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The pros and cons of State subsidised housing project

An artist's impression of Sh20 billion affordable housing project to be put up in Kariakor, Nairobi. [Standard]

In addressing the rapid increase in urban population, successive governments have resorted to developing site and service schemes to settle low-wage earners.

They also embarked on slum improvement to better the standards of living, thus dignity, of slum dwellers.

And as the national population galloped towards 45 million in 2017, the Uhuru Kenyatta administration announced that affordable housing only stood shoulder to shoulder with affordable healthcare, manufacturing and food security in its priority agenda.

The population has long crossed the 53 million mark (according to the World Bank) and is even suggested by Worldometer to be above 57 million.

The need for affordable housing has never been higher.

Various sources indicated that Kenya's urban population was around 15 million in 2020, a year after the 2019 census. A majority of this population lacks proper shelter and other amenities that could make for a decent living.

Government subsidisation has always been welcomed in housing. It is well-intentioned and should be responsible for good outcomes, including improved quality of life, but it has its problems, including the possibility of misuse by tenants.

One of the ways to subsidise housing is by guaranteeing all new purchasers of new housing easy credit facilities with prolonged periods of credit payment and giving them smaller repayment instalments with allowance for periods of grace.

"This makes it easier for prospective house buyers to buy or acquire houses than in actual market situations where no government or public authority aid is present," George King'oriah, a land economist, writes in his book Introduction to Land Economics.

The government could also subsidise rental housing like they will be doing in the affordable housing programme which aims to construct over 200,000 houses annually. "In this process, governments and local authorities build housing units, and charge less rent for them than the prevailing market rent in the neighbourhood where a housing subsidy is supposed to take place," Prof King'oriah writes.

"The objective of the government is not to maximise profits, but to recoup the cost of housing construction and to provide a small running financial surplus, which helps to meet management expenses, the costs of repair, and costs of maintaining individual housing units." For countries in which land banking- aggregation of parcels of land for future sale or development- is practised by the government, it may decide to develop subsidised housing schemes, where tenants may even buy plots fitted with infrastructural services at very low prices and build modest housing as per the agreement with authorities.

Large population densities are therefore settled without the need to go through sophisticated land buying and construction in the urban areas.

"Such schemes have been found to be practical in Kenya, especially in Nairobi, for the very low income," says Prof King'oriah. "Increase in housing demand has led to a sharp rise in house rents within the city since independence in 1963. Under the circumstances, poor people in urban areas have been priced out of decent accommodation. This has led to the formation of slums that are eyesores aesthetically and a danger to community health."

The government may also use subsidised technical services, where they may subsidise the construction process by offering to the prospective poor tenants technical government servants, from among their civil servant cadres, to help in the design of housing units.

"The result is to cheapen the overall costs of housing if the prospective house owners are not going to be liable to pay for those professional services," Prof King'oriah writes.

External benefits

The other form of subsidies is concealed, such as less taxation on housing, easy loans to certain sections of the community for construction purposes, and house allowance for government and local authority employees who build their own houses. The provision of these subsidised houses contributes to social welfare improvement because housing is a merit good.

Economics Online defines a merit good as one which when consumed provides external benefits, although these may not be fully recognised - hence the good is under-consumed.

"By subsidising housing, they (authorities) influence the supply side of the housing, causing shifts in the supply curve. Given the same unchanged demand, this supply curve shift may bring down the cost of the buildings more than ordinary market prices. The reduced costs of housing acquisition may cause the housing units to be more easily affordable, and may ultimately result in a shift in the subsidised housing demand curve. This means that in effect, more housing is consumed after a subsidy," Prof King'oriah says, adding that the standards of living are made better and overcrowding, and a lack of basic amenities, is reduced.

As housing units increase courtesy of a high number of housing subsidies, they filter down to the very poor, as the richer move into bigger, newer units they can afford to rent or they have built. This is called the adaptive model of the housing market.

But if they do not increase at a good rate, and are significantly overtaken by population growth, then the rents, which are payments for factors of production filter down instead, pushing the poor out of the most modest of houses which they no longer can afford.

Expensive units

The subsidisation of housing also leads to the redirection of resources that would be used in the purchase, construction or renting of expensive units to other uses, increasing disposable income in the economy.

"The increased consumption expenditure tends to stimulate effective demand for other goods and may result in increased investment within the sectors of the economy that are involved in the production of consumer goods through the operation of consumer multipliers," says Prof King'oriah.

Subsidised housing can also be used as a wealth redistribution mechanism, where the money taxed from the very rich can be used to provide cheap and affordable housing for the poor in society. The low-income earners can, in return, save the money they would have used for rent and servicing their housing units for other essential services.

Increasing housing units reduces excessive demand which leads to the skyrocketing of rents and house prices, which would create a bubble in real estate. But it has its disadvantages as well. For subsidised housing to work, the authority in charge has to have easy access to cheap funds, both locally and internationally, with low-interest rates and longer repayment periods for loans.

"If the government is not rich, like in most underdeveloped countries, such subsidies could be heavy financial burdens that may commit the country to heavy internal and external debts," Prof King'oriah says. Where it is financed from taxation, there could be an effect on commodity and service production by causing a reduction in disposable income in the economy.

Subsidised units need administration, especially rental units, thus committing a huge amount of labour to this.

Tenants may also be lacking incentives to treat cheap, subsidised housing like valuable assets, Prof King'oriah observes. "Misuse of premises and carelessness may result in prolonged periodic maintenance costs that can add to the costs of housing subsidies," he says.

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