Newswise — People say that home is where the heart is; but in many parts of the world unimaginable housing conditions can be heart-breaking. Governments, recognizing the need for better housing outcomes, are seeking ways to fulfill this need for their citizens.
The problem is multi-faceted and daunting in its complexity. In their research, Professor Frank Warnock, Paul M. Hammaker Associate Professor of Business Administration at the Darden School of Business, and Veronica Cacdac Warnock, Senior Lecturer and Batten Institute Fellow at the Darden School, tackle one aspect of the housing issue: the adequate provision of housing finance. In recent months they presented their research illustrating how governments and financial institutions can improve housing finance systems. They discussed how to fulfill housing needs in Bogota, Colombia, at a banking association forum called, “A Roof for Everyone is Everyone’s Responsibility”. Soon after, the Warnocks were hosted by the Asian Institute of Management in Manila, Philippines, for its public housing forum, “reThink. reShape. reInvigorate: Taking Stock of Housing and Housing Finance in the Philippines.” The goal is to help make suitable homes available to all, but especially to low-income populations.
“Housing backlogs and underdeveloped financial systems are widespread in emerging economies,” says Frank Warnock. “Often government initiatives are well-meaning but misplaced; many programs benefit households whose needs could otherwise be fulfilled by the private sector if a supporting financial and legal-regulatory infrastructure existed.”
“These governments could encourage private lenders to fulfill the needs of middle- to high-income households. This would free up resources to accommodate the populations most in need,” Veronica adds.
The Warnocks identified three major factors that hold back emerging economies from being able to create adequate housing finance systems. They include the lack of legal protections for both lenders and borrowers, unstable macro-economic environments, and the lack of meaningful credit information.
According to the Warnocks’ research, governments such as that in the Philippines can grow their housing finance markets by as much as 20 percentage points of their GDPs by bringing credit information reporting systems and legal rights in line with those of developed nations. On the positive side, macro-economic instability has diminished in much of the world, although it is not clear if that is a permanent shift or if an increase in the frequency of inflationary crises is on the horizon.
“The instability associated with inflation is difficult for both the lenders and borrowers,” says Frank Warnock. “If the banks accept the exposure to inflation, very high inflation pushes them toward bankruptcy. If the inflation risk is pushed instead to borrowers (through, for example, variable rate loans), high inflation wipes out the borrowers. Memories of this last long. In Buenos Aires, for example, the banks are still viewed with distrust, even for the most basic of banking services.”
When the Warnocks present their findings, the information they provide is often galvanizing.
“Some countries are surprised to see where their housing finance statistics stack up against their peer countries,” Veronica says.
"Much of our analysis is possible because the World Bank and International Finance Corporation have gathered a wealth of information on costs and impediments to doing business, including banking. Our work, by assessing which factors are most important for building a housing finance system, has helped countries understand which policies should be implemented to improve their ability to get housing finance to more people,” Veronica adds.
“Too much housing finance has been one source of the current crisis in the U.S.,” says Frank. “But for most people in the world the problem is too little access to finance, not too much.”
In the classroom, the Warnocks are getting students to care about the problem as well. In the Second-Year practicum, “Markets in Human Hope,” co-taught with Darden Professor Saras Sarasvathy, students are challenged to develop ventures aimed at developing markets or products that can create opportunities for the disadvantaged.
The Warnocks themselves became involved with the issue when they led a student global business experience in South Africa a few years ago. While there, they met with a housing micro-lender who needed help in developing a way to assess risk. Veronica’s expertise in housing finance, Frank’s interest in growing markets and their combined interest in improving access to financing for housing led them to develop their research agenda. Their agenda continues through their roles in research programs in Latin America (through Inter-American Development Bank) and Asia (through the Bank for International Settlements).
The Warnocks have upcoming presentations on this topic in Seoul, South Korea; Washington state; and Singapore. In the meantime, they’re examining policy changes that enable rather than hinder property markets to grow and seeking alternative housing finance products that address the needs of the lower income populations usually left out of formal financial systems.
For more information, contact [email protected] or a member of the Communication team.
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