Affordable Housing Institute : US

[Continued from the previous Parts 1, 2, 3 and 4.]

About this time, my talk at the Turkish Real Estate Summit in Istanbul was running late — and a good speaker always ends on time:

“My speech is running late! Oh, my paws and whiskers.”

What follows, I was able to sketch only very quickly, three sentences a slide, for later revisiting by my audience (and you lucky blog readers):

Government must act at multiple levels. Turkey has a municipal and regional system of government, and can act at all three levels.

As my slide indicated, the national government is the place to start for:

· Targeted loan programs. With high risk spreads and a huge need to enable homeownership, the national government could create programs for first-time home buyers, as well as home improvement.

· Earthquake insurance or earthquake home improvement loans. Earthquake risk is a national peril, and only the national government is well placed to take the risk. Of course, such a form of reinsurance or last loss insurance could be very expensive — hello, New Orleans! — but there’s no logical reason to apply it at the state rather than national level.

The regional level is the place to deal with economic development, and the local level is where inclusionary zoning and similar property use controls can come in. (More on this below.)

My hosts — including TOKI — are very successfully developing across the higher ranges of the income pyramid. That may be thinking too small, focusing solely on expanding the supply of homes within reach of the upper-middle income, rather than delivering affordability across the full range of tenures and incomes. Turkey also needs:

· Permanent professional rental housing, particularly in the urban areas.

· Small-loan programs, akin to microfinance, to help create formalized landlords and formalizing buildings.

In total family terms, here is where the greatest need lies: more than half of all metropolitan Istanbul households live in ‘informal’ housing, particularly vulnerable to earthquakes. While it is great to build new homes, as many as possible, and to reinforce them appropriately, there’s no chance whatsoever that such a building program will obviate the need for the gecekondu housing.

The most powerful force to improve informal neighborhoods is the people who own property there. As I said in my talk, one could link home improvement with formalization and access to capital. The structure would be something along these lines:

· Owner of an informal house applies for the program, and commits to formalize building structure.

· Government offers a path to formalization, a mixture of inspection now and commitment to reinspect after work is done.

· Government provides a drawdown-type loan to fund the upgrades.

· Loans are administered through private financial institutions.

Something along these lines would be of immense value, not just financial or economic, but likely in deaths prevented.

Informal housing usually sits cheek-by-jowl near formalized affluent housing

We know that in an earthquake — and there is a 65% chance that Istanbul will be hit by a 7.5 or greater by 2030 — the gecekondu are death traps:

Izmit, 1999, where 17,000 people died.

Unfortunately, improving incremental housing is where I am least optimistic. It’s hard work to do, the scale is enormous and each loan is a challenge, the potential for corruption or leakage between concept design and recipient is great, and it’s difficult to see where an elected official will get the political capital to do this (as opposed to promising it, which I imagine many may).

This is a critical intervention — absolutely essential —but a difficult one politically and economically.

I’m much more optimistic about a simpler intervention: inclusionary zoning in TOKI or private developments, particularly in the stronger market areas.

Inclusionary zoning can be applied:

· By fiat if the government owns the land and is contributing it, as done in Chicago.

· When approving increased zoning, as in the UK’s Section 106.

This idea attracted quite a bit of interest, with various people asking me after my talk what percentage of ‘those people’ one could incorporate into a larger scheme without its marketability suffering. I told them that US and UK experience suggested 15-25% would work perfectly well.

Conclusion. It was a really eventful few days.

Decades of crippling inflation has left Turkey virtually bereft of the entire housing financial ecosystem — there’s almost nothing programmatic, and the sole government agency charged with developing new programs, TOKI, is currently acting almost exclusively as a builder/ developer, leaving a vacuum in the policy space.

The Turkish ecosystem is quite underpopulated, with space in numerous sectors among the four kinds of money:

Plenty of room for the observant herd to respond to innovations

· Hard debt: With Europe’s highest interest rates, both nominally and in real terms (spread above inflation), Turkey has a huge opportunity to use the state’s ability to reduce real and perceived risk by targeting credit enhancement, mortgage insurance, or even quasi-sovereign lending to lower the interest rate paid by particular targeted populations, such as workforce housing. Credit-enhanced earthquake-reinforcement home improvement loans to formalizing household customers could also be administered through banks and lenders.

· Hard equity: The same populations likely will also benefit from down payment or deposit assistance and savings programs, possibly employer-assisted.

Those two interventions by themselves would represent a substantial move forward, expanding homeownership and encouraging development of affordable or workforce housing. If Turkey were feeling more ambitious, it could be further:

· Soft debt: Shared-equity lending, as used in the UK, constitutes very effective soft capital (debt or equity depending on program design features). With infolation an ongoing risk, such shared-equity programs would allow the government to get people into homeownership with giving them a controllable occupancy cost, and then allowing tghe prospect of governmetn recouping its investment as property appreciated (and the currency depreciates).

· Soft equity: Turkey could create a mission-oriented rental stock by authorizing non-profit housing associations and then allowing those associations to tap grant-type soft equity

All of these programs could be administered through TOKI, so long as TOKI took steps to eliminate conflicts by interest by removing itself from competing with developers for land.

No conflicts of interest here!

The foregoing ideas only scratch the surface. Others include:

· Eliminating VAT (KDV in Turkish) from the costs of constructing pure affordable properties, or even simply the affordable subset of a larger scheme, would represent an immediate 15-20% cost savings that could be plowed back into additional affordability.

· Creating a loan-application-fee matching program, whereby private lenders that took applications from targeted income or demographic bands could be reimbursed a portion (half?) of their normal application fees.

At the local level, all developers in high-cost areas — whether they are purely private or TOKI, if it remains an active player in the development arena — could be subject to an Inclusionary zoning mandate, as a condition of receiving higher zoning, to include 15-25% of the homes as affordable. Affordability bands will depend on markets, development parameters, and the value gained from increased zoning.

Key here is that Turkey has an active and professional development sector, whose self-interest is bringing them to the high-cost urbanizing areas where affordable housing is most needed. Further, Turkey has excellent access to European economic markets, and a core real estate professional cadre of smart people who have been schooled in financial principles in the UK or the US — so Turkey should build on its strong private development sector. Co-investment via IFC or USAID’s development credit authority (DCA) program could jump-start creation of new companies and players.

Couple that with new programs and Turkey would really have something.

The new mortgage law is a great place to start. There’s much more to be done.

It just takes political commitment

Political update. Evidently the political parties have found their way to a compromise:

ANKARA, Turkey (AP) — Turkey’s Parliament on Thursday approved July 22 as the date for new general elections, which were called as a way out of a government crisis that developed from a dispute over political Islam.

Parliament approved the date unanimously — with all 458 votes cast in favor — despite initial objections from the secular opposition, which argued voter turnout would be low because the elections would be held when many Turks would be on vacation and unable to vote.

The leading opposition party, which had long called for early elections, voted in favor of the date in the end.

The ruling party has a majority in Parliament and the opposition would not have been able to change the date.

“Let’s not create more chaos, as we are trying to get out of the chaos,” Haluk Koc, a legislator from the opposition Republican People’s Party warned during the debate earlier in the day.

I like that voice — that is the voice of centrism, the voice that understands, as Thomas Paine said, “if we do not hang together, then we shall surely hang separately.”

[…]

The standoff has drawn hundreds of thousands of pro-secular protesters into the streets.

Although most Turks are Muslim, secularism is enshrined in the Constitution and fiercely protected by the military, which warned last week against the growing profile of Islam and reaffirmed its willingness to act as the “absolute defender of secularism.”

The emperor Justinian, defender of the faith, whose capital was Byzantium, today known as … Istanbul

As we have seen during this eventful week, the military’s growl had the effect of raising national awareness of the potential stakes. The financial markets wobbled but did not panic. And the Constitutional Court’s ruling has the effect of enshrining a filibuster-like veto over one party capturing both legislative and executive branches.

The United States and European Union on Wednesday warned Turkey, a NATO member and close ally, to prevent its military from defying civilian leaders. The military has seized power from civilian governments three times in past decades.

Turkey’s electoral board, which oversees elections, had recommended July 22, which was also approved by a parliamentary committee late Wednesday.

So is it business as usual? Will the financial markets see this as artful compromise, or a fundamental schism papered over?

Kicking the can down the road may not solve all your problems, but it’s fun

Constitutions are not made fully formed; even ours, the closest thing to a purely written Constitution, has been multiply amended and endlessly interpreted. Rather, I think we should see Turkey’s eventful week as part of an emergent constitution much more like the English constitution, which evolved over centuries and in which precedent, tradition, and change all somehow were collectively understood and collectively managed.

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