged them to extend their lending operations (on an individual basis) to low- income housing. The largest building society has now financed a total of 2292 housing units for low-income households (Minutia-Amazing, 1990: 47). The fact that several independent evaluations have been made of shelter projects is a positive development.
Furthermore, it appears that these evaluations have been taken seriously by the administrators and professional planners in Zanzibar, to the extent hat projects and strategies have been modified as a result. In another Indonesian project, in Seminars, undertaken by an MONGO, about 1800 low-income households were able to obtain their own dwellings. Yet, reliance on funds from a large number of private donations and grants restricted the repeatability of the approach adopted here. An even bigger constraint on repeatability, however, may lie in the limited number of dedicated and energetic leaders available to initiate and supervise such projects.
One of the difficulties in learning from projects is that evaluations are recently not undertaken and that even when they are, the information gained is not incorporated into subsequent project proposals. In Colombia, evaluations are normally not Carlen out at all. Furthermore, documentation Is oaten Inadequate or unavailable, making it difficult for others to undertake the task. The lack of stability in policies and personnel further impedes the scope for evaluating past experience and learning from it (Atria, 1990: I).
The lack of channels for evaluating projects discourages the development of an iterative process in project development and management. This in turn is a major impediment in developing projects relevant to the scale and nature of demand. Even when projects are evaluated, it is comparatively rare for the results to be widely disseminated, so that professionals in other agencies can benefit from the experience. Presumably, one reason for this is the reluctance of public-sector personnel to expose themselves unnecessarily to what may be considered public criticism.
Overcoming such reservations will not be an easy task, given that it permeates many government departments. If the objectives of support or enabling policies are to make a major contribution to the provision of affordable and acceptable shelter for all, however, it is vital that the principle of learning from experience is accepted. In Colombia, it is claimed (Atria, 1990: 59) that the Bolivar City project is replicable, even though the level of subsidy was well in excess of 70 per cent and total budgetary resources for the housing sector are declining rather than increasing.
In assessing repeatability, it is clearly important to distinguish between acceptability of an approach and the capability of realizing it. In this case, the two would not seem to coincide. Upgrading projects appear to have eared better in achieving repeatability than new development projects. In Jakarta, the Camping Improvement Programmer enabled virtually all low-income households to obtain services and security of tenure within a period of about 12 years. Likewise, in Manila it was expected that the upgrading programmer would achieve repeatability within 15 years (Walton, 1984: 177).
In Lusaka, nearly 20,000 existing houses were provided with basic infrastructure and 5500 plots provided for those affected by plot regulations. This enabled the projects to reach 70 per cent of the residents in unauthorized areas of the city (Raked, 1989: 3). One reason for this distinction between new developments and upgrading projects could be that in the latter, residents are already occupying the land at densities that would be difficult to achieve in new development projects.
Another factor is that projects for supplying new plots have not been used to enhance institutional capacity to develop land- delivery systems capable of meeting the demand from each income group (Raked, 1989: 5). CONCLUSION The main constraint on achieving repeatability is the inability to produce serviced and affordable land. One way of overcoming this constraint is to expand sites-and- arrives projects, with a percentage of plots allocated for rental housing.