Tackling the world’s affordable housing challenge
McKinsey Global Institute
October 2014
By Jonathan Woetzel, Sangeeth Ram, Jan Mischke, Nicklas Garemo, and Shirish Sankhe

Decent, affordable housing is fundamental to the health and well-being of people and to the smooth functioning of economies. Yet around the world, in developing and advanced economies alike, cities are struggling to meet that need. If current trends in urbanization and income growth persist, by 2025 the number of urban households that live in substandard housing—or are so financially stretched by housing costs that they forego other essentials, such as healthcare—could grow to 440 million, from 330 million. This could mean that the global affordable housing gap would affect one in three urban dwellers, about 1.6 billion people.

:: A blueprint for addressing the global affordable housing challenge
McKinsey Global Institute (MGI)
October 2014 :: 212 pages
Executive Summary l Full Report
This report defines the affordability gap as the difference between the cost of an acceptable standard housing unit (which varies by location) and what households can afford to pay using no more than 30 percent of income. The analysis draws on MGI’s Cityscope database of 2,400 metropolitan areas, as well as case studies from around the world. It finds that the affordable housing gap now stands at $650 billion a year and that the problem will only grow as urban populations expand: current trends suggest that there could be 106 million more low-income urban households by 2025, for example. To replace today’s inadequate housing and build the additional units needed by 2025 would require $9 trillion to $11 trillion in construction spending alone. With land, the total cost could be $16 trillion. Of this, we estimate that $1 trillion to $3 trillion may have to come from public funding.

However, four approaches used in concert could reduce the cost of affordable housing by 20 to 50 percent and substantially narrow the affordable housing gap by 2025. These largely market-oriented solutions—lowering the cost of land, construction, operations and maintenance, and financing—could make housing affordable for households earning 50 to 80 percent of median income.

IN BRIEF [Report Introduction]
Access to decent, affordable housing is so fundamental to the health and well-being of people and the smooth functioning of economies that it is imbedded in the United Nations Universal Declaration of Human Rights. Yet in developing and advanced economies alike, cities struggle with the dual challenges of housing their poorest citizens and providing housing at a reasonable cost for low- and middle-income populations. In this report, we look at the dimensions of this problem—and how it will grow over the next decade—and offer a set of solutions that can narrow the affordable housing gap. Among our key findings:

:: We estimate that 330 million urban households around the world live in substandard housing or are financially stretched by housing costs. Some 200 million households in the developing world live in slums; in the United States, the European Union, Japan, and Australia, more than 60 million households are financially stretched by housing costs.

:: Based on current trends in urban migration and income growth, we estimate that by 2025, about 440 million urban households around the world—at least 1.6 billion people—would occupy crowded, inadequate, and unsafe housing or will be financially stretched.

:: The housing affordability gap is equivalent to $650 billion per year, or 1 percent of global GDP. In some of the least affordable cities, the gap exceeds 10 percent of local GDP.

:: To replace today’s substandard housing and build additional units needed by 2025 would require an investment of $9 trillion to $11 trillion for construction; with land, the total cost could be $16 trillion. Of this, $1 trillion to $3 trillion may have to come from public funding.

:: We identify four ways to reduce the cost of delivering affordable housing by 20 to 50 percent: unlock land at the right location (the most important lever), reduce construction costs through value engineering and industrial approaches, increase operations and maintenance efficiency, and reduce financing costs for buyers and developers.

:: These largely market-based measures can benefit households in all income groups and, with some cross subsidies, can reduce costs sufficiently to make housing affordable (at 30 percent of income) for households earning 50 to 80 percent of area median income.

:: Affordable housing is an overlooked opportunity for developers, investors, and financial
institutions. Building units for 106 million more poor urban households by 2025 could require more than $200 billion a year and account for 7 percent of mortgage originations.

These findings indicate that new approaches are needed. Standard approaches to affordable housing will yield only standard—and inadequate—results. Cities need to think more broadly and creatively about a housing ladder that includes affordable housing but accommodates citizens of all income groups and their changing needs. For the poorest citizens, the ladder may start with very basic housing that places people in decent accommodations and connects them to employment and society. To turn these aspirations into reality, cities will need smoothly functioning “delivery platforms.”