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Monday, 27 July 2009

Debt for homes

The US plans to loan Angola $400m to build homes for the poor in the next five years. The details are sketchy, but this is the sort of infrastructure aid (debt) approach which is worth undertaking because it's easier to monitor delivery and the benefits are both direct and catalytic.


  1. I agree that it is a nice thought and perhaps the Ambassador was misquoted, but $400 million for 1 million homes is $400 per home. I can think of a few functional structure I could assemble with that amount of material, but nothing I would want to raise a family in. Chances are this is overblown political hyperbole, and the real programme utilizes a revolving fund structure that will require the first few homes to be successfully built and paid off before they can even begin to think about a million houses with so little money.

  2. Secondly, how is the investment made toward these US$400 homes going to be recouped? Will the state charge rentals or will they sell them to raise the money? This does not sound like a sustainable economic plan. Like Yakima pointed out, a US$400 home costs less than the average 1 bedroom shack in our shanti compounds. I dont think its anything to get excited about.

  3. Deatils are certainly sketchy at this stage, but if Yakima's cpolitical concerns can be overcome, I would not so easily dismiss this idea, for three reasons:

    1. The proposal must be seen in the context of Angola's deep housing / slum crisis especially around Luanda which has prompted the Luanda givernment to accept new satelite towns which are bing constructed by the Chinese. Yakima probably remembers we have discussed this in the past, a link can be found on the "angola" tag cloud.

    2. The $400m is most likely going towards that housing construction that is aimed at the urban renewal and reducing the slum problem as well as handle the rising demand in one of the world's most expensive capitals.

    3. No where does the article rule or rule in additional public funds. Again, being fully aware of (1) and (2), we should consider that even if it involved additional funds the PRINCIPLE, as Yakima notes, is right and proper and certainly a better form of aid than we have seen in other areas.

    4. Houses in Chief Macha's area and many other in Zambia parts are being constructed for less than $400. Partly this is an economies of scale issue, but more fundamentally, its also a question of the counterfactual. What is it being compared against? If you live in the slum and the Government builds you a $400 house and you meet the expenses yourself, is that really a bad deal? I suspect these houses, if they are part of the chinese satellite citie, they'll come with infrastructure.

  4. Cho,

    Those details would indeed render the project more feasible, and as I said, I suspect that the Ambassador may have been misquoted to overstate the case. $400 million can build a lot of houses, especially if plots are already fully serviced by basic utilities. As part of the universal mission to clarify the long term economics of Aid in general, I think that it is important to hold the US Ambassador to his public word (or alternately the Angolan Press if they misquoted him). A million houses is a big promise, and such a conveniently grandiose round number that it must be questioned on the particulars.

    There is certainly no doubt that there are at least a million Angolan households in need of a house to hold. This announcement is indeed a good sign in terms of more direct aid delivery to households with presumably fewer bureaucratic intermediaries. If there is further capital forthcoming from development partners to Angola for this or related infrastructure projects, certainly this is more to the good than the counterfactual. However, neither the US nor Angolan governments should be allowed to make greater "political gains" from this gesture than it warrants on close examination. My concern is for the many homeless families relying on these policies to be sufficient to their needs. Exaggeration does them no good.

  5. Actually it is a $50 billion dollar project according to this report ($50,000 per house):

    The $400 million loan is probably to help capitalize the lending institutions for this project:

    Here is an even cheaper source of housing:

  6. More on this :

    Angola eases import rules for housing scheme
    (AFP) – 3 hours ago

    LUANDA — Angola is lifting customs duties on construction materials imported to build houses for the poor, the government announced Wednesday, one day after a housing protest in the capital Luanda.

    Angola suffers a critical shortage of housing due to three decades of civil war which destroyed huge swathes of the country and saw millions seek refuge by cramming into Luanda, where many remain in slum conditions without basic sanitation.

    A reliance on imported material like cement means construction projects are expensive and time consuming, and the focus has been on high end residential developments which yield the most profit.

    The state news agency Angop said the cabinet decided to lift the duties on building supplies for housing schemes in a bid to prod the scheme forward.

    Last year President Jose Eduardo dos Santos pledged to build one million homes by 2012, but many Angolans feel progress has been too slow.

    On Tuesday around 200 people staged a protest outside parliament after their tin shacks were bulldozed by the local government, which wants to develop on the land.

    Human rights organisations have described the forced evictions in the south of the capital as a "humanitarian catastrophe" but the local government has denied use of force and says the homes had been illegally constructed on unsuitable land.

    Shortly after Tuesday's protesters were dispersed from parliament by armed police, lawmakers inside voted to improve dialogue around the so-called "urban requalification" process but warned people to respect the land laws.

  7. Possibly what could be happening is that the $400 million lent by the U.S. could be used as depositary capital for the lending banks. Since a bank can lend many times what it has in actual deposits, it means that a bank with 10:1 reserve ratio can lend 10 times the amount it has in actual deposits. So the $400 million could be leveraged to make $4 billion in home loans with a 10:1 ratio. The $4 billion is about 8% of the $50 billion needed for the project. If other countries make similar loans to Angola and bring the depositary capital up to $2.5 billion and Angola itself uses $2.5 billion of its oil revenues for capital, then the $5 billion depositary capital needed to finance the $50 billion project could be achieved. This assumes of course that the homeowner will be taking out a loan to finance his house purchase and the government is not giving the houses away. These are my thoughts on how this scheme could be working.

  8. Kafue,

    Your explanation sounds plausible to me, since a revolving fund structure would not have enough time to roll over loans by 2012. The US contribution is generous, and necessary to get the process moving, but hardly should be credited with "building a million houses". The tariff reductions on construction materials are also a forward looking policy move to give up some short term revenues in order to speed up growth of the tax base through job creation. The biggest risk to success is probably corruption (either by government or by banks, or both), because if $1 billion of that $5 billion deposit base goes missing, the whole project would come up $10 billion short.

  9. A million new houses in Zambia:

  10. This proposal does sounds odd. If there are already 550,000 families in Zambia with enough capital to purchase homes outright, why do they still need them? With only 25% of homes earmarked for 15-20 year mortgages which still requires higher payments than the industry standard 30 year mortgage, just what sort of homes and what class of buyer are we talking about? Why is it always "a million" homes when African governments announce such things? There are hundreds of thousands of "promised" homes in Zambia as yet unbuilt, is this just inflation of hyperbole to match? The Angolans seem to have a plan which might work, if both private and public sector players refrain from corruption. They were media-savvy enough not to announce it until they at least had the US$400 million pledge from the Americans in hand.

    From my perspective, let them build ten thousand first in test plots along the line of rail, let the intended residents have a look and tell us if this is what they want to spend their savings or future income on. Whose material and labour will be used to build these houses? Is this like the prefabricated transportable hospital idea, where all the money comes from Zambia and all the value added work is done in China? If the 55% sold outright are discounted, how high are the mortgage interest rates and rental tariffs going to be on the remaining 45% (presumably poorer residents) to cover the difference? If the reverse is the case, how high is the premium being charged to the 55% in order to purchase the home outright and subsidize the builder/borrower/renter?

    As usual with the announcement of such programmes, not enough information is provided to make any kind of accurate assessment as to the real market impact of the statement.

  11. Yakima,

    One possibility is that the houses are based on different technology such as the "Nano home"

    It could be that prefabricated homes are cheaper to build and thus become more affordable to Zambians who currently are not able to buy houses based on the existing construction methods.

    I suspect that there may be many developers from many countries that will be building houses to meet the million houses goal. I don't believe there will be a subsidy on the houses, possibly the new construction methods will make the houses cheap enough to avoid this. Regarding the sourcing of materials and use of labor, the primary objective is cheap housing and the developers should be allowed to use whatever sources they see fit.

  12. Kafue,

    I see where you are coming from, and were the only metric houses or no houses then simple price points would probably be okay to use in isolation. However in this case it all has to happen in real time and within the framework of global markets, so the sourcing of labour and materials has a very real implication for "multiplier effects" on job creation, manufacturing development, transport requirements, energy consumption, and materials scarcity. In other words, a house that costs 120% as much, but returns half of that to the domestic economy, may be more desirable (i.e. ultimately cheaper) than the same house for 100% where only a quarter of the expense is returned to domestic businesses and workers. Then again, it may not.

    I have no objection in principle to foreign construction firms, or public/private partnerships, or government housing projects or home loan programmes. I am however cynical when spokespeople throw around conveniently rounded figures like "one million homes" without specifics. Certainly private sector companies are welcome to do business however and with whomever they choose, but governments are charged with representing their people's interests just as vigorously as any lawyer or doctor, and therefore should make procurement decisions and conduct negotiation based on best outcomes for their own constituents, preferably over both long and short terms.

    The "Nano-Homes" are intriguing, however it should be noted that these housing developments are supported in large part by the bustling global metropolis of Mumbai, and space is at a premium. These developments are located inconveniently far from sources of employment or public transport, and the cheaper materials being employed are not necessarily going to last as long as the more expensive options being replaced. One of the things that Zambia lacks is a decent stock of existing structures that can be remodeled for new purposes, and it won't help much if all the buildings built now are falling down in twenty or thirty years instead of a hundred or more. I understand the urgency to bring shelter to the masses, and perhaps a million homes that last thirty years and a hundred thousand jobs that last at least five is worth the loans and the interest and having to do it all over again for the next generation only bigger.

    If indeed there are 550,000 families along the line of rail with sufficient savings and/or credit to purchase homes which meet their needs, then this is wonderful news. The average household size used for needs-basket surveys is 6 persons, which would mean 3.3 million people living in and owning their new homes immediately. There would also have to be another 250 thousand families able to qualify for 15-20 year mortgages (through the builders? specific banking partners? the government?), and 200 thousand more able to pay rent in spite of insufficient credit to borrow. This brings us to somewhere in the vicinity of 5-7 million people being housed in these units, all along the line of rail, all in a few years, all without subsidy? I am finding my credulity stretched.

  13. Yakima,

    I am against mandating labor and materials sourcing requirements for companies, for the simple reason that they can drive up the sales price and make it less affordable for purchasers, thus reducing the number of purchasers that can benefit from the product.

    For example a company with an Angolan factory operating at 50% capacity supplying the Angolan market and which is also capable of supplying the Zambian market, if required to establish a factory in Zambia, would have to double its capital expenditure thus driving up its product prices. A similar example is Zambian Airways, which was buying expensive local jet fuel and incurred losses. Much better to let businesses determine where to source their inputs. The government can offer incentives such as training local labor and free land for factories etc to attract companies to source locally.

    A nano home seems a good deal to me if it lasts at least 30 years. A $4,500 home, if financed over 20 years at 9.00% interest is $41 per month, making it affordable to many people. Over time, if people's income rises, they may sell their home and purchase a larger one as happens in many countries.


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