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HOUSING AFFORDABILITY:

A SUPPLY-SIDE TOOL KIT


FOR CITIES
BRIEFING NOTE
PREPARED FOR CITYLAB PARIS
OCTOBER 2017

One feeling unites billions of people in cities around home prices and rents hitting all-time highs, nearly
the world: a sense of sticker shock whenever half of the state’s households struggle to afford
they attempt to find a new home. From London to housing in their local markets. In New York City,
Lagos, housing costs are creating financial stress MGI estimates that 1.5 million households cannot
for a large share of the world’s urban residents. afford the cost of what we define as a decent
Rents and home prices have risen far faster than apartment at market rates. This puts the city’s
incomes in most countries, particularly in big cities total “affordability gap” at $18 billion a year or
where many people want to live and where job 4 percent of the city’s GDP. As London’s economy
opportunities are concentrated. The issue affects has boomed over the past two decades, the city’s
everyone from slum residents living on the margins annual home completions increased by just over
to middle-income households. 10 percent, falling far short of demand and driving
home prices five times higher.
At the heart of the issue is an extreme imbalance
in supply and demand. Population growth, the Worldwide, MGI has estimated that some
continuing trend toward urbanization, and rising 330 million urban households currently live in
global incomes are all fueling steady demand substandard housing or stretch to pay housing
increases. In 1950, New York City and Tokyo were costs that exceed 30 percent of their incomes.
the only two cities on earth with populations of This number could rise to 440 million households
more than 10 million; today there are more than 20 by 2025 if current trends are not reversed.
cities of that size. The world’s urban population has Beyond the human toll, this issue eventually
been rising by an average of 65 million people a constrains economic growth. Investment in
year over the last three decades, led by breakneck housing construction remains below its potential,
urbanization in China and India. and households with a disproportionate share of
monthly income going toward rent or mortgage
The housing stock of expensive urban centers
payments have to limit other forms of consumption.
around the world has not expanded quickly
Returning to our example in California, MGI
enough to keep up with this surge in demand.
estimates that the housing shortage causes
Research from the McKinsey Global Institute
the state to lose $140 billion in annual output, or
(MGI) has examined the scope of the affordable
6 percent of state GDP.
housing gap. California, for instance, added
544,000 households but only 467,000 net housing The legitimate interests of investors, particularly
units from 2009 to 2014. Its cumulative housing in a low-interest-rate environment, can add fuel to
shortfall has expanded to two million units. With the fire. Foreign capital flocks into global hubs, and
residents feel compelled to leverage up to achieve up to 20 percent. A comprehensive citywide
home ownership or add hard assets that are mapping and inventory exercise can unearth many
appreciating in price. In the hottest markets, these opportunities. Based on our past work in urban
trends are sometimes amplified by speculative environments, we have identified seven places
behavior such as land hoarding or fast-paced to focus.
property flipping.
Prioritizing transit-oriented development
Some governments have taken steps to cool real It is critical for congested cities to promote
estate markets that are overheated by investors. density around transit rather than encouraging
These approaches include China’s moves to sprawl and longer commutes. Transit-oriented
discourage land hoarding by imposing a tax on development may involve redeveloping existing
idle land; additional taxes on value gain and limits residential structures or encouraging new builds
on foreign and secondary home ownership in by permitting higher floor-space ratios, loosening
Switzerland; Canada’s recent imposition of stress height restrictions, or allowing greater density
tests for home loans and tighter rules for mortgage in specific target zones. These zones can be
insurance; and Germany’s limits on loan-to-value selected to promote local objectives, such as
financing ratios. These types of measures work reduced dependence on private vehicles or the
best when they are complemented by flourishing development of mixed-use, pedestrian-friendly
rental markets that allow average citizens to save cityscapes. Places such as Hong Kong and
for down payments without facing a shortage of Seoul have already intensified land use around
housing options. transit stops. Seoul allows floor-area ratios that
are up to 20 times higher in better-connected
National and local governments around the world
neighborhoods than in more distant areas. Other
often address housing gaps by focusing on the
cities can follow this approach. Analysis in San
demand and financing side. Strategies such as
Diego, for example, found that increasing the
housing subsidies, privileged financing, or various
density of residential developments in a half-
forms of rent control offer much-needed relief to
mile radius around public transport nodes could
the low-income households they cover, and they
expand the city’s housing stock by close to
are legitimate policy choices if carefully designed.
30 percent.
But they are expensive and difficult to sustain—and
they do not address the core issue of an underlying Getting more out of underutilized sites
housing shortfall. In many cases, cities may not even need to
increase density thresholds. They can build
It will take a dramatic increase in the number
out on residential parcels that are not taking
of available housing units to achieve greater
advantage of currently allowed density. Sites that
affordability. Of course, the simplicity of this
are underutilized can be identified as priorities for
statement belies the complexity of executing
redevelopment. Incentives (such as expedited
on it. Because progress has been so elusive,
permitting, relief from parking requirements, or
this briefing note will focus solely on supply-side
investment in public parking) can make these types
solutions, addressing three challenges that all
of projects more attractive to developers. MGI’s
cities have in common: finding available land,
analysis in Los Angeles found that 28 percent of
removing barriers, and making the construction
parcels zoned for multifamily development are
sector more productive.
underutilized; maximizing them could add more
1. FIND THE LAND than 300,000 units to the city’s housing stock.
Access to land is typically the biggest constraint
Putting vacant urban parcels to work
on housing development and one of the major
Another strategy involves building infill housing on
drivers of cost. In places such as Rio de Janeiro
vacant parcels. Even dense neighborhoods may
and Auckland, the cost of land often exceeds
have empty lots that could serve as viable sites.
40 percent of total property prices. In extreme
A surprising amount of land sits idle in the face of
cases such as San Francisco, land is so scarce
huge unmet housing demand. Our analysis finds,
that it can account for as much as 80 percent
for example, that Riyadh, Saudi Arabia, has some
of a home’s price. Globally, we estimate that
40 square kilometers that are zoned residential but
unlocking land to the fullest extent could reduce
are not being utilized, while about 40 percent of
the cost of owning a standard housing unit by

2 McKinsey Global Institute Housing affordability: A supply-side tool kit for cities
all zoned residential land within Nairobi is vacant. Adding accessory dwelling units
Taxes on idle land can create an incentive to build. Finally, many cities can encourage the owners of
single-family homes to add accessory dwelling
Making public land available
units. These may include garage apartments,
Where appropriate, governments can earmark
basement apartments, or backyard cottages. It
unused public lands for housing development.
does not matter whether they house extended
Transit authorities may own property surrounding
family or renters. Accessory dwelling units are
busy transport nodes. Decommissioned sports
inherently affordable because they use existing
facilities, military bases, or transit hubs may
land, buildings, and infrastructure, resulting in
also be viable sites. It is often easier to facilitate
a sort of “invisible density.” MGI’s research in
low- or middle-income housing on these types
California found that homeowners could add up
of sites than on typical residential parcels, since
to 790,000 housing units across the state from
public authorities can make the transfer or sale
such structures.
of the land contingent on the development of
affordable housing. They may even directly 2. CITIES HAVE TO REMOVE THE BARRIERS
subcontract development of housing in these Cities have to develop governance structures
areas. Turkey’s Mass Housing Administration that represent all stakeholders (not just the most
(TOKI) has managed to open up some 4,120 entrenched, powerful, or vocal) and streamline the
square kilometers of unused land (or 4 percent of actual execution. Several approaches can help.
total urban land) from other government agencies
Aligning for better delivery: Delivery labs
for housing development. San Diego could add
and integrated housing agencies
roughly 4,000 housing units by converting disused
Housing strategies are enormously complex,
sports facilities into mixed-use commercial and
involving initiatives and policies across financing,
residential developments.
urban planning, infrastructure development,
Transforming industrial sites land use regulation, building codes, delivery
Some cities may have opportunities to convert light and contracting approaches, and more. But
industrial sites. Large unused industrial parcels stakeholders from different parts of the system
(such as shuttered factories) can offer tremendous rarely work together to smooth frictions and focus
development potential. But converting them to on the broader goal of getting more affordable
residential use should involve careful consideration housing built quickly.
of the impact on jobs and whether any commercial
The “delivery lab” model addresses this lack
activity on surrounding sites would pose issues
of coordination by bringing together 30 to 40
for residents.
people across these specialties for fast-paced,
Going greenfield intensive working events. Labs are designed
Cities surrounded by undeveloped or agricultural to translate high-level housing strategies into
land can invest in greenfield housing projects on detailed initiatives, implementation plans, and key
their outskirts. Although greenfield developments performance indicators. In these settings, public-
typically involve building infrastructure, roads, and and private-sector stakeholders can address
new neighborhoods, they may still be cheaper misperceptions and arrive at joint solutions.
than infill projects if the land is more affordable and Labs can produce integrated plans that clarify
if there is room to achieve economies of scale on expectations and synchronize timelines for what
multi-acre sites. Greenfield developments open each player agrees to deliver. Getting the right
up the possibility of building single-family homes, people around the table is critical. Sessions
which are less feasible in dense urban cores. should be well-facilitated, with consultation from
In California alone, we estimate that greenfield external topic experts. Each stakeholder should
developments could provide more than 600,000 be represented by someone with enough seniority
additional housing units. Despite their advantages, to make quick decisions, and the top sponsor (for
cities should learn from mistakes made in locations example, a city mayor) should personally attend
as diverse as Cairo and Mexico City; if greenfield and guide key sessions.
developments are built too far from existing
The delivery lab approach has had a major positive
employment centers or transit hubs, they can fail to
impact on the housing market in Saudi Arabia. The
attract or retain residents.
government invited all stakeholders across the

McKinsey Global Institute Housing affordability: A supply-side tool kit for cities 3
public sector (all ministries and government entities Cities need to take an inclusive approach to
related to housing) and private sector (including providing housing for people of all incomes,
representatives from real estate developers and ages, and demographic groups. People who
banks). Citizens’ voices were also heard through come to a city to work need to be able to find an
the use of social media and focus groups. affordable place to live there. But the voices of
existing homeowners who want to preserve the
These events took a multidisciplinary approach
status quo often drown out those of newcomers,
to identifying the key challenges in the housing
young adults, low-income service workers, and
sector and devising solutions with clear targets,
renters who need more housing. After a 2009
implementation plans, accountability, and budgets.
audit found that neighborhood councils were not
The labs have aligned stakeholders around high-
representative of the city’s broader population,
impact ideas that take practical considerations
Seattle replaced these bodies with a central
into account. To give just one example, the labs
Community Involvement Commission that includes
identified last-mile infrastructure connectivity as
mayoral and council appointees chosen to
an issue that was delaying the development of
represent a broader set of stakeholders.
large land parcels and creating uncertainty that
deterred developers. Cross-disciplinary problem- Cities can also mandate a larger role for employers
solving quickly came up with solutions, such as in the community input process. Companies
an infrastructure company focused on building have a very real stake in housing issues, since the
these last-mile connections using a build-operate- availability of housing directly affects their ability to
transfer model. attract talent. Amid the extreme housing crunch
throughout Silicon Valley, for example, Facebook
The outcomes from successful labs are a good
has advanced plans for a mixed-use, mixed-
foundation, but actual implementation is crucial.
income residential and commercial campus in
A city government can accelerate progress by
Menlo Park.
empowering an agency or unit with a mandate
to guide housing delivery from end to end. This While many cities hold public hearings and
type of unit needs exceptional talent with good disclose minutes of meetings, there are ways to
problem-solving skills, stakeholder management make the planning process more dynamic and
and communication skills, and significant decision- inclusive. Widely distributed digital surveys and
making power or direct access to the top decision- the use of analytics tools (such as City Voices) to
maker. San Diego’s Housing Commission, for track citizen sentiment and real-world use patterns
instance, hires private-sector talent, has an can keep housing decisions more in tune with the
in-house real estate development team, and actual needs of the community and lessen the
invests in marketing and communications. Turkey’s influence of smaller entrenched interest groups.
TOKI agency has wide-ranging control over Creating an open-source map of all city parcels
land resources, and it uses both public-private overlaid with development opportunities can foster
partnerships and direct contracting to ensure debate about priorities. Tools such as Owlized can
that housing units are built for citizens across the help residents visualize proposed projects in their
income spectrum. neighborhood in 3D.

Engaging more stakeholders and Speeding up


overcoming NIMBYism A maze of regulation is typically associated with
Although most people agree in the abstract that land acquisition, zoning, and building codes.
more affordable housing would be a good thing, In many jurisdictions, developers need to go
opposition often halts specific proposals. Existing through extensive environmental studies, design
residents may be concerned about the changing approvals, and public hearings. These safeguards
character of their neighborhoods, the prospect of are well intended, but they can add inefficiencies.
lower home values, congestion, and crowding in Wrongful manipulation of the approval process can
schools. To accommodate these concerns, many result in multiyear delays and millions of dollars in
jurisdictions have established processes such as added development costs. This increases the risk
public hearings or ballot initiatives that carry veto premium associated with building projects, driving
power. While the intent to give the community a up costs for renters and would-be homeowners
voice is noble, the result is often that very little and preventing some projects from being
housing gets built. undertaken at all.

4 McKinsey Global Institute Housing affordability: A supply-side tool kit for cities
Cities can streamline their processes to fast-track Where cities themselves invest in housing
land use approval and permitting, creating a or supporting infrastructure, contracts can
more predictable and less burdensome process. be a powerful lever for raising construction
Establishing “single-window” clearance (that is, productivity. In an MGI global survey, construction
consolidating approvals from multiple agencies executives, suppliers, and project owners
into one clear interface) and digitizing permit pointed to misaligned incentives and contracts
applications and status tracking are clear places as impediments. Projects are often awarded to
to start. Cities around the world, from Singapore the lowest bidder with limited regard to quality,
to Nairobi, have had success with this approach. change orders, and claims that might arise after
Simplifying the required permits can provide the fact. The planning stage may be given short
significant relief. Australia, for example, was able shrift, while overly detailed specifications can limit
to cut the number of regulatory procedures and flexibility when problems arise. Risks are often
speed up permit approvals by over two months, all misallocated, and contracts generally fail to take
while maintaining high construction quality. the inherent uncertainty of projects into account.
Furthermore, relationships may be adversarial,
Cities could consider establishing “by-right”
creating an environment that lacks trust and
special development zones in select areas
genuine collaboration.
where deviations from city zoning and land use
codes are permitted with minimal review. Blanket Moving to value-based tendering (which places
environmental reviews could clear requirements greater emphasis on the quality and past
for future developers in entire zones. Governments performance of suppliers), adding contractor
could also create appeals boards at the local and owner incentives to traditional contracts,
level for faster resolution of project rejections or and making provisions to improve transparency
mitigation proposals. and collaboration can deliver tremendous value.
An even bolder approach involves contracts
Local governments can also bring a new approach
with an integrated project delivery (IPD) model.
to building codes. Today these codes tend to be
When arrangements with multiple contractors
highly prescriptive about the choice of equipment,
are transactional, they can easily turn hostile. But
materials, and designs that construction
the IPD model encourages multiple stakeholders
companies must use. This can stifle innovation
to collaborate closely on a project, sharing its
and make it difficult to achieve meaningful
profits or losses while maintaining their separate
improvements in productivity by adopting new
business identities. Tired of missed deadlines
practices. Instead, cities could opt for “outcome-
and budget overruns on early projects, Sutter
based” regulation that requires safe, sound results
Health, a not-for-profit health system with dozens
(such as structural integrity) but give construction
of medical centers, took this approach to tighten
firms the flexibility to decide how to achieve them.
up its $7 billion capital improvement project. The
Scaling up and creating incentives for company designed an IPD model, assigning
efficiency and innovation contracts to integrated teams of designers,
Building projects on a larger scale can dramatically consultants, and builders rather than to individual
change the productivity and cost of delivering parties. The new approach has yielded projects
housing, making it possible to employ techniques that came in on time and under budget.
such as repeatability and offsite fabrication. A
Finally, by mandating use of efficient technologies
number of companies take this approach while
and innovations in their procurement contracts,
trying to incorporate design quality and variability
cities can hasten private-sector adoption and
as well as sustainability. Cities can support
investment in cost-saving tools. Requiring
industry innovation by providing the land and
contractors to submit models in building
infrastructure that allow for scale, tendering out
information modeling (BIM) software, which
city-scale developments, and consolidating high-
has a track record of fewer errors and reduced
volume demand.
rework, can solidify better industry standards
and practices.

McKinsey Global Institute Housing affordability: A supply-side tool kit for cities 5
3. THE CONSTRUCTION INDUSTRY HAS and equipment productivity. Cloud-based control
TO EVOLVE towers can coordinate large-scale, complex
Even when land is available and there is no projects, assembling data in near real time
community opposition, construction itself poses that is both backward-looking and predictive.
risks. Too many projects come in late, over budget, They can keep information flowing to owners,
or fraught with problems. Productivity within the contractors, and subcontractors. Techniques and
construction sector is consistently poor around data that are readily available today can produce
the world. Labor productivity growth averaged large improvements in the accuracy of cost
1.0 percent a year over the past two decades, and schedule estimates as well as engineering
compared with 2.8 percent for the total world productivity. Advanced automated equipment
economy and 3.6 percent for manufacturing. such as bricklaying and tiling robots can accelerate
The picture is particularly dismal in advanced onsite execution. MGI’s productivity survey
economies. In the United States, for instance, labor indicated that the biggest barriers to innovation by
productivity as measured today is lower than it was construction companies are underinvestment in
half a century ago. technology and a lack of R&D.

Some of this is due to external factors such as Transitioning to a production


cumbersome building codes and permitting system approach
processes as well as cyclical swings in public Construction is almost always approached
and private demand. Informality and corruption as a series of discrete and bespoke projects.
sometimes distort the market. At the industry But the biggest boost in productivity comes
level, construction is highly fragmented, contracts with the concept of a manufacturing-inspired
have misaligned incentives, and inexperienced mass-production system. This involves more
owners and buyers find it hard to navigate an standardized elements, panels manufactured
opaque marketplace. At the firm level, we often and assembled offsite, and limited finishing work
see poor project management, inadequate design conducted on site.
processes, and a lack of investment in technology,
Barcelona Housing Systems, for instance, has
R&D, and workforce skills.
improved productivity by up to 10-fold by moving
Pushing forward with best practices to away from traditional onsite construction to
boost productivity large-scale industrial delivery and prefabrication.
While cities can create a more efficient environment The company aims to develop more than 10,000
and incentives for innovation, construction firms housing units per project, helping to amortize the
also have to up their game. The best-performing cost of manufacturing facilities. It uses a replicable
firms take a value engineering approach to the design of four-story multifamily buildings that
design process, pushing for repeatable design mix housing, retail, and service-oriented office
elements whenever possible. They also avoid space, varying some facade and design elements
delays by focusing on procurement and supply- without changes to the structural design. All
chain management for just-in-time delivery. necessary housing components are assembled
from prefabricated modules built in a factory on-
Several approaches can improve onsite execution,
site or nearby, and the components are simple
starting with a rigorous planning process and the
enough to be built by non-skilled workers with
completion of all prework before starting onsite.
minimal training.
To ensure that key activities are achieved on
time and on budget, companies should agree The Value & Budget Housing Corporation, a
on key performance indicators, particularly for modular housing provider from India, designs
subcontractors, and hold regular performance prefabricated room components that can
meetings to monitor progress and solve issues. It easily convert one-bedroom units to two- or
takes careful planning and coordination of different three-bedroom units, saving costs by avoiding
disciplines onsite along with the application of lean extra aluminum framework. Such construction
principles to reduce waste and rework. techniques can be applied in a variety of different
housing contexts, including prefabricated single-
The construction industry also needs to accelerate
family homes as well as detached dwelling units
digital adoption. This includes the use of BIM tools
and modules for multifamily infill projects.
for design as well as analytics and the Internet of
Things for onsite monitoring of materials, labor,

6 McKinsey Global Institute Housing affordability: A supply-side tool kit for cities
Modular home construction is gaining traction in
the United Kingdom as well. A company called REFERENCES AND
Legal & General, for instance, is building one of the FURTHER READING
largest modular production facilities in the world McKinsey Global Institute research
near Leeds, where it expects to produce up to is available for download at
4,000 units a year. The £3 billion UK Home Building www.mckinsey.com/mgi. This briefing
Fund explicitly calls for and supports the funding of note draws on the following reports.
such techniques.
Reinventing construction: A route to higher
US-based Katerra uses modular construction productivity (February 2017)
techniques while delivering construction services
A tool kit to close California’s housing gap:
to customers in an end-to-end model. The Silicon
3.5 million homes by 2025 (October 2016)
Valley startup takes sole responsibility for design,
sourcing materials from a global supply chain, Urban world: Meeting the demographic
and assembling final products. The company challenge (October 2016)
is focused on using new building materials and A blueprint for addressing the global
finding process improvements by deploying the affordable housing challenge (October 2014)
Internet of Things.

Other technology breakthroughs are being applied


as well. Shanghai-based WinSun automates
construction through 3D printing. Although
relatively new, the technique has already been
used in a few cities: Saudi Arabia has signed
a contact with Win-Sun to develop 30 million
square meters of real estate, on the heels of the
company’s development of a 3D-printed office
building in Dubai.

•••

Finding an affordable place to call home has


become an issue for citizens around the world.
Subsidies and financing solutions alone cannot
close the gap. Cities urgently need to ramp up
home building to improve residents’ quality of
life, remain inclusive, and ensure that housing
shortages do not become a drag on economic
growth. The tools and strategies outlined here can
be pursued in parallel—and given the extent of
unmet demand today, there is no time to lose.

This briefing note was authored by Jonathan Woetzel, a director of the McKinsey Global Institute (MGI)
and a senior partner of McKinsey & Company in Shanghai; Sangeeth Ram, a McKinsey partner in
Dubai; Shannon Peloquin, a McKinsey associate partner in San Francisco; Mourad Limam, a McKinsey
associate partner in Dubai; and Jan Mischke, an MGI senior fellow in Zurich.

McKinsey Global Institute Housing affordability: A supply-side tool kit for cities 7
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