Resources in Housing - Essay Example

The role of savings in the acquisition of housing by low-income households has been recognized in a variety of studies. Macoloo (1994:290) reports that two-thirds of households in Kenya used savings to purchase construction materials, making this the most important source of finance during the initial stages of house-building. Yet, the significance of savings to the housing process is not without its problems. As other studies show, many households are able to become 'owners' early on, before they would be able to develop a savings profile.

While it is increasingly accepted that low-income households are not too poor to save, in an environment of low and insecure incomes, and rising prices for building materials, land and services and rising taxes, it seems unlikely that households would amass sufficient savings on a consistent basis to acquire or build housing. This would seem to be supported by macro studies that show low propensities to save in the poorest countries and in the poorest households in all countries. Most low-income households lack safe and convenient methods to save and many institutions insist upon minimum balances or do not offer positive returns on savings.

Indeed, in some circumstances low-income households are charged to deposit savings, either directly or through negative interest rates. In order to save in the formal system, therefore, low-income households have to possess a minimum level of funds and an income sufficient to pay charges: in the short term saving may be a net drain on household resources. The lack of institutional capacity is not the only reason for the low rate of saving. Countries such as Chile, Singapore and Malaysia have implemented sophisticated financial products to increase the ratio of money to GDP and raise the rate of saving.

Such reforms, however, have not improved conditions for those on the lowest incomes as measures have not been taken to improve the unequal distribution of income: with no surplus income, savings will be inelastic in relation to interest rate changes. Furthermore, anecdotal evidence suggests that, in some countries, many low-income households are heavily in debt, and are therefore unable to be net savers, and have learned through experience to be highly distrustful of financial institutions. The difficulty experienced by households trying to save in the context of limited institutional capacity suggests that many must be holding savings outside of the formal financial system.

There is very little research, however, on the form in which these savings are held although consumer items and jewellery as well as cash are mentioned frequently. One further possibility is that households invest in housing as a surrogate form of saving believing this to be a reliable store of value. As consolidation takes place the belief is that most properties will appreciate in value over time, although the small size of the second-hand property market makes reliable assessments of value difficult and some suspect that the real trend may be quite flat over the short term.

Thus, while there is evidence for a link between financial depth and housing investment, at the micro level, it is the lack of financial capacity that may