Harnessing the real property market for equitable affordable housing provision through land value capture and inclusive housing problems

• By Musa Adamu Keffi MUSA & Hon. Ibrahim Bala

The government of Nigeria recently unveiled affordable housingas part of its renewed hope agenda with a proposal to provide 100,000 units across Nigeria. The delivery model envisioned by the government is through collaborative efforts by both thepublic and private sector and incentives to facilitate privatesector investment in affordable housing. Specific interventionsinclude provision of affordable mortgage loans to off-takersthrough the Federal Mortgage Bank of Nigeria, facilitating the approval and granting of all legal titles in selection and acquisition of land for project in order to provide an enabling environment for private sector investment in the housing sector. These policies alone are unlikely to bring much change in the provision of low-income housing and may result to similar outcomes as seen before.
The planning approaches employed throughout the past decades raises the question of effectiveness and practicalities in handlingfurther expansion of informal settlements. Governments andtheir planning authorities have continued to support public financed models of affordable housing provision and failed to initiate regulations to provide an enabling environment for the market players to produce affordable housing. The housing market is majorly controlled by economic and political factors with total disregard of the interests of the urban poor. This hasgiven rise to substantial gaps between housing supply and demand in most cities of the developing world leading to high house prices in these countries. The housing problem and needs have heightened, the economy and the real estate market havebecome more robust and tools are required that captures thisdynamism. However, housing policies in Nigeria have failed to keep up with dynamic changes in housing needs. Therefore, alternative models such as Land value capture (LVC) and inclusionary housing (IH) as used in the USA need to be considered for possible adoption. These models have been praised as efficient since they are self-sustaining as they can finance affordable housing development without any public funding.
Affordable housing has traditionally been understood to indicate housing that is priced below market value or market rent for the low income and/or middle-income households who cannot afford market housing. Generally housing affordability expresses the challenge each household faces in balancing the cost of its actual or potential housing, on the one hand, and its non-housing expenditures, on the other, within the constraints of its income. It has been argued that affordability is not a characteristic of housing—it is a relationship between housing and people. This is true only if houses are built to standards and regulations. For some people, all housing is affordable, no matter how expensive it is; for others, no housing is affordable unless it is free.Accordingly, the affordability of housing can only make sense if three essential questions are answered: 1. Affordable to whom?2. on what standard of affordability? and 3. For how long?
The UN-Habitat defined affordable housing as that which is sufficient in quality (built to standards and regulations) and location which does not cost so much that it prohibits its occupants from meeting other basic living costs or threatens their enjoyment of basic human rights. Housing affordability involves more than the often-used simplified conception of house purchase price to household income. It has also to be viewed in terms of rent payable by a household. That is a price or rent which does not impose an unreasonable burden onhousehold incomes. The US Department of Housing and UrbanDevelopment (HUD) defines housing as affordable if a family’s housing costs do not exceed 30% of their net income.Households paying over 30% of their income are considered cost burdened. Households paying over 50% of their income are considered severely cost burdened.

Economists have argued that the affordable-housing problem is a consequence of supply-side regulations (zoning, building codes, regulatory processes, impact fees, prevailing wage rules) and natural constraints on the number of buildable sites that have increased the costs of housing production and human capital deficiencies, whereby some households do not have sufficient marketable skills to generate wages high enough to affordhousing. Economic policy response to this diagnosis is to reduce those regulatory constraints on housing supply that raise the costof housing and to enhance the marketable skills of low-incomehouseholds over the long run with the basic assumption behind the policy recommendations being that if all supply constraints were eliminated, the market would efficiently deliver housing atthe lowest possible cost, and that distributional issues are bestaddressed through direct income transfers and human capital investment. Housing price is a measure of the monetary worth of the asset (house) to consumers. The price of housing like any economic good is determined by the market forces of demandand supply. Housing price is determined by the interaction of demand and supply and is determined at the point where the demand and supply are in equilibrium. Participants (buyers andsellers) in the housing market include occupiers and investors. Occupiers demand housing for use, as a consumer good. As a consumer good, property is desired for the direct satisfaction it provides, and demand changes according to preferences, income, and so on. Investors see property primarily as a wealth storage vehicle, as opposed to other sorts of financial assets. It is critical to understand that investment demand and occupation demand are inextricably linked. Not only is investment in real property viable because some occupiers decide to rent rather than purchase their premises, but the amount of rent paid will alter the capital value of the interest.
The real estate market’s goal is to develop a pattern of pricing and rents such that, given enough time (the long period), land resources are allocated based on their most profitable (‘highest and best’) usage relative to other land resources. This happens because market competition encourages owners to shift resources to the usage that produces the highest net return. This explains why private investors struggle to build affordable housing without appropriate government policy action. One of the primary driving forces behind the housing market is government policy and action. Lack of or inappropriate government intervention and regulation in the housing market has previously resulted in housing market problems, triggering banking crises in Sweden, Spain, Finland, and Japan (in the early 1990s), as well as the 2007 mortgage market problem in the United States, which triggered a four-year financial and economic crisis.
Governments have intervened in housing markets because housing in general has become too expensive and unaffordable for poorer households. High costs of land, lack of serviced landin accessible locations, high construction costs and high housingdemand compared to low supply coupled with the desire for highprofits by developers are some of the inherent reasons why without interventions the market cannot produce affordable housing. Government intervention, whether direct or indirect, has always been necessary to offer affordable housing to low-income households. An effective enabling government approach addresses market failures directly, addressing the causes rather than the symptoms of housing issues, and serving the interests of national and local governments, as well as housing consumersand producers.
The idea of using the market to provide affordable housing is a component of equity planning. The concept of equity planning is largely concerned with how city planners should respond to increasing urban inequality. The equity planning model addresses both a policy aim and the role of planners as advocates for equity. “Equity requires that Government institutions give priority attention to the goal of promoting a wider range of choices for residents who have few, if any, choices”. Encouraging development so that land is put to ‘highest and best use’ may drive low-income people to relocate from centrally placed or easily accessible spaces, and reinforce uneven development. However, equity and ‘highest and best use’ can be achieved simultaneously if suitable planning methods are utilized that encourages maximal development of both market and non-market housing. LVC and IH are considered aspowerful tools for affordable and equitable housing provision and it is possible, they can provide theoretical and practical support for exploring new financing mode to solve urban housing problems.
Land Value Capture is a planning method that captures increases in land value as a result of public investments, changes to land use plans, and up zonings for public benefit. This method is predicated on the reality that the majority of these improvements in value are the consequence of public activity, rather than landowner action. Land Value Capture (LVC) refers to the use for public benefit of any increase in land value caused by public policy and/or investment (rather than direct land owner action). It is the process of requiring community benefits from land owners whose land has increased in value due to Government actions. Classical economists referred to these increases as the “unearned increment.” When understood in this light, is only fair and equitable for the public to appropriate – capture – a reasonable share of the increased land value in the form of community benefits, including affordable housing.
Understanding the components of land value is essential for appreciating the concept of land value capture. These components are classified into four. The first is intrinsic land value, which reflects the land’s productivity or economic use value as assessed by its development potential, location, soil type, and other characteristics. Under a freehold title, a landowner should own this percentage of the land value. Under a leasehold title, the leaseholder pays the government an annual ground rent for the use and enjoyment of this component of the land value. The amount of land/ground rent that lessees pay to a government lessor should be determined by the supply and demand of land use rights. Secondly, land value can also rise due to increases in local infrastructure investment and social services. Improvements in amenities, such as schools, roads, water and sewage, and public parks, can increase housing demand in a neighbourhood, thus inflating the value of aproperty. Because this land value increment is caused by publicspending, public service providers should retain this benefit to cover the costs of infrastructure investment and local services. Property owners whether freeholders or leaseholders should pay annual rates for the provision of these services. The amount of a property tax (rates) should be based on the quality and quantity of local services received. Thirdly, private land improvements undertaken by owners or users can also enhance land value.Undoubtedly, the party who invests in the land and assumes therisk should benefit from the land value increment. Fourthly, landvalue can be generated by external factors, such as populationgrowth, economic development, and changes in land use regulations. These factors are not related to the investment or labour of the landowners or users. Hence, this portion of the land value (sometimes referred to as surplus land value) should be captured by the government for the purposes of income redistribution or other public investment. This is the component of land value which is targeted under Land Value Capture.
From the above explanation, It is obvious that land value is influenced by both governmental and private investment and behavior. Each participant in value creation is entitled to a portion of the value. LVC policies focus on the change in value caused by a specific time-bound activity, such as rezoning, particularly up-zoning. When land becomes more desirable for higher density development than what is currently zoned, zoning restrictions must be changed. Up-zoning, or an increase in density, increases the value of land since it allows for more construction on the same parcel of land. The Government could take part of the gains in land value through the exercise of itsland use regulatory powers. LVC should be used forredistributive purpose as the benefits of urban land ownership should flow to all city users and should be used to redressdisadvantage. There is therefore a need to focus on the marketand rethink the broader set of exclusionary land use policies that make housing in many cities so expensive and the problem cannot be fixed unless the housing market itself is fixed. The provision of durably affordable housing is difficult and requiressignificant intervention in the housing market.

Inclusionary Housing and Land Value Capture are intertwined and actually, IH is a form of LVC. IH relies on LVC to capture the increase in land value (through increased affordable housing) brought by increased density. The ability to capture the value generated by a flexible zoning scheme is a precondition for the successful implementation of IH. IH taps the economic gains from rising real estate values to create affordable housing without stifling development. Inclusionary housing is an LVCtool because the level of housing affordability required under it is based on the change in Land value. Capturing the value provided by a flexible zoning system is a prerequisite for the successful deployment of IH. IH uses the economic benefits of rising real estate values to provide affordable housing without impeding development. Inclusionary Housing (IH) refers to land use restrictions that oblige developers of market-rate residential developments to put aside a small fraction of their units, typically between 10 and 20 percent, for people that cannot afford housing in the market. Alternatively, they can pay a fee or contribute land instead of delivering units. IH regulations are occasionally exchanged for development rights or zoning changes. IH’s major role is to enhance housing affordability as well as social and economic integration. In reality, these policies are deemed “inclusionary” because they aim to enable lower- and moderate-income households to purchase or rent property in middle- and upper-income neighborhoods.
IH is attractive to policy makers because it is cost effective, with the public sector primarily bearing administrative costs and the private sector primarily bearing construction and financing costs. However, this is not always the case, as in some programs, the public sector also covers the expense of tax breaks and fee waivers provided to developers. The architects of IH in the US were stirred by high housing prices and thought of capturing part of it for public benefit. The extent to which the cost of housingthroughout the US and particularly California was rising was beyond the reach of the low-income and middle class. This became a rallying call for change and as the precipitous increasein both the volume of market driven construction and the cost ofhousing also gave increased visibility to the opportunities toleverage the market to create affordable housing, particularly through capture of land value increments that were created by grants of planning permissions.
Many cities in California State have turned to the market usingLand Value Capture and Inclusionary Housing to increaseaffordable housing development and promote socially and economically integrated neighborhoods. These cities provide incentives to developers, including up to a 35% increase in project densities based on the amount of affordable housing provided, and an 80% increase in density for projects that are completely affordable, with the goal of encouraging the development of affordable and senior housing.