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Building Little Houses

July 14, 2009


The foreclosure rate on homes in America remains high. One of the reasons is that people, believing that housing prices would continue to rise forever, bought larger houses than they could really afford. During those optimistic years, U.S. home shows were filled with luxury houses that had indoor basketball courts, swimming pools, multiple-car garages that were large enough to fit boats and recreational vehicles as well as automobiles, and entertainment rooms fitted out like mini-theaters. Today, many of those homes sit unoccupied. Modest and reasonably priced homes continue to sell while luxury homes languish on the market. Of course, a “modest” home in America would be considered a luxury home in many countries. Too many people around the world live in slums — hodgepodges of thrown-together shanties crammed with people living in poverty. Slums lack basic running water and sanitation systems. Disease can spread quickly through the ranks of those living there. As a result, governments are eager to eliminate slums, but they understand that the people living in them have no place else to go.


India is one of the countries where too many people live in slums. The Economist reports that “last month ten-year-old Azharuddin Ismail was woken in the middle of the night by the sound of bulldozers. As policemen beat him with a bamboo stick to shoo him and his family away, his home in Mumbai’s slums was swiftly demolished. Azhar, a celebrity since appearing in the film ‘Slumdog Millionaire’, has since been given a new home by the filmmakers. But other residents were not so fortunate” [“The nano home,” 13 June 2009 print issue]. The article continues:


India’s cities need at least 25m more homes, according to report from McKinsey, a consultancy, and the Federation of Indian Chambers of Commerce. In Mumbai, the commercial capital, more than 8m people now live in shantytowns, often paying substantial rent for the privilege. But buying a home of their own is way out of reach for most of them: a 70-square-metre flat [approximately 750 square feet] in the center of the city costs $500,000 or so.”


BusinessWeek reports that “luxury flats in Mumbai can cost more than ones in Manhattan” [“Now, the Nano Home,” by Prashant Gopal, 8 June 2009 print issue]. Tata, the company that builds the world’s cheapest car, the Nano (starting at $2,500), is now turning its attention to housing. Its real estate division is building 1,300 basic units at Boisar, “an industrial area where many lower-wage commuters already rent. These apartments will be absolutely tiny. The carpeted area of the smallest units will be 218 square feet, too small even for most Manhattanites. The largest units would be about 373 square feet. … The community would have its own garden, post office, meeting hall, schools, and hospital.” As you can see from the attached floor plan of the smallest model, fitting a family into one of these units would be challenging. Yet they are much better than any shanty found in the slums surrounding India’s large cities. The problem is that India’s poorest class (or even its lower middle class) can’t even afford these tiny apartments. According to Gopal, the apartments “are targeted at folks earning an annual salary of $6,000 to $10,000. The average call center employee with 10 to 20 years experience earns 320,000 rupees or about $6,400 a year.”


The Economist reports that Tata is not the only developer looking to get into the small housing market. Matheran Realty, “is in the process of building 15,000 flats with prices starting at just 210,000 rupees ($4,500) for 19-square-metre [205 square feet] units.” The development is being constructed in Karjat, 90km east of Mumbai.


The cost is being kept low chiefly because the flats are being built outside big cities, where land is much cheaper. Owners are expected to commute. The units are also very small and spartan. The simplest consist of a single room with a sink in the corner and a toilet behind a partition. They are in buildings of no more than three stories, so there is no need for expensive structural works. Instead of bricks, lightweight molded concrete blocks are used for the walls. The concrete is often made with foam, fly-ash or other waste materials to make it lighter as well as cheaper. There are no lifts and just one staircase per block. All this means that the homes can be built very quickly and with unskilled labor.”


Of course, such construction techniques couldn’t be used in areas prone to earthquakes where much more substantial structures are needed. It is important, however, that people are finally turning their attention to the needs of poorer consumers. Gopal reports that “some business consultants (most prominently, C.K. Prahalad) [have been] arguing that companies would profit handsomely if they target the ‘bottom of the pyramid’ where the bulk of consumers are.” Tata and Matheran have finally focused on the housing market on that group. The potential profits, The Economist reports, are enormous.


The developers say the potential for very cheap housing in India is huge. Many of those living in slums today are employed as drivers, factory workers or tailors, with incomes of around 90,000 rupees a year — easily enough to afford a flat which costs 200,000-400,000 rupees. According to Ashish Karamchandani of Monitor Group, another consulting firm, India has 23m urban families with incomes of 60,000-130,000 rupees a year. Including rural areas, Tata Housing sees an even larger market of 180m households earning between 90,000 and 200,000 rupees.”


The article concludes by noting that the last big hurdle was securing financing for those seeking to back the small apartments.


Banks were unwilling to lend money to people without credit histories or proof of permanent residence. But two government-owned banks—the National Housing Bank and the National Bank for Agriculture and Rural Development—have agreed to provide funds to finance companies so that they can offer mortgages to such buyers. To reduce risk, buyers must put down at least a quarter of the purchase price and employers must confirm their income. Borrowers are then charged little more interest than those with an established credit history. Lenders and developers are convinced that they have struck gold. Who would have guessed that the combination of subprime loans and a building boom would have become attractive again so soon?


One of the reasons that The Economist refers to the loans as “subprime” is because the current economic recession has even affected the microfinance sector — which its champions had hoped would be isolated from larger global ills [“Sub-par but not subprime,” The Economist, 21 March 2009 print issue]. Their depiction of the microfinance sector as sub-par rather than subprime is more accurate.


A global credit crisis caused by subprime mortgages is hardly the ideal backdrop for a business making unsecured loans to poor people without a credit history. Yet big microfinance companies, which do exactly that, seem to be in rude health. Mohammad Yunus, the unflappably optimistic founder of Grameen Bank in Bangladesh, a microfinance institution for which he won the Nobel Peace Prize in 2006, is adamant that business remains unscathed. ‘We have not been touched in any way by the financial crisis,’ he said on a recent visit to Japan. ‘The simple reason is because we are rooted to the real economy—we are not paper-based, paper-chasing banking. When we give a loan of $100, behind the $100 there are chickens, there are cows. It is not something imaginary.’ He is not alone in thinking that microfinance is insulated from the problems of the global economy. Its proponents argue that any similarity with subprime loans is misleading. Microfinance institutions (MFIs) lend relatively small sums of money to people in developing countries to start small, profitable businesses, not to buy overpriced homes. Many of those businesses serve local needs, which has more merit at a time when exports are collapsing. And microfinance’s reliance on peer pressure for repayment must be the envy of any mainstream banker struggling with rising foreclosures and ‘jingle mail’; delinquency rates are microscopic.”


The problem, according to the article, is that many of the institutions that make micro-loans are not as insulated from the global economy as the recipients of the loans. Nevertheless, I suspect that the mortgages being drawn up for “nano homes” are better depicted as sub-par than subprime. People who have moved out of shantytowns are likely to work hard to maintain ownership of their new homes. If the building boom in India does well, I suspect that it will be copied by contractors in other emerging market countries. The real concern is that unscrupulous builders will use shoddy work and substandard material to cut corners so that their profits can be increased. Developing countries don’t need potential death traps being built in the name of progress. What the poor need is quality work and durable materials so that their hard-earned money is invested into something of lasting value.

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