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The construction of sustainable housing, capable of adapting to the effects of climate change, is not an option, but a need. However, the production of this type of housing requires a firm, forceful and joint commitment, both from the public and private sectors.In today’s blog, which is part of a series on the situation of the housing sector in Latin America and the Caribbean (LAC), we address the importance of having an ecosystem that requires, allows and encourages the construction of sustainable homes in our region. Subsidies, green mortgages or tax benefits are just a few examples of the ways in which the construction of this type of housing can be encouraged. Keep reading so you don’t miss any details!
Housing for the 21st century: sustainable and resilient to climate change
LAC is one of the most urbanized regions on the planet, with 82% of its inhabitants living in cities ( the level of urbanization could increase to 86% by 2050). This urbanization process, accelerated during the second half of the 20th century, has brought with it a demographic concentration in large metropolitan centers, leaving a significant percentage of residents living in peripheral and high-risk areas. In fact, at least 21% of the region’s urban population (120 million people) lives in informal settlements, which are the most susceptible to the devastating effects of climate change.Unfortunately, LAC is considered the second most exposed region in the world to climate change related natural disasters. Between 1998 and 2020, geophysical events affected 277 million people. Therefore, investing in sustainable, resilient housing, capable of resisting and adapting to the adverse conditions of climate change, is not only an opportunity, but a necessity.
How to build an ecosystem that favors the creation of sustainable housing?
The production of sustainable housing requires an ecosystem that requires it, allows it and encourages it. The construction of this ecosystem must be the result of the support of actors, both from the public and private sectors, and from civil society. Some of them are:
- Public housing agencies at the national, regional and local levels
- Financial entities
- Home builders and promoters
- Civil society and the international community
The objective of the ecosystem is to achieve the alignment of different interests around the same result: the production of sustainable housing and the enjoyment of the “individual and collective” benefits derived from it (Figure 1).
Figure 1. Benefits of building sustainable housing
The role of the public sector in generating incentives for the construction of sustainable housing
In general, the benefits of building sustainable housing are aligned with the medium and long-term environmental objectives of the countries, often ratified by international conventions. Hence, the initiative for the construction of an ecosystem that promotes the production of sustainable housing depends, to a large extent, on the public sector.The formulation of a sustainable construction policy falls on the public sector, consisting of the design and adoption of minimum standards required by type of building. For example: differentiating social housing from other types of buildings. These policies must also take into account the characteristics of the country’s environment, based on bioclimatic zones and the definition of “reasonable” savings based on market conditions, among other factors.
What kind of incentives should the private sector provide?
The sole initiative of the public sector is not enough (see Figure 2). The commitment, cooperation and participation of the private sector is required, especially financial institutions and housing builders and promoters. For what reason? Because it is necessary to offset the higher costs of implementing a sustainable housing project, with the design of products that entail lower financial costs for the builder or promoter of the project.
Figure 2. Towards an ecosystem for the construction of sustainable housing
In this context, financial entities can obtain resources, both from local development banks and from special sources such as multilateral banks and the carbon market, which represent cheaper funding than the traditional one. Therefore, the financing of sustainable housing is the result of the combination of various incentives, both supply (for example, green lines of credit for the builder), and demand (such as green mortgages), which are based on the definition of preferential interest rates.Other benefits can be added to the above, such as direct subsidies for low-income households, and tax and urban planning incentives granted by the public sector, both nationally and locally. What is the difference, and what does each of these types of incentives consist of?Tax incentives: in general, they are granted on the supply side and consist of tax benefits in the form of reductions or exemptions in exchange for investments that improve the environment or that lead to the acquisition of goods that reduce greenhouse gas emissions.Urban-type incentives: they refer to measures focused on promoting high-rise housing, increasing buildability in projects and reducing the time and cost of procedures associated with project construction permits and licenses.
Ultimate goal: reduction of the housing deficit in Latin America and the Caribbean
Thanks to the application of the incentives described, among others, both public and private agents and society as a whole can enjoy the benefits of building sustainable housing.A country that encourages sustainable housing optimizes the use of its natural and economic resources. On the one hand, financial entities will support projects with better guarantees, reducing environmental and financial risks. On the other hand, builders and promoters will market their housing projects more efficiently. Finally, households and society as a whole improve their quality of life and benefit from a more economical operation in the long term, of real estate assets built under the principles of sustainability; thus, more effectively addressing the housing deficit.
The IDB Group: leading the support of incentives to address the housing deficit
If you want to learn more about the challenges of the housing sector in LAC, and specifically about the important role that incentives play, you cannot miss the recording of the panel Incentives to Address the Housing Deficit at the 2022 Housing Forum of the IDB Group, that took place in Washington DC on September 29th and 30th.
Access the video (in Spanish) here