Darden Professors Frank Warnock and Veronica Cacdac Warnock bring their financial acumen to bear on one of the most pressing needs in the world — adequate housing.

A Deficit of Housing

Many developing countries suffer from “housing deficits” that the government is expected to alleviate. “A lot of countries have enormous housing backlogs — the Philippines, for example, is short 3 to 5 million units,” says Frank Warnock, an expert in financial sector development. “Many families are living in dire conditions. And the social repercussions are significant.” The common expectation is for the public sector to fill the gap, but all over the world public resources are limited, so only a small fraction of the shortfall is met.

The Warnocks focus on one bottleneck in the provision of adequate housing: a country’s housing finance system. “What you see in many countries are markets and practices that make it difficult for lenders to reach a broader set of customers,” says Veronica Warnock, an economist with a background in housing finance and development economics. Lenders might do more if they could, for example, confidently assess a potential borrower’s credit worthiness and better protect themselves against large losses due to default.

In countries with no functioning credit bureaus and vague rules regarding collateral, housing finance is marginal. “In terms of mortgage debt outstanding scaled by GDP, these countries are at less than 20 percent, compared to over 80 percent in the advanced economies,” says Veronica Warnock.

Policy Prescriptions

By showing that a number of factors are strongly associated with the size of housing finance systems, the Warnocks’ landmark research presents rationale for policy changes that can foster a well-functioning housing finance system. Their studies prescribe basic elements that any government can put in place to encourage the provision of credit, particularly for housing. Other than mandating a proper credit information system and crafting clear rights for lenders and borrowers, governments can also help streamline the process of property registration.

The policy prescriptions appear to be straightforward — and they are — but governments still face headwinds. “Developing and maintaining a credit information system can be difficult and expensive,” Frank Warnock says. Getting the data is difficult, too. “Private companies’ incentives might work against the sharing of customers’ information,” he says. “But the system should capture sufficient credit history for most of a country’s population, something only possible when information is shared and pooled.”

“Another fundamental requirement is that governments keep inflation stable,” Veronica Warnock says. “Volatile inflation crushes debt markets and lending, including housing finance.” Also important is a source of funding for housing finance, tricky because many such sources are short-term while home loans should be longer term. “Mortgage systems around the world manage the challenges, including risks, differently.”

Complex Issues and Answers

Since 2006, the Warnocks have been presenting their work to researchers, policymakers and practitioners. They have participated in housing conferences in at least 10 countries and at meetings convening regulators and bankers in Asia and Latin America. While the Warnocks focus on housing finance, they recognize that the provision of housing is complex. “Tackling housing issues means looking at land rights, urban planning and land use rules,” says Veronica Warnock. “It means reviewing other government policies that might be deterring private developers from providing affordable housing.” The issues and answers go far beyond housing finance.

In studying housing finance systems as part of complex housing issues, central to their research agenda is how governments can enable the private sector to create better housing outcomes. If there is a well-functioning housing finance system, lenders are more willing to finance home purchases for more people, improving housing affordability and enabling more people to obtain adequate housing. Homeownership is not for everyone, but similar considerations apply in the rental market, where the question is how the private sector can be encouraged to build rental properties suitable for middle- and low-income families.

Whether through rental units or homeownership, governments and the private sector can succeed in ensuring decent housing for all. Housing finance is one piece of the puzzle.

The preceding originally appeared in Issue 2 of the Darden Ideas to Action print publication, Pages 10–11.

Veronica Cacdac Warnock and Francis E. Warnock are authors of “Markets and Housing Finance,” published in Journal of Housing Economics (Volume 17, Issue 3, 2008), and “Developing Housing Finance Systems,” published in Property Markets and Financial Stability (2012), proceedings of a joint conference held by the Reserve Bank of Australia and the Bank for International Settlements. They co-authored with Arturo Galindo and Alessandro Rebucci “Too Small to Thrive: The Housing Finance Market,” Chapter 7 of Room for Development: Housing Markets in Latin America and the Caribbean (Inter-American Development Bank, 2012).