How can central banks and financial regulators expand access to sustainable housing finance?

Patrick McAllister, Director of Financial Policy and Regulation at Habitat for Humanity’s Terwilliger Center for Innovation in Shelter.

Can you outline the main challenges that exist around sustainable housing finance?

There are challenges of both supply and demand. On the supply side, how can government agencies and developers get homes built for low-income and vulnerable populations? And on the demand side, how to make financing available to people to purchase a home or, more commonly, improve their existing home. Access to finance is an important factor in both supply and demand, but particularly in relieving the constraints people face in the home improvement process; namely, buying building materials and paying laborers, generally in the informal market. One big challenge is finding ways to ensure that banks and other financial institutions can accommodate informality into their lending systems.

Where does your organization come in?

The Terwilliger Center for Innovation and Shelter at Habitat for Humanity tries to help the market develop new solutions for low-income populations.  Sometimes that relates to factors on the supply side, such as access to building materials — we have a small Shelter Venture Fund, for example, that helps companies to develop housing products and materials that are green and affordable.

Sometimes it’s the demand side, through financial institutions. Our MicroBuild Fund lends to financial institutions and provides technical assistance to help them make housing loans available to low-income people, to build or improve their homes.

So, we already work on both sides of the market, and now we’re beginning to work with AFI in the policy and regulatory space, to ensure that the enabling environment for finance is attractive to the market, allowing AFI members to serve low-income populations.

What role can/should central banks and financial regulators play?

In many countries they have been successful in encouraging the market to provide better finance for affordable housing. For example, through advocacy: central banks and policy makers are ideally placed to ensure that affordable housing is discussed at government level. They can bring together colleagues from ministries of housing and finance, for example, to tackle this issue.

Equally, central banks and financial regulators collect a lot of data and can obtain data from the regulated financial sector. Data on the role of housing in the economy, on the importance of finance, and its availability to low-income populations, is incredibly valuable.

Across the AFI network, we see a number of effective policy interventions. At the 2024 Global Policy Forum, we heard how Tanzania has brought down interest rates for affordable mortgages. The Central Bank of Egypt is actively expanding affordable mortgages to lower-income people through a range of subsidy programs, and is working with the private sector to help bring better products to the market.

There’s also a big focus right now on Inclusive Green Finance. AFI’s IGF Working Group is looking at how to ensure that some of the capital from big global climate funds providing finance at preferential rates flows to affordable housing. The challenge for lenders is that qualifying their loan portfolios for those funds is generally based on taxonomies: very strict criteria that governments or market participants must follow in order to access the funds. Sometimes, those taxonomies effectively exclude lower income populations, meaning that if someone needs to install a faucet in their house, but doesn’t have access to a certified green faucet, the bank won’t qualify that loan for the lower-cost ‘green’ funds, and the consumer ends up paying more.

But I do see progress being made. IFC, for example, is trying to expand their green buildings standard, Edge, to include “self-builds” — making it easier for people who are trying to improve their homes themselves to access lower-cost green financing. And there are plenty of other efforts being made, many by AFI members who are actively seeking to develop effective responses.

You can learn more about this topic in a new AFI publication, produced in collaboration with Habitat for Humanity: Fostering Inclusive, Affordable and Sustainable Housing Finance (IASHF) Innovation.