During the last two decades, many Latin American countries have instituted sweeping structural reforms in the housing sector. These reforms have enabled sound regulatory environments conducive to the growth of formal land and housing markets. One key component has been the expansion of primary mortgage markets.

Increasingly, housing policy in much of Latin America complements market forces through instruments that create incentives for lenders and builders to venture down-market, meeting the demand from low and middle income households. Such instruments include:

  • Large demand subsidy or voucher programs that enable lower income residents to close the financing gap for formal housing.
  • State lenders originating mortgages in Mexico and Brazil for the low and middle income segments.
  • Mortgage securitization, which in countries like Colombia now exceeds approximately 30 percent of the mortgage portfolio to the secondary market.
  • Mortgage insurance products that enable lenders to hedge risks for mortgage lending to lower income segments.
  • Targeted tax incentives for low-income mortgage lenders and investors in secondary markets as well as targeted interest rate subsidies for low-income households.
  • A package of enabling reforms including those that have improved land management and property rights.

The net impact of these structural reforms and “demand-side” incentives has been a brisk increase in mortgage lending and home production for middle and low-income segments. However, policymakers have found that these reforms and incentives have not made a significant dent in housing deficits. In Colombia, for example, officials estimate a 2.5 million housing deficit in cities, with annual production barely able to keep up with the demand generated from new household formation. In Mexico, this figure is approaching 9 million units.

In the face of continued and significant housing deficits, countries like Brazil, Mexico and Colombia are considering more aggressive supply-side strategies organized around PPP principles. These PPPs aim to create incentives for private developers to develop and take to market low-income housing projects by providing access to subsidies within the structure of “concession-style” or “output-based” contracts.

The largest of these regional programs is the Minha Casa Minha Vida (MCMV) in Brazil. MCMV was launched in 2009 and has committed a staggering 160 billion Brazilian reais ($81 billion in 2009) in subsidies and associated incentives through 2014 to meet a target of 3 million low and middle income homes. The program involves three product lines targeting three income segments with a PPP-style approach for middle income segments. For these middle income segments, developers receive subsidies on the sale of units to eligible households while bearing the commercial risk for project development, marketing, and sales.

In Mexico, the government has launched an ambitious land and housing development program on municipal land, Desarrollos Urbanos Integrales Sustentables (DUIS). The program aims to support large-scale land and housing developments through integrated planning and a mix of public and private investments on a project-by-project basis. The government also guarantees access to mortgage lending from state mortgage companies. Developers bear partial project risk.

The Macroproyectos Urbanos program in Colombia (under development with the support of the World Bank) will dedicate up to $500 million in supply-side subsidies through 2014 under a mixed-use land and housing development PPP approach in partnership with developers.

While these PPP programs for land and housing development are nascent, lessons are emerging to guide policymakers through the opportunities and risks of such interventions.

1. Scale is good, but beware (negative) externalities.

Large land and housing PPP programs that consolidate and direct subsidies can attract developers and catalyze private financing in low-income housing.

However, reaching this scale is not without risks. In Brazil, the magnitude of the MCMV program has generated concern that it—alongside overall buoyant growth and a large public investment program—is contributing to rapidly escalating land prices as developers rush to buy land in larger cities where absolute deficit levels are considerable. Additionally, analysts are concerned that effective demand—clients with access to mortgage lending—may dry up as banking institutions reach mortgage lending limits. When thinking big, policymakers are advised to keep a full system view of how the potential PPP program will impact different aspects of the housing markets.

2. Allow developers to drive project development, with oversight.

Private developers are best placed to identify and structure a project pipeline. The role of the public sector is to create a clear regulatory framework and to invest in technical and real estate capacity to be able to effectively analyze proposals and negotiate with developers. In Colombia, initial investments under the Macroproyectos Urbanos program suffered from poor quality technical and environmental design because municipal governments were responsible for project development.

Relying on private developers is not without risk. Developers frequently have a land pipeline that they are looking to take to market. This pipeline may not always be the most appropriate, due to indirect investment requirements in infrastructure and social services. This reinforces the need for the public sector to build strong and independent project evaluation capacity.

3. Mixed-use land and housing development has multiple benefits.

Mixed-use land and housing PPPs require developers to deliver a minimum built area of low-income housing alongside market rate housing, commercial and industrial use installations, and others based on the developer’s discretion. Colombia’s Macroproyectos Urbanos program, for example, employs a mixed-use approach to maximize cross subsidies from higher rent uses, and to mitigate social risks associated with purely low-income housing projects.

Mixed-use projects can also serve to expand the tax base for cash-strapped municipalities. While municipalities rarely want to dedicate precious land to low-income housing, they might be convinced by the costs and benefits of a well articulated mixed-use approach.

4. Develop a framework for post-construction asset and social management.

PPPs in low-income housing have not traditionally dealt well with post-construction asset and social management—these functions tend to be left to municipal governments with limited ability and capacity. In Brazil, for example, the evaluation of the first phase of the MCMV program found that low-income housing projects were susceptible to poor operations and maintenance practices and potential asset deterioration.

To address post-construction asset management, policymakers should consider a concession-style arrangement where a portion of subsidy payouts are made over a five-year post-construction period, conditional on the structuring of a condominium management arrangement.

Similarly, regional experience demonstrates that better post-construction social management practices reduce social risks in low-income housing projects. In Medellin, Colombia, low-income housing programs are accompanied by the provision of integrated social services that have proven to enhance livability and security.

5. Promote a cautious, output-based design for supply side subsidies.

Subsidies for low-income housing PPPs should be designed to minimize excessive public sector risk.

Where construction finance markets are deep, subsidies can be disbursed on an output basis against the sale of homes to eligible buyers. This is possible in countries like Brazil and Mexico, where private construction finance markets have emerged and state banks and provident funds actively lower borrowing costs for developers or directly extend credit to home builders.

In less developed markets, policymakers may consider a more nuanced approach to disaggregating PPP contracts with developers into output-based stages. In such instances the public sector will take on more project risk and will need to carefully understand and mitigate these risks. In either context, the public sector should build capacity in PPP contract design and management.

6. Create incentives for smart and sustainable urban growth.

The need for significant new home construction is inevitable in Latin America, given the scale of housing deficits. A significant increase in housing production can reinforce existing urban sprawl. Policymakers should be careful to design the next generation of low-income land and housing PPP programs around smart growth principles. Incentives may be built into PPP programs that encourage improved public transport connectivity and the use of low-cost, green homebuilding technologies.