All GCC countries use a combination of non-cash and cash housing finance subsidies. Non-cash subsidies include: (i) making land available for housing either through land grants or directly producing residential projects on allocated land; (ii) housing grants to needy groups including families with limited income, families with special needs, and divorced, widowed, or unmarried women, and (iii) subsidizing water and electricity. On the other hand, cash subsidies include: (i) grants to purchase, build, repair, or expand a house given to those with limited income; (ii) interest free housing loans to buy, build, repair, or expand a house, ranging in value from USD 52,000 in Oman to USD 350,000 in Qatar with a repayment period ranging from 25 years in all GCC countries, with the exception of Qatar, which offers loans up to 35 years.
However these subsidy programs are not getting people into housing fast enough, resulting in long waiting periods and extensive waiting lists for government housing services. Indeed, government subsidy programs in most GCC countries are facing many challenges, including: (i) increased demand for housing due to local population growth; (ii) rising cost of housing, mainly due to rising cost of land reflecting the increased demand for housing from the growing expatriate population; (iii) lack of coordination between different government entities which is negatively impacting housing supply and affordability; (iv) complexities and red-tape involved in the present subsidy programs; (v) lack of clear eligibility and priority rules leading to friction (when some are denied and others helped), game playing (where some maneuver themselves to become eligible), and political subterfuge (where those who should not be eligible use personal connections and favors to try to wriggle into eligibility); and (vi) specific challenges to each program to be discussed in detail in another blog.
Moreover, these subsidy programs heavily promote home ownership at the expense of rental housing. Even in countries such as Bahrain and Kuwait, which provide rental apartments, governments are unintentionally stigmatizing rental housing by offering rental assistance to the “least fortunate”, such as those who have been on waiting lists for more than 5 years, divorced or widowed women, or to households with very low incomes. However, quality affordable rental housing is an integral part of a well-diversified housing stock because it better serves many households, including: (i) young couples just starting out, who need a place of their own but lack the assets to buy a house and may not know how large their family will be; (ii) singles who wish to live independently but may be married in the future; and (iii) older couples whose children are grown and who no longer want the responsibility of maintaining and improving their home.
Villa housing units
Furthermore, housing authorities are advocating living in villas by predominantly building villas, allocating apartments, in the rare event that they are built to the “least fortunate”, granting land to build villas, and mandating large residential plots. Although the desire for a villa is universal, the health of our cities and hence of our economies and nations, depends on diversifying beyond villa, mainly because (i) villas are ecologically stressful, adding to our rate of land and energy consumption; (ii) higher density resulting from greater diversity of housing types can lower average costs and incentivize developers to enter the affordable housing market; and (iii) diversifying housing types enhances social cohesion by allowing people in different stages of their lives to move to larger or smaller homes without leaving their community.
Governmental resources must be made to go farther through reforming the current subsidy programs and exploring new ones. Reforming current subsidy programs may include initiatives such as: (i) revising eligibility and priority rules, which need to be available only to those who cannot succeed in the open market, based on principles of ‘common sense equity’, clearly state who is in-or-out, and self-adjust with changing economic conditions; (ii) reinventing the land grant system. For example it could be a grant of a plot of land sufficient to hold a villa within a preapproved subdivision, to be built by a private developer according to specifications, with a loan on favorable terms. People who own a plot could have the option to turn it back for cash or credit.
Products of the Sheik Zayed housing program
Governments can promote rental housing through programs, such as: (i) a supply-side program, probably through non-profits or religious associations. For example, Waqf land is grossly underused in the GCC and could be the source of land for rental or charitable housing; (ii) a demand-side housing subsidy that eligible households may use to pay part of their rent on accommodation found in the marketplace.
Moreover, governments can encourage diversifying beyond the villa, through strategies such as: (i) redefining the subsidy. Instead of asking “would you like a villa or an apartment?” ask “You have this amount of subsidy, how would you like to spend it?” Those who spend less can reserve the money for future use, or receive cash rebates. In other markets, when faced with such a choice, some voluntarily consume less; (ii) letting people move into apartments via rent-to-own and start enjoying their new home while saving to buy it. This will help those not in a position to purchase a home to do so and build equity; and (iii) letting people stay on a waiting list for a villa, while moving them into an attractive apartment now.
Other tools that governments may want to consider include non-cash tools, such as: (i) limiting density, which creates a renewable and monetizable commodity that government or the private sector can sell or trade; (ii) providing trunk and on-site infrastructure, a tool to improve the quality or affordability of housing and offer significant value to the developer or owner; (iii) assuming risk or enhancing credit to encourage private banks to participate. Governments can take the credit risk associated with lending to affordable households or properties through purchasing loans originated by others, insuring loans originated through approved intermediaries, and guaranteeing a government or private sector entity; and (iv) exempting eligible projects from government imposed fees to reduce overall costs and increase affordability.
Cash tools include: (i) soft debt – a government entity lends money to a developer or property owner, and takes a subordinate lien position to other lenders to encourage the development of new affordable housing; (ii) hard equity – to encourage the development of affordable housing, the government gains an ownership stake in the property, or the organization developer/ operator and seeks an economic return on its capital; (iii) operating subsidy – this can be on the supply-side when given to property owners who then charge residents low rents or on the demand-side when given directly to householders or residents to help defray their costs; and (iv) re-directive subsidy – government can capture revenue from another income stream and direct it to housing, through, for example, payroll deductions, ore revenues from transportation or utilities.
In other nations that we have looked at successful policy instruments have evolved during an extended period of trial and error that led to the evolution of a mixed system of low-income housing policy with a much diminished national role in program design and outcomes, an ascendant role for local governments and the private sector, and the opportunity for the recipients of housing vouchers to scout the private market for the best deal they can find. The permanent nature of housing inspires caution on the part of policymakers. Homes can be the physical and enduring expression of policy, and as a result, every city in the world has some properties that are the reminder of a previous experiment that either failed or outlived its utility. Thus, giving stakeholders clear information and access to technical expertise can help them proceed with confidence.
Housing in Oman