The document outlines an introductory course on housing finance, highlighting its importance in providing access to quality housing. It discusses the evolution of housing finance systems, types of financing such as mortgages, and the role of government in supporting housing finance development. Additionally, it emphasizes the economic and social objectives of housing finance, including improving living conditions and ensuring affordability for all households.

1. Course: Housing Finance (HDM-6041)
Introduction to Housing Finance
By: Dr. Goitom A.
Week One
Ethiopian Civil Service University (ECSU)
College of Urban Development and Engineering (CUDE)
Program: Housing Development and Management

2. Contents
• Introduction
• The demand and purpose of housing finance
• Housing finance , meaning
• Evolution of housing finance
• Government and housing finance

3. The need for Housing Finance
(Reflection Exercise)
• How would like your house be?
• What minimum standards and functions you expect the house to
have?
• How much ,on average, do you think such house costs?
• Your household income, Do you save for housing?
• What percentage can you save for housing?
• How long will it take you to save that ?
• How much would the price be by then?

4. Introduction
• Housing is one of the most important items that we human beings need.
• There are many things that we would find difficult, if not impossible, to do without
good-quality housing.
• Without good-quality housing, we might find it hard to
– Find and keep a job,
– To learn,
– To maintain our health,
– To vote,
– To claim benefits we are entitled to and
– To initiate and maintain stable relationships.

5. Introduction
• Housing is for many households around the most important asset.
• But just because something is important, this does not mean it is always
available.
• Like most commodities, housing comes with a price tag attached.
• Compared to a household’s average income, the purchase of a housing unit is a
large investment – in many cases it is in fact a household’s biggest life-time
investment.
• There is, then, a gap that needs to be filled, between the aspirations people have
for good quality housing and their ability to access it because of a lack of income.
• This is where housing finance comes in, by acting as the bridge over this gap.

6. The Concept of Housing Finance
• Housing finance is a broad topic, the concept of which can vary across
continents, regions and countries, particularly in terms of the areas it
covers.
• Housing finance is what allows for the production and consumption of
housing.
• It refers to the money we use to build and maintain the nation’s housing
stock.
• But it also refers to the money we need to pay for it, in the form of rents,
mortgage loans and repayments.
• Therefore, the term 'Housing finance' means financing, for purchase/
construction/ reconstruction/ renovation/ repairs of residential dwelling
units which would include (a) loans to individuals or group of individuals
including co-operative societies for construction/ purchase of new dwelling

7. The Concept Of Housing Finance….Cont’d
• The concept of housing finance and housing finance systems has been evolving over
time.
• Looking at definitions from the mid-1980s, we see that housing finance was defined
primarily in terms of residential mortgage finance:
• The purpose of a housing finance system is to provide the funds which home-buyers
need to purchase their homes.
• This is a simple objective, and the number of ways in which it can be achieved is
limited.
• Notwithstanding this basic simplicity, in a number of countries, largely as a result of
government action, very complicated housing finance systems have been developed.
• Therefore, Housing finance brings together complex and multi-sector issues that are
driven by constantly changing local features, such as a country’s legal environment or
culture, economic makeup, regulatory environment, or political system.

8. Types of Housing Finance
• “There is recognition of other relevant forms of housing finance [apart from
residential mortgage finance] such as developer finance, rental finance, or
microfinance applied to housing.
• Developer finance is often in the form of unregulated advance payments by
buyers, and developers sometimes provide long-term finance to buyers through
instalments sales when mortgages markets are not accessible.
• Microfinance for housing is typically used for home improvement or progressive
housing purposes. Loans are typically granted without pledging properties.
• Although the overall impact of microfinance in housing remains limited, this
activity can represent an important source of funding for those in the informal
sector.

9. Types of Housing Finance…Cont’d
• Moreover, there are different types of housing finance such as:
• Home purchase loan: basic home loan you can opt for
purchasing new home
• Home construction loan: Loan opted for construction of new
home
• Home extension loan: offered for meeting the operating costs
of alteration cost of alteration to an existing building. Extension
here means addition of an extra room.
• Home conversion loan: offered for converting the already
existing home.

10. Housing Finance System
• The housing finance system refers to the entire mechanism for gathering savings
and tunneling them to purchasers.
• We can view the housing finance sector in terms of supply and demand.
• Demand for housing finance is in a sense a derived demand that flows from the
demand for housing, which in turn depends importantly on the rate of household
formation and income levels.
• On the supply side, one way to think about the provision of housing finance is to
split it into two components:
• (i) the provision of housing finance by a lender who has ample funds at hand,
• (ii) the mobilization of funds within an economy so that lending institutions have
access to funds.

11. Housing Finance System….Cont’d
• For lenders with adequate funds to choose to allocate some portion to long-term housing
finance, a number of preconditions should be in place:
• Information on the borrower: To adequately price a loan, a lender must have information on
the creditworthiness of prospective borrowers that enables the determination of the
probability of default.
• The information could be produced by a standardized and accurate source of credit history—
such as public credit registries or private credit bureaus.
• Bank spends considerable resources acquiring information on potential borrowers, the loan-
creation capabilities of the lenders and of the housing finance system as a whole.
• Ability to value the property: Determine the market value of the property.
• This is a natural outcome of a well-functioning housing market in which detailed information
on housing transactions is maintained in a systematic way.
• For example, if data on the sales price and relevant features of the home (location, size, age,
etc.) are maintained in a mandatory property registry, appraisers can more accurately value
prospective homes for the lenders and borrowers.

12. Housing Finance System….Cont’d
• Ability to secure collateral: The lender should to be able to secure collateral against the loan in
case of default.
• The house itself is an obvious candidate for that collateral, providing that in the case of default
the lender can seize the property.
• To seize the property requires that there is something resembling clear title and that the legal
system allows the lender to seize collateral.
• Macroeconomic stability: The macroeconomic environment should be stable.
• If inflation is volatile, the lender would incur substantial interest rate risk if it lends at a fixed
rate.
• In an unstable environment, lenders will typically pass on this risk to the borrowers—who are
less likely to fully understand it—by only offering floating rate loans.
• Substantial interest rate risk, no matter who bears it, will retard the development of the
housing finance system, as either lenders will go out of business or borrowers will be unable to
repay their loans (or both).

13. Housing Finance System….Cont’d
• Sources of funds: In the primary market, deposit-taking institutions, such as banks, can fund
mortgages through deposits.
• However, because deposits are short term, if this is the only source of funds housing loans
will tend to be short term or at variable rates
• Short-term loans, given that housing is expensive, are unattractive to potential borrowers.
• Additional sources of liquidity: Whatever the usual sources of funds, it is important to have a
backstop, such as a governmental liquidity window, in case of temporary liquidity crunches.
• In summary, a basic infrastructure that can enable a well-functioning housing finance system
includes factors that promote long-term lending (the ability to value property and to seize it
in the case of default, information on the creditworthiness of potential borrowers,
macroeconomic stability) and factors that promote the mobilization of funds (be it through
savings and deposits, capital markets, a governmental liquidity window, or secondary
markets)

14. Effective Housing Finance Systems
Effective Housing Finance Systems
Borrowers/Users
Suppl
y of
Credit
Credit
Availa
bility
Credit
Affor
dabili
ty
Lenders/ Investors
Invest
ment
Attrac
tiven
ess
Securi
ty of
Funds
Profit
abilit
y for
share
holde
rs
Government/Policy
Makers
Ach
iev
abl
e
indi
rect
ben
efit
s
Eco
no
mic
Pre
req
uisi
tes
Ins
titu
tio
nal
Pre
req
uisi
tes
Sec
tor-
spe
cifi
c
pre
req
uisi
tes

15. Purpose of Housing Finance
• Because of the long-term and expensive nature of housing, buyers usually are not in a position to
pay cash and therefore require an annuity mortgage.
• Long-term finance is therefore a critical component of the price of housing, which makes it
different from most other commodities in the economy. Therefore, housing finance has the
following purposes:
• To build new dwellings;
• To cover a household’s housing costs in the form of rent or mortgage repayments;
• To fund necessary maintenance and improvements to dwellings;
• To manage the housing stock to ensure it meets certain political and social objectives, such as
fulfilling urgent housing need.
• Therefore the true purpose of housing finance – and the historical reason why the state has
intervened to provide subsidies – is to ensure that all citizens gain access to good-quality
housing.
• Put simply, housing finance exists to make quality housing affordable that offers quality and
access to all households.

16. Importance of Housing Finance
• Housing finance development, therefore, plays a role in boosting equitable
economic growth and reducing poverty through helping households build assets,
improving living conditions, empowering the middle- and lower-income population,
and strengthening communities.

17. Quality and Access Affordable Housing
Quality – standard of housing
What we aspire to have
– To live a civilized and healthy
existence
– Acceptable to the society of
which we are a part
– The better the standard of
housing, the more it will cost
Acess – affordability
What we can afford
• Quality comes at a cost,
and this limits access to
affordable cost.

18. Source of Housing Finance
• Government subsidies to landlords and households
• Households’ own income used to provide, maintain and improve their housing and the
amenities within it
• Private finance from mortgage lenders and financial institutions to fund house
purchase and social housing development
• the investors can be domestic or foreign institutions or individuals; and, recent
events in markets for mortgage securities notwithstanding, secondary mortgage
markets can be an important part of a country’s broader capital markets.
• The wealth stored in housing which is used to fund housing and non-housing activities.
• Government regulation of housing which imposes or limits costs, such as building
regulations and rent controls

19. Housing as a Consumption and An Investment
Housing as a consumption
• It is a consumption because in buying a
house the individual acquires an asset
at higher cost, which he 'consumes'
over time very much like a consumer
durable.
Housing as an investment
• It is an investment, because while he
consumes the services having provided
the investment appreciates in value, its
replacement cost escalates.
• Furthermore, housing is a store of wealth, and thus we need to be aware of the fact
that the housing stock is an asset that can be used by its owners.
•Because housing is so expensive and so valuable an asset – as well as being so
important to our well-being.
.Therefore, is viewed both as consumption and investment.

20. Evolution of Housing Finance
p
• p
e
e
r
p
r
e
s
s
u
r
e
t
o
e
n
f
o
r
c
e
c
n
d
e
r
'
s
r
i
s
k
• l
o
n
g
p
e
r
i
o
d
o
f
t
o
m
p
l
e
x
f
i
n
a
n
c
i
a
l
s
y
s
t
e
m
• The mortgage, which uses the house as collateral for fully securing a long-term loan,
is an invention that has transformed housing beyond recognition.

21. Government Role in Evolution of Housing Finance
• Governments acted to support the development of mortgage markets
– By promoting the establishment of financial institutions,
– by regulating them,
– by guaranteeing and insuring mortgages, and
– by providing numerous subsidies to home owners.
• Mortgage instruments were further modified to withstand inflation and financial liberalization
• mortgage system were adopted, directing mortgage credit to lower-income families.
• Government does not intervene in the same manner with all households.
• Government’s role differs according to households’ income and for their ability to provide housing for
themselves.
• In some cases government offers financial support and regulation, Whilst in others it merely regulates
standards.
• Moreover, this regulation might directly or indirectly impose costs on households, rather than providing them
with financial support.
• In a broad perspective, the evolution of housing finance can be viewed as an interplay of complementary and
mutually supportive actions of the private sector and the public sector.

22. Government Objective in Housing Finance
• In general,
governments
have four
interrelated
objectives in the
development
of housing
finance:
.
Developing a vibrant and healthy housing finance sector as an integral
component of the financial sector;
Improving overall housing conditions by promoting the development of the housing
sector as a key economic sector in terms of savings, investment, production,
employment, and the creation of wealth;
Making home ownership more affordable by increasing popular access to
mortgage finance; and
Ensuring that credit is allocated in accordance with social objectives

23. Policy Instruments in the Housing Finance
Regulating the housing finance sector to ensure its viability, without impeding its ability to meet
a broad spectrum of housing needs;
Supporting the creation and development of housing finance institutions; and
Channeling housing subsidies through, or in conjunction with, housing finance.
•To achieve the above objectives, governments may employ three different sets
of often-conflicting policy instruments in the housing finance sector:

24. Thanks