Policy Research Working Paper

Review of Argentina’s Housing Sector:

Options for Affordable Housing Policy

Argentina Country Management Unit Finance, Private Sector and Infrastructure Management Unit Latin America and the Caribbean Region November, 2006

The World Bank CURRENCY AND EQUIVALENTS

Currency Unit: The Peso (AR$)

AR$ 1.0 = USD1 1990-Jan 2002 AR$ 3.1 = USD1 2002 AR$3.07 = USD1 2006

FISCAL YEAR

January 1 - December 31

Vice President : Pamela Cox Country Director : Axel van Trotsenburg Sector Director : Makhtar Diop Sector Manager : John Henry Stein Task Manager : Maryse Gautier ABBREVIATIONS AND ACRONYMS

BAMA Buenos Aires Metropolitan Area BCRA Central Bank of Argentina CoPUA Environmental Urban Planning Comité (Consejo del Plan Urbano Ambiental), ciudad de Buenos Aires CONAVI Nacional Housing Council (Consejo Nacional de la Vivienda) DGSIG Geographicla Information System general Direction (Dirección General de Sistemas de Información Geográfica), Ciudad de Buenos Aires FONAVI National Housing Fund (Fondo Nacional de Vivienda) GCBA Buenos Aires City Government (Gobierno de la Ciudad de Buenos Aires) ICC Index of Construction Cost ISAC Synthetic Indicator of Construction Activity INDEC National Institute of Statistics and Census IPV Provincial Housing Institute (Instituto Provincial de Vivienda) MFPIySP Ministry of Federal Planning, Investment and Public Services NGO Non-Governmental Organization NOA Northwest Provinces Region of Argentina (Norte Oeste de Argentina) NEA Northeast Provinces Region of Argentina (Norte Este de Argentina) OG General bylaws (Ordenanza General) ONABE Public Land management Entity (Organismo Nacional de Administración de Bienes) PROMEBA Slum Upgrading Program (Programa de Mejoramiento de Barrios) PROPASA Program of Provision of Running Water, Social Help and Basic Sanitation PROSOFA Program of Basic Social Resources PROTIERRA Land Program, Buenos Aires Province (Programa de Tierra, Provincia de Buenos Aires) PSU Social Urban Planning (Programa Social de Urbanización) SSDUyV Subsecretary of Urban Development and Services UADE Universidad Argentina de la Empresa Table of Contents

EXECUTIVE SUMMARY...... I 1. CONTRIBUTION OF HOUSING AND CONSTRUCTION TO THE ECONOMY...... 1 2. HOUSING MARKETS...... 8 3. CHAPTER III: PUBLIC POLICY AND PROGRAMS IN ARGENTINA...... 22 4. ACCESS TO LAND AND LAND MARKETS...... 38 5. HOUSING FINANCE...... 51 6. OPTIONS FOR AFFORDABLE HOUSING, URBAN LAND AND HOUSING FINANCE IN ARGENTINA...... 64 ANNEXES...... 71 1. HOUSING AFFORDABILITY ANALYSIS...... 71 2. SMALL-SCALE LOW-INCOME HOUSING PROGRAMS...... 79 3. FONAVI AND FEDERAL PROGRAM PERFORMANCE INDICATORS...... 80 4. CURRENT ACCESSIBILITY TO MORTGAGE FINANCE...... 87 5. HOUSING MICROFINANCE IN LATIN AMERICA AND ARGENTINA...... 93 6. HOUSING MARKETS AND POLICY IN LATIN AMERICA...... 95 Acknowledgements

This report discusses some key issues in low-income housing policy in Argentina. The work is based on several missions of the World Bank that visited Argentina in 2004 and 2005 Preliminary conclusions were discussed in a seminar held in Buenos Aires in June 2005 and organized together with CEF (Centre de Estabilidad Financiera). The Bank team was led by Maryse Gautier (Urban Department, Latin America and the Caribbean), and included Olivier Hassler (Financial Sector Operations), Mila Freire, Regional Adviser in the Latin America and the Caribbean Region, Cynthia Goytia, Nora Clichevski, Marcela Cristini and Ramiro Moya (consultants). Bruce Ferguson, Senior Housing and Urban Economist, edited the document and provided very useful comments in substance and organization. The team acknowledges and thanks the cooperation of Argentine Government officials, especially from the Ministry of Public Works and the provincial governments, as well as representatives of the private sector. EXECUTIVE SUMMARY

1. Providing access to affordable shelter has become a key preoccupation for many governments. This is due to the dual nature of investment in shelter. Not only it can improve the conditions of the poor and their opportunity for better livelihood but does also re-activate the economy, creates jobs. In Argentina, low-income housing has occupied a central position in government policies, both at central and provincial levels. Substantial amount of public and private funds have been mobilized and allocated with important impact and consequences for the economy as a whole. This report aims at looking at the sector as a whole and at contributing with insights on areas where improvement could be envisaged or others were scale-up is needed and possible. The report starts with a review of the importance of housing investment in the Argentine economy. It proceeds with a study of the housing market dynamics, land and property rights, and housing finance. We compare the Argentine housing experience with other experiences in Latin America and make suggestions for affordable housing policy and programs, based on international experience, historical background and professional literature.

Background

2. Housing Investment. It is well known that development of the housing sector has a quick and important impact in both the financial sector and the real economy of any country. In the case of Argentina, direct construction expenditure accounts for 11% of GDP (2004), and housing for half of this total. When indirect expenditures on building materials and other related sectors are included, the contribution of construction and of housing to GDP doubles to 22%. This spending also generates considerable jobs both unskilled and skilled employment.

3. Housing has played a large role in the boom, bust, and current recovery of the Argentine economy. Low interest rates on dollar-denominated home loans helped spur a housing boom that lifted economic growth during the mid to late 1990’s. Formal-sector production increased, housing units filtered down from higher-income to lower-income groups, and housing in slums decreased. During the crisis of 1999 to 2003, the devaluation of the peso and capacity constraints led to a hike of housing prices as construction costs doubled in real terms. As a result, affordability of new home purchases plummeted, and informality has accelerated.

4. Since 2003, mortgage lending and housing market construction have recovered. However, the crisis has shaken the confidence necessary for the housing-finance system to recover its former dynamism, and has lead to a mismatch between supply and effective demand that distorts the housing market.

5. Housing Market Dynamics. The legacy of the crisis together with the excess demand for new housing units has created an enormous challenge. Some 2.6 million Argentine households out of a total 10 million face grave housing problems. While moderate/middle-income families can no longer afford new homes, many low-income families live in dilapidated units in precarious neighborhoods or multi-family buildings.

6. The crisis has reduced the real incomes of the bottom 80 percent of the population, and doubled poverty rates while the price of housing has skyrocketed. As a result, the “housing price- to-income” ratio for a median-income household to purchase a basic two-bedroom home exploded from 4 in 2001 (comparable to that of much of Western Europe, the U.S. and Canada) to 10 in 2005. Only the top quintile of households can now afford to buy a modest 2-bedroom

i home. Rental housing, which accounts for only 12 percent of the stock, is not an option for many, and pressure on the rental stock has increased prices (rents) by 50 percent in the last two years in some areas.

7. While moderate/middle-income families can no longer afford new homeownership, the poor live in precarious units and neighborhoods; 500,000 to 800,000 irreparable units need replacement, 2 to 2.7 million units require rehabilitation; 1.7 million households have no access to satisfactory sanitation, and 8 million people – 20 percent of the country – lack a convenient means of getting water for cooking. Deficient housing units are heavily concentrated in low- income groups. Two thirds of the population of the poorest group live in units requiring some kind of improvement, while almost 80 percent of deficient units are the dwellings of families earning less than AR$750 per month. As low-income families cannot afford to buy satisfactory complete units, they access housing by “progressive” methods, that is acquiring a range of “low- cost housing solutions” and upgrading them, or through densification of the existing units.

8. With formal-sector systems broken or disrupted, affordable housing policy and government programs have urgent importance for Argentina. However, the federal affordable housing delivery system has performed unevenly.

9. Affordable Housing Programs and Policy. The main federal-government housing agency – FONAVI – has channeled funding through Provincial Housing Institutes (IPVs). IPVs typically provide land and then develop and extend credit for the sale of their units with FONAVI resources. An earmarked federal gasoline tax largely funds the FONAVI/IPV system. FONAVI has had some successes. In particular, it has generated funding for and production of an average of 42,000 units per year over much of the last fifteen years, and involved Provincial governments in housing.

10. However, the FONAVI system also has severe flaws. It overwhelmingly produces new units for sale to moderate and middle-income households, rather than the wide range of low-cost housing solutions suited to low-income families. IPVs neither require that households make a downpayment nor that they get a private market-rate loan. Thus, subsidies fund almost the entire cost of these projects, and remain unleveraged by other sources of finance. Although the federal government funds FONAVI programs, IPVs have gained virtually unrestricted control over their use, unguided by national policy, program parameters, and performance incentives. Provinces have also diverted FONAVI transfers to other purposes, reducing affordable-housing production.

11. The FONAVI/IPV system also produces low-quality units in undesirable distant locations at costs far above those of private-sector building. This high cost and low quality stems largely from the production method – direct government development of new projects (“turnkey production”). Subsidies are tied to particular projects and units (“supply-side subsidy”) rather than delivered to households that choose among developers, locations, and units to use them (“demand-side subsidies”). IPVs make loans to families to buy these homes on highly concessional terms, fail to collect a large share of repayments, and - thus - deliver an implicit subvention of around 80 percent. In addition to the credit subsidies, IPVs typically provide land free to these projects, and price the sale of units at much less than their development cost. IPVs transfer property title to about 40 percent of household purchasers of these units, and the remainder do not receive proof of full legal ownership.

12. Federal disenchantment with the many failures of FONAVI has led to reductions in public funding this organization and to shifting resources to new federal housing initiatives. The “housing construction” and “housing improvement” (Mejor Vivir) programs are the two largest.

ii A half dozen smaller federal programs are also planned for low-income households, while three new federal programs target moderate-income families. These new programs have helped raise federal expenditure on housing back to its historical norm - 0.45% to 0.5% of GDP, and 1.5% to 2% of the federal budget. Many of these recent federal initiatives also focus largely on low-cost housing solutions suited to low-income families. These new low-income programs share some of the design strengths of successful housing initiatives for the poor internationally. In particular, they employ intermediary organizations (NGOs, municipalities, cooperatives etc.) to help families use these programs, and to perform some of the other tasks in the process.

13. However, these new federal initiatives continue to display some crucial weaknesses of the FONAVI/IPV system. The housing sector still suffers from the lack of strong federal leadership necessary to influence the many public and private organizations involved. The new federal programs fail to leverage public subsidies with household savings and private-sector credit. The moderate-income programs continue direct development and finance by government and supply-side support. In contrast, much of Latin America has replaced such turnkey production with direct demand-subsidy programs that use private developers and lenders to build new units for moderate-income households much more effectively.

14. Urban land presents the single greatest obstacle to low-income housing. Submarkets for low-, moderate-, and upper-income land development operate in different financial universes. Low-income land development occurs almost exclusively through informal means, including illegal subdivision on the urban fringe, squatting in central-city tenements, and - most recently – squatting in warehouses and houses. Informal settlement has accounted for one-third (1990’s) to two-thirds (during and after crisis) of new residential development in greater Buenos Aires.

15. Various factors contribute to low density, vacant or partially-occupied subdivisions, leapfrog development, high infrastructure extension costs, and informal title and land settlement. Property tax rates and recovery rates are very low; hence, landowners face few costs in holding their parcels for long periods. The legal status of many vacant or under-used parcels is complicated and difficult to entangle. Government agencies continue to own substantial amounts of land, particularly in Greater Buenos Aires. Local subdivision standards (full services and 300 m2 lot minimums in Greater Buenos Aires) far exceed the ability of most households to pay, contributing to pushing settlement into the informal sector. The cost of property registration and maintaining full legal title force 15 percent of the population to use a range of alternative proofs of property ownership, while others occupy formally-titled land and buildings (e.g. through invasions of formal property and buildings).

16. Two federal programs address low-income land problems. The Arraigo program has regularized title for 350,000 people on occupied government land. The Neighborhood Improvement Program – PROMEBA – is upgrading slum communities through launching 188 local projects.

17. Overall, urban land is a complex issue with little systematic data available in Argentina. One important step in this area consists of applied research to lay the foundation for intervention. However, two other avenues for action present opportunities. First, striking amounts of vacant and under-utilized land lie within cities, in general, and Greater Buenos Aires, in particular. Accessing this vacant land offers one of the most effective levers at hand for affordable housing development of both the public and private sector. Second, provinces and localities operate or have substantial influence over land systems that condition supply – including the real property

iii tax, the public deeds registry, and land-use planning and enforcement (in particular, subdivision requirements). IPVs, in particular, have the potential to take the lead in urban land by joining project investments with policy reform.

18. Housing Finance. The Argentine mortgage sector boomed during the 1990’s to become the most dynamic in the Region. A virtuous circle joined macro-economic growth, an increase in real income, the creation of private pension funds, development of capital markets, the participation of foreign investors, strengthening of creditor rights, and the expansion of the primary market with the privatization of the State Housing Bank.

19. The crisis pushed housing finance into a downward spiral. Real wages collapsed, inflation rose to 40 percent, and mortgage defaults skyrocketed from 10 percent in 1998 to 30 percent in early 2003. Government responded to the surge in defaults with a moratorium on foreclosure procedures against most property, and a series of other measures. New mortgage lending virtually halted, while the stock of mortgage loans fell by one half. This decline resulted not only from the impact of new foreign exchange rules, but also from early mortgage repayments by middle-income households with hard currency who had experienced a windfall with devaluation of the peso.

20. For the majority of the population without hard currency, however, the “wealth effect” proved highly negative. These households experienced a sudden pauperization, reflected in the steep increase in the median house price-to-income ratio.

21. Spurred by the recovery, mortgage interest rates have declined dramatically from their crisis highs, and new mortgage lending began in 2004. However, the crisis has left a legacy of mistrust for home lenders, borrowers, and investors. Full recovery of housing finance from severe crisis has taken a decade in other Latin American countries.

22. This experience suggests that the way forward in Argentina is likely to involve improving the financial management of mortgage lending. The evolution of mortgage finance depends more on the macro-economy more than housing policy. Meanwhile, creating new tools for expanding access of low and moderate-income households to housing finance is crucial and timely. Measures used elsewhere in Latin America for this purpose include: (a) mortgage insurance; (b) housing microfinance; and (c) strengthening the capacity of regional banks, cooperatives, and other “popular” lenders that already serve moderate-income home finance markets.

Latin American experience in affordable housing, and options for Argentina

23. Latin American experience in affordable housing. While considered a “merit good” generally, housing and homeownership have particularly crucial importance for socio-economic development in Latin America. Housing and land markets are highly segmented by income group, and use different systems for finance, land development, building, sales, property tenure, and other aspects of shelter and settlement. As a result, experience throughout the Region shows that programs must use different delivery systems to reach low-income households as opposed to moderate-income families.

24. The best programs for low-income shelter and settlement in Latin America strengthen progressive housing to make this process a solution rather than a problem. As progressive methods build the bulk of the low/moderate-income housing stock of Argentine cities as elsewhere in the Region, improving the efficiency of this process and reducing its costs holds crucial importance. Options used in Latin America to this end include: (a) use intermediary

iv organizations (NGOs, Cooperatives, municipalities etc.) to work with households and perform key aspects of these programs; (b) guide the location of low-income settlement; (c) phase upgrading over time to low-income communities; (d) extend market-rate housing microcredit for a wide range of low-cost housing solutions to bankable families (i.e. employed low/moderate- income households), and make grants or use revolving funds for the poor; (e) stimulate programmed household savings over time and leverage federal support with local-government land and other resources; and (f) support and guide the home construction process.

25. The most effective housing programs in Latin America for moderate/middle-income families delegate development and lending to the private sector, and use direct-demand subsidies. Thus, the reform of traditional turnkey production – such as the FONAVI system - has involved two broad steps in Latin America. The first step consists of delegating to the private sector the functions of home developer and lender. Private-sector lending and development usually improves outcomes relative to turnkey methods, but still gives control over use of the subsidy mainly to government, developers, and financial institutions – rather than households. A second step involves establishing a uniform nationwide direct demand subsidy program (DDS). Government then delivers the subsidy to households, and these families can choose the project, type of unit, and developer on which to use this benefit. Developers and financial institutions compete for households’ business (DDS) rather than the reverse (the case of turnkey production). and document other aspects of the design and operation of DDS programs.

26. Options for Argentina In this context, four options appear particularly compelling for housing programs and policy in Argentina. a. Reinforce federal leadership of the housing sector and coordination of national and local housing agencies. CONAVI and the Public Housing Unit have advisory policy roles, but IPVs, Provinces, and other public and private organizations involved in the sector have little reason to follow their lead. International experience such as that of Mexico demonstrates the crucial importance of strong federal leadership to advance in the housing sector. This leadership best takes the form of the committed support of the President, strong federal institutional mechanisms for influence, and an official national housing policy that communicates a vision for the sector. b. Delegate development and credit finance to the private sector. Using private-sector developers and financial institutions has quickly improved the efficiency and transparency of their affordable housing delivery system. In particular, it builds the capacity of and teaches a wide range of institutions how to provide low/moderate-income housing and, thus, helps create markets for the components of this process. The shift from direct government provision to private-sector production and credit finance is a straightforward process for moderate-income households: the government specifies the characteristics of the housing project(s) in question; the public sector appropriately channels its funding through private financial institutions, which service the loan. These institutions leverage government resources, and are in charge of selecting beneficiaries on credit worthiness criteria. c. The shift from public to private provision becomes more demanding for low-income households. Program experience has shown that low-income housing delivery systems require that an intermediate organization work intensively with families to assist them in using the program (qualifying for the subsidy, saving a downpayment, getting a loan, identifying and getting support for acquisition of an appropriate parcel of land, working with developers, organizing “sweat equity” so that beneficiary households’ provide labor for unskilled aspects of the construction etc.). Often, NGOs (non-profits) have a comparative advantage in working with low-income households.

v d. Establish a demand-oriented subsidy program. As compared to the supply-oriented subsidies, the demand-driven subsidy system will be more adapted to Argentina. Thus, households rather than developers or financial institutions decide on the location, the type of unit, the project, the developer, and other aspects of using the subsidy. The subsidy program should encompass not only the flow but the stock of housing. This class of subsidies intends to increase the willingness and the capacity of households to consume better quality housing or to become homeowners through leveraging their ability to obtain a loan or by lowering the cost of the loan. They can target the low to middle income beneficiaries in a precise way, and stimulate the corresponding market, with rules on which private actors can depend. Among the different types of individual household subsidies, the policy preference is for upfront grants linked to savings. While the upfront grants target a low to middle income population which can access the formal mortgage market, the subsidy program must be completed with other solutions that will address the need of population with low-income, informal employment, or collateral problems. e. Engage Provinces and major municipalities as protagonists in operating low-income housing programs and in advancing systemic reform to unblock local land supply. While new federal housing programs increasingly target low-income households, Provinces, together with IPVs have yet to develop a strategy for serving this group. In other countries, states and major localities often play a dominant role in low-income housing because of their influence over the most important input to this process: urban land.

24. Many examples of involvement of state and local government in low-income housing exist in the Region with possible applicability to Argentina including: (a) establish a wide range of lines of support that correspond to the steps in progressive housing, including improvement, expansion, construction of a unit on a lot owned by the household, tenure regularization, sanitation and service extension or provision, technical assistance for construction, and others; (b) continue to provide land parcels for low-income housing development; and (c) undertake systemic reforms to relieve supply bottlenecks, particularly of land-related systems under the control of localities.

25. Introduce new tools for extending credit to low/moderate-income households. The provision of adequate finance is a condition for low-to moderate income households to afford decent housing. .The proposed strategic options for that purpose include: (a) enhancing the generation of long term lending, a primary condition of affordability that the financial system has difficulties to meet; (b) establishing new tools and schemes in order to widen the outreach of housing finance towards moderate income groups and increasingly reach the lower income households; and (c) support financial institutions that serve these categories.

vi 1. CONTRIBUTION OF HOUSING AND CONSTRUCTION TO THE ECONOMY

1.1 In addition to improving welfare for low-income groups, expanding access to housing in Argentina promises to yield substantial macroeconomic returns, as housing and construction have clear positive impacts on economic activity and job creation. This chapter focuses on these economic linkages. It examines the housing sector in the broader economic context and reviews recent economic performance. It explores how the recent crisis has precipitated declines in total investment and construction output, which has contributed to a sharp fall in per capita GDP. And it outlines the dramatic recovery that has been underway since 2003. Overall, the chapter analyzes the potential of the housing sector to fuel the construction industry and provide a quick and reliable boost to economic activity and employment generation.

1.2 Argentina is an upper-middle income country, but suffers from high levels of poverty and inequality. Annual growth has averaged a sluggish 0.6 percent over the last two decades, leaving this formerly wealthy country with a per capita GDP of about USD3,9001 in 2004. In 2001 and 2002, GDP plunged by 6 percent and 12 percent respectively, amid a devastating economic crisis. The country is recovering quickly, with a growth of 9.2 percent in 2005, but unemployment remains high, at 12.1 percent in 1Q 2005. Income distribution is highly skewed, with the highest decile earning 21 times the per capita income of the lowest. The latest available estimate (2H 2004, on EPHC data) puts 40.2 percent of households below the poverty line, despite a recent decline in this proportion.

1.3 Housing is an important sector in Argentina both in the real economy and in the financial sector. Prior to the crisis, real estate loans were growing twice as fast as the average financial sector – 18.4 percent a year compared to 9.5 percent a year. Housing accounted for 14 percent of total financial portfolio in 2000. At present, construction accounts for 11.1 percent of GDP, and housing for about half of this. Construction is quite sensitive to housing development as well as to private investment, both of which have undergone wide cycles, at approximately four-year intervals, with highs in 1980’s, 1988, 1994 and 1998. Table 1.1.: GDP and Fixed Gross Domestic Investment, 1993 -2004

1 World bank Data

1 GDP and Fixed Gross Domestic Investment 1993 - 2004 Thousands of 1993 ARG $ - Constant Prices

Fixed Gross FGDI FGDI Fixed Gross Domestic FGDI as % of Year GDP Domestic Construction Construction Investment: Construction GDP Investment as % of FGDI as % of GDP 1993 236.505,0 45.069,4 27.786,5 19,1 61,7 11,7 1994 250.307,9 51.231,4 30.529,6 20,5 59,6 12,2 1995 243.186,1 44.528,3 27.510,9 18,3 61,8 11,3 1996 256.626,2 48.483,9 29.222,5 18,9 60,3 11,4 1997 277.441,3 57.047,5 33.338,3 20,6 58,4 12,0 1998 288.123,3 60.780,7 35.270,4 21,1 58,0 12,2 1999 278.369,0 53.116,3 31.444,2 19,1 59,2 11,3 2000 276.172,7 49.502,1 29.772,7 17,9 60,1 10,8 2001 263.996,7 41.749,6 26.961,7 15,8 64,6 10,2 2002 235.235,6 26.532,9 18.283,0 11,3 68,9 7,8 2003 256.023,5 36.659,5 24.674,7 14,3 67,3 9,6 2004 279.020,0 49.306,2 31.028,2 17,7 62,9 11,1 Source: Own, based on DNCN

Table 1.2.: Recent variations in Construction Investment 1994-2004 (constant 1993 prices)

Recent Variations in Construction Investment. 1994 - 2004 (1993 Constant Prices) % change over previous year

Fixed Gross Domestic Investment Year GDP Total Private Public Construction 1994 5,8 13,7 13,8 12,0 9,9 1995 -2,8 -13,1 -12,8 -16,1 -9,9 1996 5,5 8,9 11,2 -16,6 6,2 1997 8,1 17,7 15,9 43,2 14,1 1998 3,9 6,5 6,7 4,3 5,8 1999 -3,4 -12,6 -13,6 -0,5 -10,8 2000 -0,8 -6,8 -4,3 -32,8 -5,3 2001 -4,4 -15,7 -16,3 -6,2 -9,4 2002 -10,9 -36,4 -36,4 -37,6 -32,2 2003 8,8 38,2 35,5 73,7 35,0 2004 9,0 34,5 n.a n.a 25,7

Source: Own, based on DNCN

1.4 The weight of the construction sector in national GDP goes beyond its direct value added and total employment (6 percent in 2002). Taking into account the indirect impact and supplying sectors -- steel, construction materials, painting, electrical equipment, etc -- the “expanded” construction sector was estimated to account for 12 percent of both GDP and employment in 1997. As a whole the multiplier effect of the construction sector is estimated at 1.82, that is, for each peso invested in construction the final aggregate demand will potentially increases almost twice as much. This is considerably higher than the total demand effect of investing in retail or wholesale sectors, and even in telecommunications.

Table 1.3.: Construction Multiplier Impact (for each AR$ 1 million)

Sector Production Employment Pesos Jobs

2 Direct Demand 1,000,000 40 Indirect demand 800,000 20 Services 300,000 10 Industry 450,000 9 Mining 50,000 1 Multiplier 1.8 1.6 Total Demand 1,800.000 60 Source: M&S consultants, INDEC Input-Output Matrix

1.5 The impact on job creation is equally important. For each one million pesos (USD300,000), the construction sector generates about sixty new jobs, half of these through direct hiring into the construction sector, the other half indirectly through the increased demand for labor in connected sectors and providers. The multiplier effect in terms of employment creation is estimated at 1.6, or one of the highest in the economy, just below furniture and apparel.3 Within the construction sector, housing is the most labor-intensive component. For each AR$1 million invested in low income housing, 80 jobs are created; 90 jobs in the case of middle-income housing. Housing investment has the potential to create jobs at twice the rate of average infrastructure spending. The multiplier effect of the construction sector in terms of job creation is among the highest in the economy, only surpassed by the sectors of furniture and garments. The employment multiplier (1.6) is a bit lower than the multiplier effect in terms of production (1.8) due to the fact that the construction sector includes several sub-sectors quite capital intensive, notably office building and high tech residential buildings. (see Table1.2)

1.6 Construction and housing intensively employ low-skilled labor. This characteristic holds particular importance in times such as the recent economic crisis, when job creation has priority. Construction and housing investment can also join with targeted public programs such as trabajar and jefes de familia to reduce the unemployment problem. The high multiplier effect, rapid response on employment generation, and capacity to employ unskilled as well as skilled labor make construction and housing particularly important as counter-cyclical activities. Thus, they can help the Argentine economy to recover while serving lower income groups.

1.7 Construction and housing have helped lead expansions and exacerbate declines. As a component of total investment 4 construction and, particularly housing investment, have shown similar patterns.

1.8 Boom: 1990’s. Declining interest rates and easy access to dollar denominated bank credit helped drive the housing boom of the 1990’s. During 1991-1994, construction grew very rapidly (72 percent), at more than twice the overall economic output (34 percent), fueled by a doubling in housing production. Housing investment rose from 4.5 percent of GDP in 1990 to 6.9 percent in 1994 despite the relatively undeveloped state of mortgage lending. Between 1993 and 2000, housing investment was about 47 percent of total construction investment and a market of USD 14,500 million a year.

3 The employment multiplier (1.6) is a bit lower than the multiplier effect in terms of production (1.8) due to the fact that the construction sector includes several sub-sectors quite capital intensive, notably office building and high tech residential buildings 4

3 Around 15-17 percent of this amount was financed through mortgages.5 In terms of production, housing construction jumped from 134,000 units in 1990 to 180,000 in 1994. Out of this total, 140,000 were supplied by the private sector and nearly 40,000 by the public sector.6

1.9 After the short recession of 1995-96, construction activity again grew at a record level - 17 percent in 1997 and hit a record high of 12.2 percent of GDP in 1998 (half in housing, half in infrastructure). Job creation in housing also crested as the sector benefited from unusual profits, easy credit, and generous development approval of large projects.

1.10 Bust:1999-2003. The situation deteriorated in 1999, as the crisis lead to the worst contraction of construction sector in the last fifty years. In 2001, both housing and private investment suffered severe losses – investment went down 15.6 percent in real terms; construction 9.4 percent. The crisis deepened in 2001 and 2002 with domestic investment plummeting further by 16 percent and 36 percent respectively. Total investment fell to its lowest point of 12 percent of GDP in 2002 compared to a high of 22 percent in 1982. Between 1999 and 2002, construction activity fell 47 percent and the share of investment in construction shrank to an all time low – 7.8 percent of GDP. In contrast, for half a century (1950-2000), the share of investment in construction averaged 15 percent of GDP; in 2002.7

1.11 Recovery: 2003 to present (2006). As of 2003, aggregate investment reversed this negative trend, with an annual increase of 38 percent while another 35 percent was added in 2004. In 2004, total investment reached AR$49.300 million, the same amount as in 2000 at 1993 constant prices. Construction activity also rebounded, increasing 35 percent for 2004 and 25, 5 percent in 2004 when it reached AR$ 31.000millions, similar to the 1999 figure. (Table 1.4) Table 1.4.: Construction Investment 1993-2002

Investment in Construction as % of GDP

Investment in Construction Total Investment Decade Total Housing Infrastructure (Const + Equipment) 1950 16.7 10.8 5.9 24.2

5 Between 1996 and 2000 new housing loans were estimated in USD 2,000 millions annually provided by the banking system. Informal financial sources, mainly direct private loans intermediated by notaries, added an additional 10% to the previous figure.

6 It is not entirely clear whether housing investment was made less volatile by the 1995 reforms and the decline of interest rates , but the rapid increase in housing investment when finance did become available suggests that Argentina had suffered from chronic under–investment in housing in the absence of mortgage credit, and that there was a latent demand for housing in the country that was not satisfied. At present, however, households are reluctant to seek long– term mortgages in a climate of high unemployment and income insecurity.

7 Total investment fell to 11,3 percent of GDP one of the lower rates in the world. In the last two years, total investment has recovered to 17,7 percent of GDP, a similar value as in 2000.

4 1960 14.9 8.8 6.1 25.0 1970 17.7 9.6 8.1 28.3 1980’s 13.6 7.1 6.5 20.3 1990-2000 11.3 5.8 5.5 18.6 Av. 50 14.9 8.5 6.5 23.3 years 2002 8.0 4.0 4.0 13.0 Source: M&S Consultants

1.12 Construction, as measured by National-Accounts estimates, consists of four main components: public construction, private construction (includes housing), industrial construction and construction for the petroleum activity. Unfortunately, separate estimates for housing construction are not available. One related indicator useful to follow for housing construction evolution is the Synthetic Construction Indicator (ISAC). 8 9 Construction and housing activity levels as reported by ISAC reached their lowest level in 2002 and strongly recovered thereafter (see Chart 1.1 )

Figure 1.1.: Fixed Gross Domestic Investment and Synthetic Construction Indicator , Seasonally Adjusted , 1993-2005

GDP, Fixed Gross Domestic Investment and Synthetic Construction Indicator Seasonally Adjusted - 1997 = 100 1993.1 - 2005.2 120.00

110.00

100.00

40.00 3 4 5 6 7 8 8 0 0 2 2 3 4 3 4 5 6 7 9 9 1 1 3 4 5 9 9 9 9 9 9 9 9 9 9 9 9 9 9 0 0 0 0 0 0 0 0 0 0 0 9 9 9 9 9 9 9 9 9 9 9 9 9 9 0 0 0 0 0 0 0 0 0 0 0 1 1 1 1 1 1 1 2 2 2 2 2 2 1 1 1 1 1 1 1 2 2 2 2 2

------

I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I GDP market prices SA Fixed Gross Domestic Investment SA Synthetic Construction Indicator

Source: Own based on DNCN-MECON and INDEC.

8 In the 1993-2004 period, the correlation coefficient between Construction investment and the ISAC –general level was 84%, the corresponding correlation coefficient between Construction investment and the ISAC-housing was 78%. 9 ISAC estimation involves an indirect measurement of housing construction, since it is estimated by composing construction inputs into housing activity level using the 1997 input-output table for the economy.

5 1.13 Construction permits granted by municipal governments provide an alternative indicator of housing production. This figure indicates the level of private building and, therefore, leads ISAC evolution. Permit data also allow calculating the average number of square meters built per housing unit, thus illustrating housing demand. The average permitted size of units decreased from 154 m2 during the 1990’s to 132 m2 in 2002- 04.10

Figure 1.2. Synthetic Construction Indicator (ISAC) General level and Housing, seasonally adjusted. 1993-2005

Synthetic Construction Indicator (ISAC) General Level and Housing Seasonally Adjusted 1993 - 2005 130

100 0 0 1

90 7 9 9 1 80 x e d n i 70

40 4 5 4 5 3 4 5 6 7 8 9 0 1 2 3 4 4 4 4 4 4 4 4 4 4 4 5 5 5 5 0 0 9 9 9 9 0 0 0 0 0 0 0 0 0 0 0 9 9 9 0 0 0 0 0 0 0 0 0 0 ------9 9 9 9 0 0 0 l 9 9 9 0 0 t r r r r y y c v e b o p e b n n i 1 1 1 1 1 1 1 2 2 2 2 2 u c a b a b a a o n e u g e n e u J D A O A J J F M F M E A S E N M M

General Level Housing

Source: Own based on Indec.

10 Corresponds to Bs.As. City permits.

6 1.14 Industry structure. The construction sector in Argentina is structurally in transition. The sector includes a variety of firms of different sizes and technology ranging from family enterprises and small builders (who build for themselves, assist households in building, often employ workers informally, and contract their labor to larger construction firms as the need arises) to larger and more sophisticated units. At the moment, small firms overwhelmingly dominate the sector in terms of number of companies. Less than 10 companies - a surprisingly small number - produce more than 200 dwelling units annually.11 In this context, many small firms may well move from their traditional focus on single-family units to develop the capacity for large public works projects or/and the construction of apartments buildings.

1.15 Construction costs have increased sharply. The index of construction cost (ICC) increased 11,4 percent during the first eight months of 2005, lead by a rise in labor ( 18,3 percent)12, followed by general expenses (11,3 percent), and building materials (6,3 percent). In comparative terms, the index has exceeded the rise in wholesale prices index (6,3 percent) and retail (7,7 percent). From the devaluation of the Argentine peso in 2001 to 2005, building materials had increased 121 percent, general expenses 72 percent, and labor 70 percent.13 During the first 7 months of 2005, the ISAC grew 8,4 percent, and cement prices increased 18,7 percent while supply reached record production levels (7,1 tons).

1.16 Boom, bust, and recovery have left a mismatch between housing supply and effective demand. Overall, then, declining interest rates and easy access to dollar denominated bank credit drove the housing boom of the 1990’s. With the financial crisis, banks had difficulty recovering loans, liquidity shrank and a large proportion of construction and housing loans were written off. Fiscal difficulties and competing needs hindered the public sector from compensating for plummeting private credit, and housing experienced a severe bust. A surprisingly strong recovery in construction and housing investment has been underway since 2003. However, as Chapter Two details, a strong mismatch between supply and effective demand has developed that distorts the housing market.

11 Interview with Dr. Carlos Pisula, Vice President, Argentinian Chamber of Construction, Buenos Aires, 7 February 2001. 12 The latest increases in labor cost have been derived from fixed sum raises in salaries in the months of January and April. 13 Ever since September 2001, the highest increases in prices among materials corresponds to iron bars, 289%, sand 181%, Portland cement 144%, and bricks 165,8%.

7 2. HOUSING MARKETS

Housing Demand

1.17 Argentina is a middle-income country with a demographic growth rate of less than 1 percent . With a country size among the largest of the world, the density in Argentina is particularly low and reaches about 13 inhabitants per sq km. The urban share of the population is 89.3 percent and the demand for housing countrywide is mainly urban. The rate of rural-to-urban migration has stabilized and the urban growth occurs mainly from in-situ increase, not migration. The total housing stock has been estimated at 10.7 million units in 2005, resulting in an average of 3.6 people per dwelling.

1.18 Urban Growth. In 2005, the Argentinean population was 38.3 million: 40.2 percent of urban households were under the poverty line - a monthly income of AR$787 (USD272)14. Over the next 10 years, it is estimated that the total population will reach 42.4 million people, creating an average of 137,500 new households per year; 55.000 households (or nearly 40 percent of the total) will earn less than AR$750 per month, and 27.500 less than AR$458 This latter group are likely to have very few housing options other than slums, flood-prone areas or the poorest neighborhoods (tables 2.1 and 2.3) if the situation remains similar to the present.

Table 2.5.: Population Growth and Household Formation, 2005-2015, by income group. Household 2005 2010 2015 Monthly Income per Households Households quintiles (AR$) Households Population Population Population (*) (*) From To 10 459 2.142.379 6.669.145 2.250.399 7.005.407 2.417.460 7.331.159 460 750 2.142.379 7.591.688 2.250.399 7.974.465 2.417.460 8.345.279 751 1,160 2.140.806 7.947.286 2.248.746 8.347.993 2.415.685 8.736.175 1,161 1,866 2.142.379 8.277.724 2.250.399 8.695.092 2.417.460 9.099.414 1,867 52,050 2.140.806 8.088.184 2.248.746 8.495.994 2.415.685 8.891.059 Total 10,708,748 38,574,027 11.248.689 40,518,951 12,083,751 42,403,087

Sources: The total monthly income per quartiles was estimated using the Continuous Household Survey (Encuesta Permanente de Hogares, INDEC), T1 2005, which covers 29 urban conglomerates. The projection of the population is based on the estimation elaborated by INDEC based on projections from the 2001 National Census and INDEC’s ( considering an Average annual rate of 0.98 for 2005-2010 and 0,91 for 2010-2015) The households growth index is 12,84 percent, same one as from 1991-2001.)

1.19 Housing Deficit. The size of a “housing deficit” differs according to alternative definitions of an “adequate house unit” that covers households’ “shelter needs.” These definitions have varied over time and across government levels. Notwithstanding the definition and subsequent size of the housing deficit, one of its characteristics in Argentina has been its persistence over time. Even though the country GDP increased

14 The poverty ratio is steadily decreasing and the last figure is now closer to 38% (value December 2005)

8 from the mid 1980’ss to the late 1990’s, the housing deficit remained an unsolved problem. This was partly due to poor social housing programs.

1.20 According to the 2001 census, Argentina has a stock of 2.641 million units requiring improvement or replacement to meet adequate standards of livelihood and hygiene, out of the total stock of 10.7 million housing units. This overall deficit has been broken down into three groups which would require various levels of intervention. First, 535,000 units need to be replaced since they cannot be improved to acceptable standards. They are mainly from the slum areas of the main cities or the neighborhoods in flood-plains. Second, 1,647,000 could be repaired or need an upgrade of the infrastructure network, to provide them with adequate water, wastewater, and road condition. Finally, an additional group of 469,000 units shelter households in situations of high density. The deficient housing units are heavily concentrated in low- income groups. Two thirds of the population of the poorest group live in units requiring some kind of improvement, Almost 80 percent of deficient units house families earning less than AR$750 per month.

Table 2.6.: Housing Deficit in Argentina in 2005

Houses Total Total Houses % of High Houses that can Household Housing with Household Slums density without be s with Units Deficit per s with (‘000) Housing Deficit recovered Deficit (‘000) quintile Housing (‘000) (‘000) (‘000) (‘000) % Deficit

Quintile 1 308 831 225 1,364 651 2,015 51.7 67.7

Quintile 2 119 462 145 726 1,289 2,015 27.5 36.0 Quintile 3 60 217 57 334 1,681 2,015 12.7 16.6 Quintile 4 31 112 22 164 1,850 2,015 6.2 8.2 Quintile 5 17 26 9 52 1,963 2,015 2.0 2.6 Total 535 1,647 469 2,641 7,433 10,074 100% 26.2 Source: : Subsecretary of Urban Development and Housing based on National Census, 2001

1.21 Data from the University of Buenos Aires, the Housing Commission of the Chamber of Deputy, and the Ministry of Public Works consistently point toward similar figures -- from 500,000 to 800,000 new housing units need to be constructed to replace the most dilapidated ones, and 2 to 2.7 million housing units need repair and improvements.

1.22 Housing demand. Argentina would require 326,000 new units per year over a period of 10 years to meet the need of new households and phase out the existing housing deficit With such a 10 year horizon, the construction sector would need to build a total of 3,260,000 units, including 1,375,000 units to meet urban growth, 535,000 units to replace those in slums, as well as improve 549,000 dwellings identified as requiring repair and upgrading;15 and 797,000 units to reduce overcrowding in the existing housing stock16. Therefore, in addition to the demand for 137,500 units arising from 15 For the group of 1,647,000 housing units in need of repair and upgrade, it has been estimated a cost equivalent to 549,000 units or 33% to face the improvement 16 To reduce the excess housing density, the number of housing units should be of (5.4/2)*469,000=1266,000 since the current number of person per family is of 5.4 for the poor, also 5.4 person per room in this case, and that the projected density would be of 2. The additional number of housing units is therefore of 1266,000-469,000=797,000

9 new household formation. 188,400 new housing units would be needed for repair or replacement of the existing stock, leading to a total housing demand of 326,000.

1.23 Table 3 breaks down housing demand into 5 income-categories based on the 2001 Census.. The demand is highly concentrated in low income groups: 63 percent of the 326,000 units needed would go to households earning less than AR$750 (USD258) per month. In comparison, this group represents 37 percent of the population.

Table 2.7.: Total Housing Demand, Average per Year over 2005-2015 Period Housing deficit Demand Income from New To solve Deficit Deficit Total Total (AR$ per Households overcrowding from estimated (%) month) housing slums from housing density improvement 10-458 27.508 38,200 30,800 27,700 124.208 38,1 460-750 27.508 27,000 11,900 15,400 81.808 25,1 750-1,160 27.488 9,600 6,000 7,300 50.388 15,5 1,160-1,866 27.508 3,700 3,100 3,700 38.008 11,7 1,867-52,050 27.488 1,500 1,700 900 31.588 9,7 Total 137,500 80,000 53,500 54,900 326.000 100% Source: distribution of housing deficit per income group from census 2001.

1.24 The number of new units needed each year has been priced in Table 4 – assuming that production of new units constitutes the tool for addressing housing problems For the moderate and low-income (those earning between 0 and AR$1303), the projected demand of 277,000 units would require an annual budget of AR$ 9,200 million. Just meeting the demand of 73.000 units for the low- income (defined as below AR$212 and technically considered indigentas their monthly income does not allow them to afford a food-only basket17) would require mobilizing a budget of AR$1,096 million. Overcoming the deficit of this lowest income group would mean doubling the production of units or other types of housing solutions. In short, the financial needs associated with solving the housing problem in Argentina are estimated at AR$16,000 million a year or USD5.5 billion, over next 10 years The bulk of the production would need to focus on the lowest revenues, with a supply increasing from near 35.000 units in 2005 18 to 73.000 units per year.

1.25 The huge amount necessary to build sufficient complete new units to eliminate the housing deficit in 10 years – USD5.5 billion per annum – is over 15 times the sum actually spent (about than USD400 million per year) under the federal program, and would represent over 30 percent of the federal budget. Thus, while a useful heuristic exercise, these calculations suggest that Argentina address the housing problem in a more nuanced way. Rather than rely overwhelmingly on building new units, housing policy could focus increasingly on lower-cost housing solutions that cost a modest fraction of a new unit.19 Instead of depending almost exclusively on the federal budget, affordable housing finance could increasingly leverage household savings and various

17 AR$ 371 of monthly income are needed by a basic family of four members, to avoid been considered indigent. 18 Source: National Budget 2005, physical goals for Housing and Urban Development function. 19 Such lower-cost solutions fit the unsatisfied demand, which comes largely from low-income families.

10 forms of credit including not only mortgage finance but also housing microfinance. 20 Rather than depend on government to directly develop, extend credit, and perform other functions related to affordable housing, policy and programs could increasingly use the private sector.21 Chapters Three to Six discuss further these options for shifting focus.

Table 2.8.: Annual Demand for Housing Units, per Income group during 2005-2015 Period Household Average Average Unit Price Number of Units Total cost Income income annual (P) (N) (PxN) Decile Peso/month( income (Million *) (Peso) /Deficit Pesos) group 15,000 73,096 1 212 2,543 73,096 1.096 2 385 4,621 51.112 3 547 6,561 43.515 4 678 8,149 38.293 40,000 203,620 8,145 5 834 10,017 26.814 6 1,029 12,342 23.574 7 1,303 15,611 20.312 8 1,642 22,500 17.696 120,000 4,144 9 2,200 26,400 19.122 36,817 10 4,545 55,513 200,000 12.466 12,466 2,788 326,000 16,153

Source: Own estimates, based on Housing Deficit provided by Subsecretary of Urban Development and Housing , National Census, 2001 and EPH-T12005

The impact of the Crisis on Housing Affordability.

1.26 The 4-year economic recession and the associated financial crisis during 1999-2003 had a dramatic impact on the incomes and the purchasing power of Argentinean households. Due in large part to the increase of unemployment, the share of the population below the poverty line nearly doubled between 1999 and 2002 to reach 58 percent; the share of people in extreme poverty jumped from 6 percent to 28 percent. Those figures decrease to 24.7 percent and 8.4 percent for 200522. During the financial turmoil, households’ income in urban areas fell in real terms by one third, mainly because of the surge of inflation in 2002-2003 (+ 46 percent in 2 years).

1.27 In addition, the distribution gaps widened considerably, especially since the beginning of the economic crisis in 1998. Incomes in Argentina have become increasingly regressive over the last decade with the two top deciles concentrating 50 percent of income. Even before 2001-2002, the income distribution had been regressive. All of the first eight deciles decreased its share of income from 1992 to 2004, decile 9 increased its share marginally, and the highest decile of income increased its share by 13.6

20 Experience in other Latin American countries demonstrates methods for stimulating low/moderate- income households to save and developing credit instruments that can reach these groups. 21 As do the great bulk of Latin American countries through direct demand subsidy programs and other types of housing interventions. 22 EPH INDEC end of 2005.

11 percent over the period. As a result, the income ratio between the 10th and the 1st deciles moved from 18 in 1992 to 21 in 2005, with a peak of 37.7 in 2001. The non- uniform fall in income has certainly implied a significant increase in poverty and inequality, and a fall in aggregate welfare. Annex 1 presents a detailed analysis of housing affordability. This income disparity has clear implications on the housing market and the Government’s role in increasing access to said market.

Figure 2.3.: Average Monthly Family Income per Deciles in AR$.EPH-T1 2005

5000 4500 4000

3500 3000 $ g r 2500 A

n I 2000 1500

1000 500 0 1 2 3 4 5 6 7 8 9 10

Income Poverty line

Source: EPH T1 2005-INDEC

1.28 The evolution of real estate prices has aggravated the combined effect of loss of purchasing power and wealth redistribution for housing. These factors have led to four major consequences: a. New construction material costs, which are heavily affected by the cost inflation of construction materials and are largely sensitive to international prices in USD) increased more than 90 percent over 2002- 2005)23; Construction costs are still rising, at A 13,4 percent increase in the construction index has been registered in the last year/ b. The price of the existing housing stock skyrocketed once converted into Pesos immediately after the devaluation; and c The market has become increasingly segmented. An upper segment where prices in USD remained more or less stable (equivalent to a three fold increase in AR$ pesos) until 2004 increased around 20 percent in US dollar terms in 2005. All other types of property have experienced a decline of price in USD; the decline in this latter case fell far short of the

23It is necessary to point out that construction materials cover 46% of the index, labour 45,6% and general expenses 8,5%

12 depreciation of the national currency, and prices in Peso increased strongly. The price of a basic 2 room apartment in Buenos-Aires rose 150 percent from AR$40,000 in 199924 to AR$100,000 in 2005. d. The redistributive impact of the crisis was amplified by differences in the population of mortgage borrowers. Borrowers who had US dollar held outside Argentina benefited from a sudden wealth effect. In strong contrast, the majority of borrowers lost much of the real value of their savings.

1.29 Family income and housing prices have reflected the structural relative price adjustment that followed the sharp devaluation of local currency. Household purchasing power in terms of square meters has decreased from approximately 1.4 m2 (a month) in 1997 to 0.3 in 2005. This has created an affordability problem restricting the access of households to housing ownership and their capacity to be qualified for mortgage lending. For instance, to buy a new dwelling unit of around 50 m2, a new household will need to invest around AR$90.000 while the bank will cover only 70 percent of that value, around AR$60,000. Taking into account formal income only (and also presuming that previous savings by the family are enough to cover a 30 percent down-payment), around 2 percent of the households are able to repay a 10-year loan of this amount at a 10 percent annual interest rate (current market conditions). Taking into account total income, 4.6 percent of households can afford to purchase such a commercially built house. However, only half of the highest income decile earns this amount.

1.30 The extremely low percentage of households able to pay a mortgage loan for a new dwelling unit may dramatically impact the development of the mortgage market in the future25. However, at present, a limited mortgage supply appears sufficient to meet greatly-reduced mortgage demand.26 The banks active in the mortgage business provided less than 50.000 new housing mortgage loans in 2005. In comparison, 100.000 to 243,000 households have sufficient income to repay a AR$60,000 loan and, thus, effective demand seems roughly comparable (see detailed presentation in Annex 1).

1.31 Consequently, housing has become unaffordable for the vast majority of the population, including the middle income groups who were able to become homeowners before 2002. For a Buenos Aires urban household with a median income level, the price-to-income ratio for basic two-room unit rose from 4 in 2001 to 10 in 2005. This situation naturally leads to a re-orientation of the demand for housing, towards areas remote from the center and towards the rental sector. The initial impact was felt in the City of Buenos Aires, through an increase in vacant and/overcrowded apartments. At present, some middle income households who lack the financial capacity to get a mortgage use the relatively small rental housing market, spurring rental prices of up to 150 percent.

24 See Schlomo Angel. 25 The formation of new households is estimated in around 140.000 a year. According to our estimates most of them will be facing affordability problems to become new owners. 26 Factors conditioning the supply and demand for mortgages include: (a) the slow take off of mortgage operations by banks; (b) the presence of mortgage borrowers that are owners and/or have enough savings to cover the down payment; between 2003 and 2005 many individual investors decided on real estate as a way to diversify their portfolios, and given the low rates of alternative investment in public debt. These investors have mainly put cash into housing, often unsupplemented by bank loans; and (c) greatly-reduced home affordability in general.

13 1.32 The low share of household income that goes for housing and basic services increases the affordability problem. Although somewhat outdated, the last national survey on household expenditure (Encuesta Nacional de Gastos en los Hogares), made in 1996- 1997, gives an average allocation of 12.76 percent of the household income (this figure is adjusted by the size of the households) as the median made on housing payments.

Table 2.9.: Households’ expenditures per income deciles. Argentina, 1996-1997

Type of expenditure Percentage of Total family income per capita %

Decile of households 1º 2º 3º 4º 5º 6º 7º 8º 9º 10º Total Housing 11.72 12.1 12.69 12.25 12.98 12.16 12.93 13.37 13.02 12.87 12.76 Rental for Housing 1.62 2.87 4.07 3.73 4.56 4.42 5.40 5.37 5.30 5.26 4.70 Current expenditures and repairs 1.40 1.16 1.07 1.25 1.73 1.57 1.97 2.98 3.42 4.59 2.69 Fuels 3.24 2.80 2.59 2.56 2.38 2.25 2.04 1.82 1.54 1.08 1.92 Water and power supply 5.46 5.28 4.96 4.71 4.31 3.92 3.52 3.20 2.76 1.94 3.45 Household equipment & operation 4.68 4.73 4.99 4.82 5.53 5.06 5.72 6.63 7.59 9.74 6.77 Transportation & communications 8.37 9.71 10.74 11.92 12.70 14.07 14.37 15.02 15.93 15.58 13.90 Miscellaneous goods and services 5.34 5.24 5.34 5.21 5.31 5.22 5.41 5.00 4.78 4.59 5.01

Source: Survey of Households Expenditures, 1997, INDEC. Figure estimated from a sample with a 10/30% standard error

1.33 In other words, the post crisis affordability situation faces three mutually aggravating problems: a) low incomes, b) a small fraction of that income allocated to housing, and c) the low purchasing power of salaries in terms of housing. Meanwhile, Government’s response to the demand has been mainly channeled through the FONAVI, which, since its creation, in the mid 70s, built up an annual average of 35.000 new units and in 1991- 2001, 42,500 units. Moreover, this program generally supplies finished housing units requiring an interest-free repayment, which targets mainly low-middle incomes that can pay the geographically weighted average of USD12,500 (AR$35,000).

1.34 Population growth and new demands for infrastructure. Throughout the country, 1.7 million households do not enjoy satisfactory sanitary conditions and lack bathrooms or running water. Eight million people, 20 percent of Argentine households, lack a convenient place for getting water for cooking. The population without sanitation in the 24 sections of the Great Buenos Aires is 57 percent and 29 percent of the households have no access to running water in their houses. In some provinces, as Santiago del Estero, 81 percent of the population has no sanitation infrastructure. Municipalities have to face new requirements for infrastructure. In most of the cases, this population

14 growth follows patterns of low density urban expansion, which makes the cost of infrastructure provision rise considerably.

The supply of housing

1.35 No comprehensive database documents housing construction in Argentina. Hence, this study makes estimates for overall housing production as well as for the informal sector.

1.36 The official statistics office, INDEC, collects the construction permits issued by 188 municipalities every year. These local governments cover 81.9 percent of Argentina urban population, which, in turn, represents 89 percent of the total population. Even though the construction permit is mandatory for any new house, and for improvements in already existing housing, enforcement is not systematic. The amount of total square meters permitted, processed between 1993 and 2001 results in an average of 11.500.000 square meters for an average of 80.000 new housing units annually authorized, as shown in Table 2.6.27

Table 2.10.: Annual new houses reported to municipalities. Total country, 1993-2001

Year Housing Units 1993 69,124 1994 90,320 1995 74,947 1996 75,271 1997 92,530 1998 97,814 1999 83,865 2000 80,512 2001 64,585 Average 80,997

1.37 Adding to these 80,000 private houses an average of 42,500 units funded by the public sector results in a total of 122.500 new houses per year. Other sources of information, such as the national census suggest a higher figure of 195.000 units per annum. Figures for the increase of the housing stock between 1991 and 2001 total 135,000 units per year. Broadly speaking, the changes in private housing production exceeded the annual variations of GDP from 1994 to 2003, demonstrating that construction investment tends to lead the business cycle. (Chart 2.2)

27 Total square meters permitted include both residential and non residential units, providing information about new production and extension of existing units. Own estimates are based on new residential housing units permitted covering the whole country. For years 2003 to 2005, the information provided by INDEC, is not disaggregated by type of construction and covers only the main 42 municipalities, representing 50% of the urban population.

15 16 Figure 2.4.: Changes in percentage in real GDP and in number of registered new housing permits. Argentina, 1994-2002

-10 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 -20

GDP (changes) Houses permitted (changes)

1.38 Comparing the 1991 national census to that of 2001, the number of housing units rose from 10,109,678 to 12,041,584, which represents an increase of 19.3 percent and an annual average production of 193.190 housing units. Public sector construction accounted for, on average, 42,500 of that number. Thus private construction amounts to around 150,000 new houses every year. Since 80,000 units have been formally registered with adequate permits, it is estimated that 70.000 are supplied by the informal sector, and most probably by the lowest income households.

1.39 The supply of formal private housing units started to decline just before the economic crisis from a peak of nearly 100.000 units in 1998 to a low 44.000 in 2002, but resumed rapidly afterward at a steady pace. The figure started to rise again in 2003 with 65.400 new housing units, increasing by 50 percent the number of registered units from the previous year.28 Most recently, data taken from forty two municipalities in the country indicates that square meters permitted have increased an additional 15.5 percent in 2004 reaching the same value as in 1996, nearly 75.000 units. The last indicators taken for the same group pf municipalities show an additional increase of 38,9 percent for the first semester of 2005, expanding the prospective construction to 105.000 units.

1.40 The housing market has recovered strongly in the two last years. The growth of residential construction has been lead by the city of Buenos Aires, which concentrates 25 percent of the square meters permitted in the main 42 urban centers of the country, of which 85.4 percent is in apartment buildings. The average square meters approved for development in the city in 2005 quintupled those authorized for 2002.

1.41 The distribution of housing supply is strongly biased in favor of higher income households. Thus, the unmet demand for housing units, or housing deficit, is almost entirely concentrated on lower segments where the demand is larger. Although the growth in the formal housing supply over the last two years is auspicious, these units are purchased primarily by households with earnings greater than AR$ 2,000, who can

28 Source: INDEC and Argentine Construction Chamber (CAC)

17 fund their units mainly out of savings and, to a lesser extent, mortgages. Thus, formal housing supply is accessible for 10 percent of households, at best.

1.42 In well functioning markets, filtering29 and a housing ladder30 combine to increase the options available to lower and middle income households. In Argentina, these alternatives proved important in the1990’s. Expansion of mortgage finance at accessible terms in this decade helped improved the access and affordability for middle income households who purchased or improved housing units, which, in turn, increased housing supply. Units filtered from higher to lower-income families (Table 2.7). For example, the development of new suburban locations such as country clubs with permanent residents in the outskirts of large cities, promoted re-sales elsewhere to lower income families.

Table 2.11.: Evolution of new housing construction, 1991-2001

Units (N) New Housing Construction In thousands Flats 24 Houses type A ( net from 1/3 ex type B) 31 1.308 Houses type B ( net from shacks) -37 Total 1.296 Source: Own estimate, based on National Census of Population. Households and Housing 1991 and 2001, INDEC

1.43 Rental markets are problematic in Argentina. While immediate purchase of a new home is often not an option for lower and middle income families, even in high-income countries, families usually can rent. Rental units, however, account for only 12 percent of total housing in Argentina; 86 percent are apartments and type A housing units, and are mainly concentrated in the capital city. During the last 10 years, rental units as a percentage of housing stock has stabilized for the highest income households, but decreased for the lowest income formal sector. In addition, households living in hotel rooms and tenement, mainly concentrated in the City of Buenos Aires, have increased by 500 percent in the last 10 years. The decline of rental options for low-income households, coupled with lack of finance aggravates the housing problems of the very poor.

The Supply of Government-Assisted Affordable Housing

1.44 Housing policy in Argentina has been characterized by an active involvement of the public sector, especially at the provincial level. The government’s main role has been the financing and construction of completed housing units, usually aimed at middle– income households through FONAVI and the launching of a federal Housing Program

29 Filter refers to the process by which housing supply becomes available through resale to populations of a lower income level than the units’ original owned due to expansion in the total housing supply and/or income growth of original occupants. ( World Bank, 2001) 30 The housing ladder refers to the pattern of housing preferences that reflect income and family characteristics over a person’s lifetime. In the U.S., this may be characterized by a person in his 20’s living in an apartment, followed by a small home, then a larger home to accommodate the family, and then possibly again a smaller home or retirement facility. ( World Bank, 2001)

31 Type A housing refer to the houses that are not considered type B. Type B Houses encompass all those that meet at least one of the three conditions: earthen or low quality floor, lack of water distribution inside the dwelling, or lack of flushing toilet.

18 targeting lower strata of population. FONAVI production reached its peak in 1999 with 58.000 housing units, but decreased drastically to 20.500 units in 2005. The causes for this significant reduction include budget cuts in FONAVI transfers to the IPVs, use of the earmarked FONAVI funds for other purposes than housing (Libre Disponibilidad) by IPVs and the huge rise in construction costs stimulated by the economic crisis of 1999 to 2002. More recently, FONAVI reduced production tends to be compensated, at least partially, by the Federal Housing Program.

1.45 The recent crisis led to a halt in construction of affordable housing projects, which are now being reactivated by the Federal Housing Program. Compared with the average of 44.000 housing units produced by FONAVI in 1991-2001, only 24.000 units32 were built each year from 2002 to2004, 43 percent less than in the past decade. (Table 2.8)

Figure 2.5.: Supply of Housing Units Developed by FONAVI (Housing units and housing solutions33) Total country, Years 1990-2004.

FONAVI HOUSING UNITS 1990-2004

S d T n

I 70 a N

s 60 U u 50

o FONAVI G

N HOUSING T I UNITS 1990-

U 20 2004 O 10 H -

1.46 The extent of the decrease of FONAVI supply in 1990-2004 varied among jurisdictions, from 81 percent in the Province of Buenos Aires to 17 percent in San Luis, while in Santa Cruz, Rio Negro and Entre Rios, the supply has increased. For 2004 the total number of housing units supplied by FONAVI decreased again to 17,311 housing units and 3,000 housing improvements,34 while another 60,000 FONAVI housing units were still under construction in 2005. The 2005 estimated production of 23,200 units, comprised of 20,500 new housing units and 2,700 improved units, is comparable to that of 2002.

32 Includes housing construction and improvements. 33 Housing solutions include housing repair and improvements. 34 Source: FONAVI Audits, 2001 to 2003, Subsecretary of Urban Development and Planning,

19 Table 2.12.: FONAVI: Comparison of Median Annual Housing Supply with Housing Construction and Housing Improvements. Years 1991-2001 and 2002-2004. Ranked by Province

Province Median Annual Median Annual Difference Difference Housing Supply Housing Supply between Median between 1991-2001 2002-2004 Annual Median Annual (in Units) (in Units) Housing Supply Housing Supply percent (in Units) Buenos Aires 6.709 1.252 -81,34 -5.457 Formosa 704 172 -75,62 -533 Tierra del Fuego 474 157 -66,78 -316 Córdoba 2.977 1.016 -65,88 -1.961 Catamarca 1.105 414 -62,55 -691 La Pampa 1.179 481 -59,21 -698 Santa Fe 2.519 1.079 -57,17 -1.440 Chaco 1.946 866 -55,50 -1.080 Chubut 1.525 681 -55,33 -844 Salta 2.026 985 -51,41 -1.042 Misiones 2.470 1.225 -50,42 -1.245 Tucumán 1.703 926 -45,61 -777 City of Buenos Aires 503 310 -38,35 -193 San Juan 1.637 1.121 -31,54 -516 Corrientes 1.810 1.313 -27,47 -497 Jujuy 1.110 827 -25,49 -283 Sgo.del Estero 1.850 1.406 -23,98 -444 Mendoza 3.023 2.342 -22,55 -682 La Rioja 998 805 -19,35 -193 Neuquén 1.406 1.134 -19,34 -272 San Luis 2.482 2.053 -17,31 -430 Santa Cruz 759 796 4,86 37 Río Negro 1.490 1.581 6,09 91 Entre Ríos 1.533 2.299 49,92 766

Total 43.939 25.240 -42,56 -18.700

Source: Elaborated from FONAVI Management Reports issued by the Subsecretary of Urban Development and Housing

1.47 While, under FONAVI, Government has focused mainly on producing new units for sale to moderate/middle-income households, a variety of housing programs over the last ten years have supported home improvement, infrastructure upgrading and title regularization for the lowest income households. Up to now, however, the impact and

20 size of such progressive housing production by FONAVI has been small, representing only 10 percent of supply for 2005.35

Table 2.13.: Physical Goals for Housing Supply set by the Ministry of Planning, Public Investment and Services for years 2003-2006.

Activity / Assistance Unit of 2003 2004 2005 2006** Measure FONAVI Construction Completed 22.325 31.664 20.528 Housing units (66.586) (52.841) (49.433) (Units in Construction ) Housing 1.700 4.828 2.683 Housing Solutions Solution

(Units in (9.123) (11.024) (10.750) Construction ) Federal Plans Completed Construction Housing units _ _ 49.820

(Units in (22.560) (73.558) (122.866) Construction) Housing Housing Solutions Solution _ _ 20.836 ( Units in (44.000) (62.368) execution) Technical and Financial Assistance Finished 54 For Basic Housing Housing 433 950 (1.504) 5 (Units in (2.004) (2.893) Construction) For Housing Improvement Housing

Solution 477 929 1.004 (Units in (1.261) (658) (3.061) execution) Fitted out 9 22 33 n/a Actions for Neighborhood Neighbourhood Improvement Assisted Family 3.858 6.108 12.567 n/a

Cooperatives (Units in - - - (6.000) Housing construction Construction)

Total housing units * 28.793 44.149 108.313 (376.485)**

35 Nevertheless, the slow dynamic in the implementation of the programs made the achievement of this goal doubtful.

21 *Including improvements and families assisted for neighborhood improvement. Not including the fitted out neighborhoods ** For 2006, the unit of measure for the physical goals established by the government in the National Budget has changed from completed units, to units under construction. Source: National Budget 2005 and 2006. Housing and Urbanism Function, MECON.

1.48 In 2004, the Government started the Federal Housing Program aimed at addressing the needs of lower income households. Nevertheless, the ambitious physical goals for housing construction and improvement in 2005 still fell short of the estimated supply needed to overcome the deficit and the new demand for housing units. Thus, the deficit for low-income groups will continue to increase.

Table 2.14.: Housing Demand and Government-Assisted Housing Supply for 2005.

Household Income (AR$ per month) AR$10 – 485 AR$486 -1,866 First and Second Income deciles Third, fourth, and fifth income deciles Estimated Public Supply Estimated Public Demand Demand Supply New demand 27.508 82.500 950 70.031 Deficit from slums 30.800 21.000 Overcrowded 38.200 40.300 To improve 27.700 34.332 26.400 2.683 TOTAL 124.608 35.282 170.200 73.031

Source: National Budget 2005,per function, National Census 2001 for deficit and own estimates for demand. The supply for each income group based on information published by the SSUDyH

1.49 In summary, increasing the supply of housing to low-income families requires a shift in strategy – from mainly new units to a broad range of lower-cost housing solutions, from near-exclusive financing by government to leveraging household savings and market-rate credit, from direct government production and finance to more private provision, both through for-profit and non-profit entities. It will require a change also in the provision of land for low-income families to address the increasing need. The next chapter, Chapter Three, analyzes further housing policy and programs, and strategic options, and Chapter IV the land markets.

22 3. CHAPTER III: PUBLIC POLICY AND PROGRAMS IN ARGENTINA

1.50 This chapter highlights the major issues that government must confront in order to achieve its goals in affordable housing. Particular attention is paid to the National Housing Fund (Fondo Nacional de Vivienda, FONAVI), the decentralized housing institutions within the Federal Housing System, and the housing initiatives created under the Federal Housing Program.

Public Finance of Housing

1.51 Public support to affordable housing comes through three channels: the Federal Housing System created by the Law 24-464 of March 1995; the local government budget, partly in association with FONAVI; and specialized programs designed by the central government. These sources totaled AR$2.4 billion in 2005, or 0.5 percent of GDP.

1.52 Since the mid-1970’s, FONAVI has been the main affordable housing program. In comparison, provincially-funded programs represented a small share of total public expenditure in housing. FONAVI resources consist of earmarked funds provided by the Gas and Fuels Tax, provincial matching funds, and - to a lesser extent - mortgage loan repayments ( Table 3.1). In 1999, the Federal Government and the Provinces signed a Federal Agreement (Compromiso Fiscal, Law 25235) that enabled provincial governments to divert FONAVI funds into current expenditures in case of fiscal difficulties.

Table 3.15.: Evolution of FONAVI Resources (AR$ million) 1999 2000 2001 2002 2003 Automatic budgetary 743 794 603 427 460 appropriations Repayments 221 230 205 203 251 Local contribution and other 279 243 228 258 545 incomes* Sub-total 1.243 1.267 1.036 888 1.258 Balance of 357 203 282 259 64 available funds TOTAL 1.600 1.470 1.318 1.147 1.194

Source: FO.NA.VI Audits. (*) Estimated Investment for FONAVI Completion Program I and II is AR$91 million and other resources, AR$454 million, including mortgage loans repayments and matching provincial funding..

1.53 During the 1980’s, public expenditures on social housing programs represented approximately 0.6 percent of GDP, 2.3 percent of total federal and provincial expenditures, and about 4.6 percent of total social public expenditure. In the 1990’s,

23 these ratios decreased steadily to 0.4 percent, 1.5 percent and 2.3 percent, respectively. More recently in 2004, the share of social housing programs in public expenditures have decreased to less than one percent.

1.54 From 2002 to 2004, actual expenditures on FONAVI fell short of the minimum level mandated by law - AR$900 million - and this law has been eliminated. Since 1994, a new group of federal housing programs (under the Federal Housing Plan) has returned public housing investment to its previous share of GDP - 0.47 percent - similar to the average share of the 1990’s.36 From 2004 to 2005, spending under the Federal Housing Program grew 69.2 percent at constant 2001 prices, and 86.8 percent at current prices.

Chart 3.1.: Expenditure on Housing and Urbanism in real terms. In AR$ million

EXPENDITURE ON HOUSING AND URBANISM IN REAL TERMS Millions of AR$ 2.500

Deflacted by Construction Cost Index

Deflacted by an average of CPI and WPI

0 1997 1998 1999 2000 2001 2002 2003 2004 2005

Source: Own based on MECON

Table 3.16.:Public Expenditure in Social Housing Programs by Federal Budget 2001-2005. Annual rate growth and Total Expenditure as percentage of GDP.

Housing Expenditure Annual Growth Total Housing Expenditure (as Rate (%) %) Year $000 $000 Current Constant Total Social GDP Current Constant 1/- Expenditure Expenditure 2000 904.784,1 1.409.504,7 - - 2,3 3,08 0,32 2001 691.332,9 1.088.915,1 (23,6) (22,7) 1,9 2,51 0,26

36 Executed amount was close to 13%.

24 2002 528.666,3 637.813,9 (23,5) (41,4) 1,4 1,78 0,17 2003 721.360,6 787.625,3 36,4 23,5 1,4 2,03 0,19 2004 1.138.861,6 1.138.861,6 57,9 44,6 1,9 2,69 0,25 2005(*) 2.127.300,0 1.926.752,4 86.8 69,2 3,1 n.a. 0,47 1/Expressed in constant terms using GDP deflactor (*) Budget Figure Source: Own estimates based on Ministry of Economy 1.55 While FONAVI had dominated public expenditures on housing historically, the investments related to the Federal Housing Program have superseded FONAVI resources. They include housing construction and improvement, and urban development (see Table 3.2).

Table 3.17.: Public Expenditure in Social Housing Programs – Federal Budget – In Millions of constant ARG $ 2004 1/ Programs 2000 2001 2002 2003 2004 Annual Growth (%) Millions of constant ARG $ 2004 2001 2002 2003 2004 Housing and Urban 1,401,6 1,060.5 617,2 755,1 1,030.2 (24,3) (41,8) 22,3 36.4 Development Titling and land 1,4 1,8 1,6 1,7 1,1 27,3 (8,2) .3,5 (34,4) Neighborhood - - - 20,6 93,8 - - - 354,3 Improvement 6,5 5,2 3,9 2,0 - (19,6) (25,2) (49,4) - Housing Improvement and Core Infrastructure - 21,4 15,0 8,2 13,8 - (29,9) (45,4) 68,2 Basic Social Resources 1,409,5 1,088.9 637,8 787,6 1.138,9 (22,7) (41,4) (23,5) 44,6 Total 1/ in constant terms using GDP deflactor Source: Own estimates based on MECON

1.56 Provincial budget contributions to housing have been very small and erratic. An analysis of the performance of the Federal Housing Program indicates that the resources available for the System from 1992 to December 2003 reached AR$13,000 millions. Out of this total, 63 percent corresponded to automatic (i.e. formula-driven) federal transferences to lower levels of government, less than 1 percent went to Federal programs, 17 percent came from cost recovery on investments, and 20 percent derived from other resources, such as provincial funding and mortgage loans. Direct investment in public construction works totaled AR$ 9.700 million, while AR$ 786 millions were spent on infrastructure. Operating expenses accounted for 12 percent.

Institutional arrangements

1.57 The Federal Housing System has four institutional pillars:

1.58 FONAVI. Created in 1970, FONAVI was initially funded by 5 percent of formal-sector wages.37 In 1992, the funding changed to a levy on the gasoline tax. The law initially guaranteed a minimum annual allocation of AR$900 million from the federal budget to FONAVI, which was reduced to AR$558 million in 2005. Although Central Government has responsibility for managing these funds in theory, automatic formula transfers channel the great bulk of funding for housing to provincial housing institutes

37 Similarly, a share of formal payroll funded the great bulk of national housing programs in Latin America at the time, including those of Venezuela, Mexico, Brazil, Bolivia, Jamaica and elsewhere.

25 (Institutos Provinciales de Viviendas (IPVs), which have total discretion on their use in practice (Libre Disponibilidad).

1.59 Law 24.464, enacted in 1995, established the formula leading to automatic allocation of FONAVI funds to provincial governments, and prohibited the central government from intervening in the design and conduct of housing policy, which is now entirely in the hands of provincial governments. The distribution formula was based on population, wealth, housing deficit, and performance of past transfers/loans, an incentive toward budgetary discipline. While the law specified a revision of the formula every other year, no adjustment has been made so far, leading to inconsistencies in the budget transfers. Provinces receive resources without taking into account existing needs. For example, the City of Buenos Aires received 1.28 percent of the 2003 FONAVI budget, while the sparsely-populated provinces of Neuquen or Santiago del Estero received respectively 4.37 and 4.22 percent.

1.60 IPVs (Institutos Provinciales de Vivienda). Each province and the City of Buenos Aires have Housing Institute. FONAVI funds the operation and investment of these IPVs from the National Budget under a Federal Plan for implementation. In turn, the FONAVI funds are used by the provinces mainly at their own discretion (Libre Disponibilidad) within two broad expenditure parameters: no more than 20 percent is to be used for infrastructure, and at least 45 percent is to be used for mortgage loans for construction, acquisition, or improvement of housing units. By law, IPVs use transfers as revolving loan funds, extending credit to households that then reimburse the IPV.

1.61 In many provinces, the IPVs also act independently of the Provincial Government. The City of Buenos Aires Institute, however, has set up a multi-year housing program, prepared in close coordination with the City Government. FONAVI funds only 10 percent of its budget, while the bulk of resource come from the City Government. The Buenos Aires Provincial government has also started to reform its housing program in order to improve performance and target resources to the poor. Overall, however, provincial housing institutes continue to finance housing construction with a low level of efficiency, and have little incentive to reform.

1.62 CONAVI (Consejo Nacional de la Vivienda). The National Housing Council consists of representatives of provincial governments and the capital as well as Federal representatives. Its functions are to: (a) oversee the Federal Housing System; (b) advise Federal, provincial, and municipal governments on housing questions; (c) assess housing needs and define objectives of the System; (d) coordinate implementation, and (e) determine the future allocation of the FONAVI budget based on indicators of efficiency in the allocation of funds and in the recovery of FONAVI loan arrears. CONAVI defines the eligibility and selection norms of the beneficiaries of this assistance. However, as CONAVI has no regulatory power to enact these parameters into law, Provinces largely ignore them.

1.63 Central Government Housing Unit. The Housing Policy Directorate within the Sub- secretary of Urban Development and Housing, in the Ministry of Planning, Public Investments and Services, is the main central agency nominally in charge of housing policy and programs in Argentina. It supervises the Federal Housing Program, audits FONAVI housing programs in each jurisdiction, and submits the audit results to the national legislature and to the National housing Council for inspection. As CONAVI,

26 this Directorate has no power to change or regulate provincial housing actions based on these audits.38

1.64 Thus, institutional mechanisms nominally exist for coordination of the housing sector – including CONAVI and the Central Government Housing Unit. However, these federal coordination mechanisms remain largely unused, and Provinces spend this federal funding with no accountability.

The FONAVI System

1.65 This fund has been the most important housing program since the mid-1970s39. The basic structure of the FONAVI system produces many of its positive and negative outcomes. In essence, the FONAVI system transfers federal government revenues from the gasoline tax to State Housing Institutes (IPVs). These IPVs use these resources to directly develop housing projects. The development process involves IPV assemblage of land and either building the project directly or contracting of a private construction firm to build the project. Households are selected by the IPVs often based on point systems, although no specific income limit exists. Once the project is built, IPVs then make individual loans for purchase of the units directly to the selected households. Property title is supposed to be delivered to households as part of this process.

1.66 The FONAVI system has a number of accomplishments. In particular, FONAVI has generated a substantial number of units over time – an average of 42,000 units per year during the 1990’s until the crisis. This production represented about one third of new demand - as indicated by new household formation of 135,000 per year. The FONAVI system has also supported the involvement of Provincial governments in housing.

1.67 The most critical flaws of the system also come from its overall design. The declared objective has been to assist those households unable to qualify for commercial mortgage loans for purchase of a new commercially-built unit, but who can afford to repay such loans on a subsidized basis. Thus, the program never intended to reach low- income households. At the same time, FONAVI was structured as a supply-side subsidy, granting loans to buy housing units built directly or indirectly by the Fund. In this context, the many drawbacks of the FONAVI system come as no surprise. In particular, the housing delivery system used by FONAVI involves government in direct development and finance of moderate/middle-income housing – a problematic role worldwide. This method - known as “turnkey development” - has produced similar problems in many other Latin American countries.

1.68 The construction process is very long40, generates high carrying cost, and makes project completion sensitive to unanticipated construction-cost increases and inflation. The cost of development and building a unit is often substantially higher that of private- sector commercial development. However, the average cost per unit has been

38 By decree 1.142, November 2003, the programs that used to belong to the jurisdiction of the Ministry of Social Development were transferred under dependency of the Sub- Secretary of Urban development and Housing. 39 Law Nª 19929 of 1972 created FO.NA.VI, and after several modifications it was replaced by Law Nº 21.581 in 1977. 40 The number of units under construction is regularly about 2.5 times as big as the number of finished units.

27 decreasing progressively in the last years in application of the recommendations proposed by the auditors and followed up by the Sub-Secretary of Urban Development and Housing.

1.69 The FONAVI program conveys heavy explicit and implicit subsidies:

 Financing is provided on highly concessional terms: repayment of loans involve between 21 and 26 years, fixed interest rates are well below market standards, between 0 percent and 6 percent depending of the type of program

 The loan recovery rate is very low: 36 percent on average.

 Altogether, these credit-related subsidies translate into a de-facto subvention level of 80 percent of the value of the house. This figure does not include the subsidies embedded in the provision of land at concessional prices to these projects by the local governments.

1.70 The beneficiaries of the system are not among the neediest households:

 No income ceiling is set. However, a minimum income is required in order to face the largely theoretical obligation of repayment.

 Although the majority of Provinces use a scoring system based on socio-economic criteria to qualify beneficiary households for the subsidy, lotteries and - allegedly - political interferences play a significant role in the selection of recipients

 The households actually served by the program have a median monthly income of AR$800 in 2004. Thus, they are moderate income rather than poor.

1.71 Government funds nearly the entire investment, instead of leveraging private-sector credit and household savings:

 In the principal programs, investment is totally financed with no down payment or matching funds of beneficiaries, thus reducing the incentive of households to repay and helping explain the low cost recovery rate.

 Attempts to raise market resources have been sporadic and marginal.

1.72 Starting in 2004, the Government decided to substantially reduce the FONAVI budget, and decrease its importance in Housing.. FONAVI is expected to receive AR$558 millions in 2005, down from a peak of almost AR$800 million in 2000, a figure that underscores its declining role.

Principles and Overview of New Federal Housing Programs

1.73 The Central Government is developing a new Federal Housing Program, aimed at reactivating housing provision by reaching low-income households, and by generating employment. The current administration has set a target for increasing housing production to 400,000 units per annum by the end of its term - an ambitious goal considering that average annual production ran at rates of 60,000 from 2003 to 2005. The strategy of the current administration, however, still concentrates on direct public

28 production largely of new housing units, both for low-income and moderate-income households. These features result in very high expenditure requirements.

1.74 The National Budget includes funding for a group of new federal housing initiatives to provide 400.000 housing units per annum mostly for low-income groups, in addition to the efforts of FONAVI.. These new federal programs are still in their initial phase of implementation. Federal policy has a number of basic objectives:

 Improve the household housing situation and living standard. Several programs for housing construction and improvements have been set up to deal with the above mentioned situation. These initiatives not only provide new units, but also support housing improvement and the provision of basic infrastructure.  Reactivate the housing and construction sectors. The role of housing and construction as powerful engines for economic growth and employment generation has made this sector a target for public investment. ( Chapter 1) Hence, improving housing conditions can also reactivate the construction sector, which was deeply affected by the recent economic crisis.

 Reduce unemployment. Direct employment generation is an important goal of these federal housing initiatives. To this end, many of them require contracting of smaller local construction companies, as well as other measures.

 Social inclusion. Another central goal is increasing equity and decreasing social conflicts.

1.75 Table 3.4 summarizes the new federal programs. The following sections examine first the low-income programs, then the middle-income programs, followed by an assessment.

Table 3.18.: Federal Programs for public housing and targeted income strata, 2005

Income Program41

Low Federal Program for Housing and Employment Emergency Federal Program of Housing Solidarity Urban Upgrading Federal program for Housing Construction and Improvement Federal plan for Housing Improvement, Mejor Vivir Program PROMEBA Housing Improvement and Basic Infrastructure Provision of Urban Services (PROPASA) Social Development in the Northwest and Northeast Provinces (PROSOPA) Subprogram for Urban Habitat Improvement in slums and informal settlements Program for the Recovery of flood affected areas Pro Rosario

41 The Subsecretary of Urban development and Housing has got at present under its dependency most of the programs that the National government develops in the scope of housing and Social infrastructure.

29 Low/Medium FONAVI Medium Completion FONAVI I and II Federal Program for Housing Construction I and II

Medium/High The government is analyzing what type of policy to be implemented for improving housing finance by leveraging private investment and household savings.

High Norms to facilitate real estate development

Source: Subsecretary of Urban Development and Housing The Program Arraigo, for land tenure regularization, under the scope of the Ministry of Social Development is not included in this list. New Federal Housing Programs for Low-Income Households

1.76 Three main housing programs target lower income households and seven other programs – including one subprogram - are directed at vulnerable groups and households living in slums (“villas“) and informal settlements. In addition, the Arraigo program, under the scope of the Ministry of Social Development, supports land-tenure regularization of the same target group. The following paragraphs describe the three main programs:

Table 3.19.: Public Housing Programs targeted to Low Income households42

Program Average Terms and Funding Vol. Of Targeted Action Monthly conditions Operation Population income Emergency AR$ 212 Cost per unit National 6.500 Indigent Housing AR$ 7.000 Budget units population construction To (utilizing and by AR$25.000 unemploym unemployed cooperatives 50 years, ent AR$12 to subsidies) AR$ 36,6 Subsidy to per month, cooperatives 0% interest AR$ 5,250 rate. for equipment Solidarity AR$ 212 Cost per unit National 18.700 High levels of Self And up. from AR$ Budget , units Unsatisfied -constructio 20,000 to nonrefundab Basic n and 37,000 le to needs, with assisted Subsidy provinces Jefas y jefes housing varies across Land and de Hogar provinces complement Social ary assístance works by Plan Provinces and

42 For 2005

30 Municipaliti es. Housing AR$ 212 Unitary cost: National 140.000 Low income Improvemen Improveme AR$ 385 AR$11,700 Budget, units living in t, expansion nt AR$ 547 to 25,700, Subprogram (20,800 deficient and and sanitary AR$15 in with units in overcrowded modules 300 months Municipaliti 2005) Housing. 0% interest es in the Beneficiaries rate Province of provide plot Buenos with Aires appropriate land tenure

1.77 Federal Program for Housing and Employment Emergency. Funded at AR$124 million, this effort targets poor households that benefit from the Jefes y Jefas de Hogar program. Essentially, this initiative finances families that have created cooperatives for housing construction. Each cooperative receives a subsidy of AR$20,000 per unit, of which AR$2,000 goes for infrastructure, for the construction of 4 units programs in 6 months. The program will finance 6,400 units. The beneficiaries will repay the cost in installments for 600 months or 50 years, at the rate of AR$34 per month. The program requires proof of land ownership. Demanding full legal title, however, could well limit the participation of many organizations as well as districts that lack public land to provide as local counterpart.

Table 3.20.:Federal Program for Housing and Employment Emergency

Province Housing Cooperatives Employment Investment Subsidy Units Direct Indirect in AR$ million ( AR$ million) Buenos 3.002 393 6.288 1.572 2.063 Aires Corrientes 110 13 208 52 2.200 68 Chaco 130 17 272 68 2.600 89 Entre Rios 400 50 800 200 8.000 262 Jujuy 1.204 246 3.936 984 24.080 1.291 Misiones 202 31 496 124 4.040 162 San Juan 910 114 1.824 456 18.200 598 Tierra del 16 2 32 8 512 10 Fuego Tucuman 420 57 912 228 8.400 299 Total 6.394 923 14.768 3.692 128.072 4.842

Source: Subsecretary of Urban development and Housing, 2005

1.78 Federal Program for Solidarity. This program, funded at AR$465.684 million, finances construction of projects of up to 50 housings units with infrastructure by local firms. No firm may receive more than 2 contracts. This program, which is planned for a total of 19,000 housing units, is restricted to urban areas with high poverty indices, most of them from the northeast and northwest regions of the country, and targets a limited number of Provinces, such as Catamarca, Corrientes, Chaco, Entre Ríos,

31 Formosa, Jujuy, Misiones, Salta y Tucumán. The Solidarity Program transfers 100 percent of the total funding through federal resources to provincial housing institutes, without a requirement for cost recovery. Provinces or municipalities must provide land and pay for complementary works. The program also provides public-works employment for “Jefas y jefes de Hogar”,43 and seeks to increase the participation of small and medium-sized construction firms in order to generate local employment.

Table 3.21.: Federal program for Solidarity: Housing Units Completed, July 2005

Province Housing Units

Total Finished In execution

Catamarca 2.000 750 1.250 Cordoba 160 61 99 Corrientes 2.040 946 1.094 Chaco 2.076 1.203 873 Chubut 499 31 468 Entre Rios 1.940 80 1.860 Formosa 2.000 240 1.760 Jujuy 2.186 313 1.873 Misiones 2.030 1.266 764 Rio Negro 30 0 30 Salta 2.025 337 1.688 San Juan 387 312 75 Tucumán 2.118 60 2.058 TOTAL 19.491 5.599 13.892

1.79 The two Federal Programs for Housing Construction and Housing Improvements are the most important new initiatives in implementation currently. They built or improved 70,000 housing units in 2005 - that is to say, 70 percent of total government housing production, more than double the production of the previous three years. The funds to be allocated for 2005 from the National Treasury to these two programs total AR$5,331 million. No clear requirement exists for cost recovery under these two programs, although the Federal Program determine that awarded households must start reimbursing the loan no later than two months after the reception of the housing unit.

43 The social program “jefas y Jefes de Hogar” grants a monthly subsidy to every family head that is unemployed, with children under 18 years.

32 Table 3.22.: Federal Program for Housing Construction and Improvements - Regional distribution of Funding set by the Framework Agreements (2004)44

Región Federal Federal Federal Federal Federal Federal Total Constructi Improvem Construction Improvem Construction Improvemen on Plan ent Plan Plan ent Plan Plan t Plan

Units Units AR$ million AR$ Percentage Percentage Units million of Deficit of Deficit

South 8,200 3,300 414 56.5 10.7% 3.9% 11,500 Patago nia North 5,800 4,820 231 64.93 6.% 4.5% 10,620 Patago nia Cuyo 12,000 10,610 360 106.1 9.3% 7.3% 22,610 NOA 15,000 22,510 450 225,1 11.6% 15.5% 37,510 NEA 13,000 26,000 390 260 10.1% 17.9% 39,.000 Center 18,000 20,410 540 109.6 13.9% 14.0% 38,410 Metrop 48,000 52.350 1,490 538.7 37.0% 37.0% 100,350 o-litan Total 120,000 140,000 3,.875 1,360.93 100% 100% 260,000 Countr y

Source: SSDUyV, Ministry of Federal Planning, Investment and Services ( 2004)

1.80 Federal Plan for Housing Improvement ( Mejor Vivir). This program targets low income households that have no access to other sources of credit for extension, sanitary improvement or other type of finishing of a sub-standard home. The improvements are contracted through small local firms to generate local employment.. The planned investment, AR$1,456 million for 2005, is intended to cover 140,000 deficient units. The unit cost will depend upon the location, varying from AR$11,700 to AR$25,700. The program was dimensioned based on the number of households countrywide belonging to the first and second income quintiles. Moreover, future modifications are to be made by CNV based on indicators of efficiency and the level of accomplishment

33 of the goals set by the Federal Program for FONAVI installment recovery (Programa Federal de Fortalecimiento y Optimizacion del Recupero de Cuotas de las Viviendas FONAVI).45

1.81 In addition, the government has created a specific subprogram of Mejor Vivir to reach the municipal governments of the province of Buenos Aires. The initial phase starting in 2005 is for 47,000 housing units amounting to an expenditure of AR$512.3 million. As the Subsecretary of Urban Development and INDEC have estimated that 1,647,000 households living in housing units would fit in this category, the pace of the program is to substantially increase. 46 (Table 3.9) Table 3.23.: Federal Plan for Housing Improvement “Mejor Vivir”

Area Housing UNITS Housing UNITS PERCENTAGE DEFICIENT In execution To be improved of Housing ( in thousand) Units ( in thousand) total Units housing units (in thousand) Supplied

Patagonia - 3.3 2,3 42 South Patagonia - 4.8 3,4 85 North Cuyo 1,23 10.6 7,5 191.5 NOA 3,78 22.5 16 438 NEA 10 26 18 506 Center 0,68 20.4 14,5 358 Metropolitan - 52.4 37,3 1.012 TOTAL 15,68 140 100 2.632

Source: Subsecretary of Urban Development and Housing and Deficit estimates 2001, SSUDH

1.82 Various other new efforts more modest in scope also target lower income households. Some deal with urbanization and housing upgrading in slums and informal settlements, basic infrastructure and social assistance. Others also target specific regions of the country or types of terrain or households, such as flood prone areas or rural households.

1.83 For example, the Neighborhood Improvement Program (PROMEBA ) of AR$92 million for 2005, which is co-financed by IDB, aims at providing or upgrading basic urban services such as water, electricity, natural gas, wastewater, public lighting, urban drainage, and urban environment services to deprived urban neighborhoods. Land titling regularization is included. Its objective is to improve the quality of life of the population having unsatisfied basic needs. The method involves concentrating a wide range of physical investments joined with selective social action in order to integrally

45 The objective of the Program for strengthening and optimizing the recovery of FONAVI payments is to provide mechanism to make the collecting of payments more efficient and improve collection for the plans already executed, for achieving, in 2004 , the duplication of the levels of collection corresponding to monthly FONAVI repayments. 46 Up to the present , housing units improvement already contracted amount to 15, 680 units..

34 consolidate a neighborhood.47 These investments are planned in conjunction with the community and made over a relatively short time (typically, 2-3 years).

Table 3.24.:PROMEBA Evolution of the Program up to July 2005

Number of projects Families/plots Contract amount executed Neighborhood ( Units) (Units) ARGAR$ Million Finished 49 14.118 AR$ 110.4

In execution 56 22.706 AR$ 294.7 Under Bid 40 12.539 AR$ 240 process Developing 32 8.731 AR$ 117.6 projects

TOTAL 177 58.094 AR$ 762.8

Source: PROMEBA, 2005

1.84 Housing programs for the poor living in flood-prone areas. In addition to the Central Government programs, a specific housing program was developed in the framework of Bank-financed projects. This program provides new housing units for the poorest households living in flood prone areas. The households contribute through self construction. Although modest in size with 11,000 units financed, this program has proved highly successful by minimizing the public cost, limited to construction materials, and providing high involvement of the households through labor. The construction phase helped develop new skills among unemployed and created community awareness. The methodology, developed in 12 provinces and recognized as best practice, could easily be expanded to slum improvement.

1.85 Other low-income housing programs of smaller scale. Various other programs of smaller scale are described in Annex 2.

47 PROMEBA projects are carried out in three stages: (i) the initial phase, the formulation, involves the diagnosis of the neighbourhood and a technical design of the solution; (ii) the second phase, the execution, includes physical works and social and technical support; and (iii) finally, the post-work comprises different levels of social and technical support to secure the sustainability of the project (social price lists, environmental management, communal organization). The corresponding land must be public and integrated into an urban plan, and must not be situated in areas facing critical environmental issues, or unusually expensive service connection.

The neighbourhood eligibility criteria include size of the community (50 families or more), population of the urban area (5000 inhabitants or more), unsatisfied basic needs (75 percent or more), and family incomes below the value of the first quintile of the provincial income distribution for 75 percent of the households. The beneficiary population must expressly accept the execution of the project, and organize a community association..

35 New Federal Programs for Moderate/Middle Income Households

1.86 Three new federal programs mostly target low-middle and middle income households, earning an average monthly income from AR$547 to AR$1300. They are: the Federal Program for Housing Construction, FONAVI and FONAVI Reactivation I and II.

1.87 Federal Program for Housing Construction. The program was established by a Framework Agreement among the National Government, the provincial governments and the Government of the City of Bs. As, at the Consejo Federal de la Vivienda. The objectives are to strengthen the process of economic reactivation of the housing sector, to satisfy the housing demand of new households and to improve their standard of living. The program counts on the use of National Budget resources for the construction of 120.000 housing units. In the first stage, 49.820 units will be finished.

1.88 In terms of regional distribution, substantial funding has been allocated to the Province of Buenos Aires, which concentrates about 40 percent of the housing deficit belonging to the first and second income quintiles. Funding also has been assigned to the Metropolitan Region (37 percent), followed by the Northwest (13 percent), the Northeast (14 percent), and the Center region of the country. This distribution will be revised every six months based on the regional distribution of the housing deficit and the housing management capacity of the provincial governments and provincial housing institutions. (Table 3.11). Table 3.25.: Housing Programs targeted to Low- Medium and Medium Income households, 2005.Variations across jurisdictions.

Program Average Terms and Funding Vol. of Targeted Action Monthly conditions Operation Population income AR$ 679 From National 120,000 Low- New Housing and up. AR$35,000 Budget 77%, housing middle and housing units Construc No limit to AR$ provincial units , middle tion established 75,900 budget 23% 50,000 in income 300 to 600 ( recently, 2005. households monthly utilizing demand for payments FONAVI housing 0- 6% funding) interest Provinces rate. provide land and complementar y woks.

36 FONAVI AR$ 679 From FONAVI Average Low- New * AR$ 835 AR$ 5,000 automatic 38,000 middle and housing units, and up to transferences housing middle housing Decentraliz AR$ 48%, units and income solutions ed 91,500** repayments 6.000 households ( 80%) out From AR$ 20%, and housing demand for of which 369 other solutions** housing 5% are resources * loans. Infrastruct 32% ure and social equipment (20%) Reactivat AR$ 679 AR$ National 23,200 Low- New ion of AR$ 835 35,000 to Budget 30% housing middle and housing units FONAVI and up 70,000 and 50%, units middle (90%) Decentraliz Subsidies, nonrefundabl income Housing ed amortizatio e, matching households solutions From AR$ n and grants in demand for (10%) 369 interest addition to housing rates varied FONAVI- between provincial provinces funding.

*AR$5,000 corresponds to the less expensive finished housing unit of two bedrooms adjudicated in 2003 in the province of Salta and AR$ 91,500 to the more expensive two bedroom housing unit adjudicated in 2003 in Tierra del Fuego. **Based on data from FONAVI Audit 2001- 2003. +++ Average estimated for 1991-2001.

1.89 Completion I and II. The two programs intend to finish projects now part way through construction that have been funded by FONAVI and executed by IPVs. This initiative has received granting funding of AR$375 million from the National Government. This contribution amounts to 30 percent of the certificates in the first program Completion I and 50 percent in the second program. The objectives are to reactivate the unfinished works, promote the full affectation of FONAVI resources on housing, contribute to employment creation, and improve recovery of arrears.

1.90 In addition to the Federal Program for Housing Construction, dated July 2004, which intends to supply 120,000 housing units through spending AR$3,875 million, the Central Government has announced new programs48 included in a multi-year plan for Housing Construction II, aimed at building 300,000 new housing units for a total of AR$17 billion. The main objective is to provide finished housing units through construction companies hired by public bidding and carried out by the Provincial Housing Institutes. In most of the provinces, targeted families are selected by Municipalities.

1.91 Upgrading of Residential Infrastructure in Urban Slums: Important infrastructure deficiencies typically afflict irregular unplanned neighborhoods—“villas miserias” and “asentamientos irregulares”— 25 percent of the urban population live in neighborhoods without paved streets, sidewalks, drainage or sewerage networks. These needs are gradually being met, but not necessarily at the required scale. Municipalities are responsible for maintenance and repair of local infrastructure, and the federal

48 Newspaper Clarin dated September, 2004. No information mentioned on the objectives.

37 government attends to the urban infrastructure improvement. The investment required to meet the needs for urban infrastructure improvement is estimated at AR$10 billion. This is 15 times the amount that the Central Government allocates to the housing sector every year. At present, no allocation has been contemplated in the national infrastructure plan to meet these needs. Thus, the sheer size of the required investment presents an enormous financial and planning challenge that remains largely unaddressed by federal government.

Assessment of New Federal Housing Initiatives in context of FONAVI experience

1.92 The new federal housing programs aim at correcting the deficiencies of FONAVI and at ramping up production to meet demand. Although implementation is still incipient, these new initiatives appear to make some important advances. Foremost, they seek to focus much more on providing targeting low-income households and increase somewhat support of low-cost housing solutions as opposed to new units for purchase – the highest cost housing solution.

1.93 These new low-income programs also engage intermediary organizations (NGOs, cooperatives, municipalities etc.) to organize poor households into groups, and to assist these groups in the production of a housing solution and improvement of their neighborhoods. International experience shows that these characteristics are crucial elements necessary for effective low-income housing programs.

1.94 Provincial governments have key influence over the most important aspect of low- income housing – serviced urban land. Thus, IPVs and other local agencies appropriately play a central role in implementation of many low-income housing efforts, particularly neighborhood upgrading.

1.95 However, some crucial aspects of the FONAVI housing delivery system remain largely unchanged, deeply flawed, and risk repeating past problems. The following briefly discusses these difficulties as a prelude to more extensive analysis with options for reform in the final chapter of this report – Chapter 6. In addition, annex 3 provides figures of FONAVI performances over the period 1999-2003, which have been issued from the annual audit reports.

1.96 Lack of strong federal leadership. The Government Housing Unit begins to draw a national strategy through the new federal programs. In general, however, IPVs, Provinces, and other public and private organizations involved in the sector have little incentives to follow the lead of this federal entity. International experience (see Box on Mexico) demonstrates the crucial importance of strong federal leadership to advance in the housing sector. This leadership best takes the form of the committed support of the President, strong federal institutional mechanisms for influence, written agreements on specific matters, and an official national housing policy that communicates a clear and transparent vision for the sector. In other countries, such leadership involves not only other levels of government and different housing agencies, but also private- sector leaders engaged in various aspects of housing.

1.97 Government continues to develop and finance moderate/middle-income housing directly. International experience strongly demonstrates that private home lenders and developers serve moderate/middle-income households much better than government agencies under well structured programs. In Latin America, direct demand subsidy

38 (DDS) programs developed as a response to the failures of turnkey production, and now represent the main mechanism for private-sector finance and development of low/moderate-income housing in many countries. If properly designed and funded, DDS programs result in lower cost, greater scale, better quality, improved income targeting, and – overall – a much improved fit between supply (type, quality, location of unit) and demand (preferences of households). A large body of experience with these DDS programs has made clear the essential elements for good design and operation, which are listed in Annex 4.

1.98 For many reasons, Argentina would best be served by consolidating its programs for development of new units for moderate/middle-income families into a nationwide direct-demand subsidy program, as discussed further in Chapter 6.

1.99 Housing subsidies largely fail to leverage private credit and household savings. Historically, the fundamental developmental purpose of housing subsidies has been to stimulate market-rate credit and household savings. Such leverage constitutes a central reason for and mechanism of DDS programs in Latin America. However, the new federal housing programs of Argentina show little promise for making progress in leveraging other sources of finance in Argentina, and correcting this failure of FONAVI.

1.100 Such financial leverage is as important for low-income households as for moderate/middle-income families. Low-income families, in effect, build their homes and, thus, the bulk of the built environment of most cities funded mainly by their own savings. Accessing small private market-rate credit can play a vital role in this progressive housing process and in incremental infrastructure extension. Guidance in construction should also support this process. Program experience in other Latin American countries discussed in Chapters 5 and 6 shows how this can be done on a large scale. The next chapter (Chapter Three) analyzes the most critical bottleneck to low-income housing: urban land.

39 4. ACCESS TO LAND AND LAND MARKETS

1.101 This chapter examines land market activity, as well as State regulation, urban policies, property titles registration, and the tax policy for urban land. The specific objective is to support the development of land policy for the low-income population.

1.102 Urban land, which plays a fundamental role in housing construction and other urban services and equipment49, is not dealt with in adequate depth, either by public policy level or in academia. In particular, urban land presents a crucial bottleneck for low- income housing. However, lack of data and understanding of this area make defining policy a challenge.

1.103 This analysis of the land market is based on information on the Buenos Aires Metropolitan Area – BAMA – and city of Buenos Aires . No information could be gathered on the cities of the interior. Supply and prices figures came from advertisements major newspapers and real-estate sales firms.

The historical process of incorporation and commercialization of urban land

1.104 In the first decades of the 20th century, , the process of transfer of rural to urban land 50 took on greater importance and set the framework for the present situation51. Inadequate public regulations has allowed private agents to incorporate land to suit their own needs, creating leapfrog development that has left many vacant and under-utilized parcels, sometimes in the form of unsold subdivisions52.

1.105 At the end of the 1930’s and more intensely as of 1947, BAMA began a period of rapid expansion that continued until 1960, when it started to slow down53; Subdivisions occurred for high, medium, low and very low-income groups, The location, lot size, infrastructure, and other features of these subdivisions varied to suit these different submarkets. The urbanized surface of Greater Buenos Aires, which in 1918 was half the area of Buenos Aires City, was 8 times larger in 1918. Between 1958 and 1967, an average of 14,000 hectares was subdivided each year. A fall in demand in the 1970’s joined with inappropriate government policy54, lead to a decrease in the production of serviced lots for middle and low-income.

49 As well as in other urban uses of land, such as industry, business and recreation. 50 Such a process implies longer periods of time for the approval by provincial authorities; municipalities had little autonomy on the subdivision of land until the end of last century, and in some provinces even up to now, therefore the local governments only “visa” the subdivisions that have been approved at a higher administrative level. 51 It is similar throughout the country, but with some peculiarities as far as the dynamics of each area – and therefore the historical moments of greater incorporation of land to the city - , the size of cities, the structure of private property in the rural area where cities are inserted and developed and fiscal property. 52 In Argentina there has not been any legislation to limit or restrict the urban division of rural land. Neither the Instituto Nacional de Tecnología Agropecuaria – INTA – nor the Ministry of Agriculture have any intervention in that process. 53 The population, according to census data, was 4.6 million inhabitants in 1947, 6.7 million in1960, 8.3 million in 1983, a little over 9 million in 1980’s and more than 11 million in 2001. 54 El Decreto-Ley Nº 8912/77, que prohibe loteos sin infraestructura, como se muestra en el párrafo 121

40 1.106 In contrast, land development for the upper middle class has increased steadily. In the 1930’s the first country club55 appeared in BAMA. This type of upper-income development peaked around 1970 and in the 1990’s, together with gated communities and private cities.

1.107 Until the end of the 1970’s, real estate agents extended credit for land purchase - both for the low-income sectors (with credits of up to 150 fixed monthly installments) - and for medium-income sectors –(where these agents offered credits on shorter terms, only 1 to 3 years).

1.108 The financing of basic urban infrastructure (water supply, sewers and drainage; road network, electricity), as well as collective equipment (especially health, education and recreation) lay mainly in the hands of the national State until the 1990’s, when the federal government started concessioning public services to private companies, and decentralized health and education to provincial and local governments.

Land markets at present

1.109 Extreme segmentation and discontinuity of submarkets. The land market in BAMA is conditioned by its history56 as well as by current dynamics.. Most fundamental, land markets are highly segmented. The price and process of land development and sale for high, medium and low-income housing function in almost complete isolation, as “niches” or “islands” that rarely meet.

1.110 In the 1990’s, and until the end of 2001 – when the crisis broke out - the most active submarkets were those aimed at medium income sectors. Lot prices represented a modest share of the total price of a two or three-room houses financed with long-term credit. Land for high-income households consisted of two products: (a) exclusive lots for building high-rise towers with infrastructure in the city of Buenos Aires, and (b) parcels for large exclusive development such as country clubs/marinas, private neighborhoods and, more recently, farms and private cities.

1.111 One of the consequences of the 2001 crisis was the virtual disappearance of credit for middle-income sectors and, hence, a fall in the demand for lots.. When the 2003 recovery began, demand was almost exclusively for large pieces of land, aimed at upper-middle and high-income households, which were the only segments with the financial capacity to access a house, either through a mortgage loan or savings. The housing submarkets for medium and low medium-income sectors are recovering at a slower pace.

1.112 Land demand in the Buenos Aires Metropolitan Region -BAMA-.Table 4.1 shows the land supplied by area and type of lot. The districts with greatest supply are: San Isidro, Pilar and Escobar in the North and Florencio Varela and Alte. Brown in the South, for lots in urban areas (dgSIG, 2005 b).

55 Country clubs are closed residential developments, where security, urban infrastructure and amenities are shared among owners. 56 In many cases, there is no information about the owners of the land owing to lack of sales records.

41 Table 4.26.:BAMA. Distribution of land offered and Surface by zone, June 2005

Zones Quantity M2 M2 average Buenos Aires City 1.347 730.534 542,3 Greater Buenos Aires 1.174 2.502.811 2.131,9 Rest Metropolitan Region 283 931.668 3.292,1 Exclusive Urban land 572 903.647 1.579,8 Total 3.376 5.068.660 1.501,4 Source: dgSIG, 2005 b

1.113 Land Supply in the City of Buenos Aires. After the 2001 crisis, the recovery of the land market began in 2003, and intensified in 2004, with purchase offers increasing by 74 percent in that year and continued momentum in 2005. Land market activity was concentrated in the southern neighborhoods of the city, an upper middle-income area. There is a limited supply of land lots for high-income housing and the great demand for them entails an almost immediate transaction57.

1.114 Large development companies now own substantial land reserves. One of the largest developers, for example, owns land in Puerto Madero, Pilar (74 Has.); in Benavídez (100 Has.), in Santa María del Plata (ex Sports City at Boca); in Monserrat and also in the South of BAMA (Centro de Estudios para el Desarrollo Económico Metropolitano, ciudad de Buenos Aires CEDEM, 2004 and 2005).

1.115 Virtually non-existent legal submarket for low-income population. The formal submarket for sales of individual lots in monthly installments to low-income households was important from 1950 to 1970. Now, however, it is practically paralyzed. Indexation58 in the 1980’s put an end to these sales. Increases in taxes and fees for urban services led to other problems59. Private credit provided by the land developers themselves, disappeared at the beginning of the 1980’s and was only re- established later in that decade (but with shorter terms than the former 150 monthly installments). These purchase-money developer loans disappeared again in 1989 in the period of hyperinflation. In the 1990’s, with financial stability, land credit did not resume. Partly as a result, many subdvisions remain unsold and show no signs of being sold, such as the opening of streets.60 Therefore, an important quantity of subdivided vacant land exists that could help expand supply for low-income households.

57 Many projects for high-income sectors had been paralyzed by the 2001 crisis and have been reactivated in the last few years, but those developers already owned the land. 58 A product of the high-inflation periods. Although lots were sold at a “fixed price”, the Central Bank, through the Circular Letter Nº1050, permitted the application of the inflationary index to prices (to index prices), during the military government (1976-1983). The Circular Letter Nº 1050 was cancelled in 1984. 59 Two impacts: early sale of land by families of low income, or lands remaining unoccupied for long periods. 60 The phenomenon is so important that in the photo readings of 1992, many blocks could not be recorded, in relation with those existing in the Property Registry of the Province of Buenos Aires in 1973 (Clichevsky, 2002 a)

42 1.116 The informal land market. Even at the beginning of the 1980’s, illegality had assumed a multiplicity of forms: historical slums, sale of land in undivided rural lots, clandestine or irregular divisions - many of them in places unfit for residence (flood-prone, environmentally unsound such as proximity of garbage dumps, etc.), boarding houses, and – most recently - squatting in warehouses and houses.

1.117 Although no accurate data document these many types of informal land development, some anecdotal evidence exists. The 2001 Census for BAMA districts (outside Bs.As. city) identified 600,000 people living in slums and settlements (4.3 percent of population), i.e. a slight decrease as compared with the 1991 Census. Other official sources report larger figures, given the underestimates typical of the latest census and the worsening of living conditions after the 2001 crisis (Cravino, 2005). In Bs.As. City, around 130,000 people live in slums and settlements, in addition to other informal habitats, such as warehouses and houses taken by squatters and tenements, etc., which house another300,000 people.

1.118 The large quantity of vacant land in BAMA is fundamental for housing policy and projects of both the public and private sectors. The first step consists of understanding the legal status of vacant lots. Some parcels may be developed in a straightforward way, through incentive mechanisms to place them in the market. Others have complex ownership problems that are difficult to solve in the short term. Clarifying the legal status of these parcels represents a pre-requisite for other action to stimulate their use. In the districts farther from BAMA, most of the land consists of partially-occupied divisions, i.e. with dispersed empty lots, as shown on Table 2.

1.119 Although lot production decreased between 1994 and 2004 (see Table 4.2), the quantity of vacant land is still significant. Typically, the vacant lots in subdivisions aimed at the low and medium-income market, have around 300 m2; the lots for “casas-quintas” or week-end houses on an individual lot – a common typology until the 1970’s – have up to 2000 m2. Most of the vacant land lacks infrastructure of any kind for a variety of reasons. Services were optional at the time of the subdivision of many of these parcels. A large share is also located in areas that get flooded by heavy rain or by the overflow of rivers and streams in the different BAMA basins. Because of insufficient sewerage systems, rain drains are used as open gutters which, together with clandestine garbage dumps, cause great environmental pollution.

Table 4.27.: BAMA. Vacant land in 1994 and 2004, in representative districts

1994 2004 Districts Nº of vacant lots % of vacant lots Nº of vacant lots % of vacant lots Florencio 76.087 76,6% 37.403 36,2% Varela Pilar 89.082 80,6 65.920 50 % Moreno 108.623 73,7 63.731 41%, Source: Own elaboration based on Clichevsky, 2002 and UGEIF, 2004

43 1.120 Public land. Although it is impossible to accurately determine the quantity of vacant public land, since government organisms conceal the extent of their assets in land, it has enormous potential. Most public land in BAMA districts belongs to the national government, the Army, the ex Argentine Railway Company, the province of Buenos Aires and the municipalities. From 1990, the new law on fiscal land, as part of the State reform Law (Ley de Reforma del estado y Emergencia Económica) opened the possibility of sale of public land. Thus, the Government sold large pieces of land to the private sector61 . In Puerto Madero, the development provided 170 new Ha to Buenos Aires city. Another large project in Buenos Aires city that has not yet been implemented is located in Retiro. This project would induce new and important territorial modifications in the very center of Buenos Aires, because it has a surface of 93 Has. Also, the Instituto Municicpal de la Vivienda in Buenos Aires city owns around 500 Ha of land in BAMA municipalities. On the other hand, there is no accurate information yet on the land owned by the Organismo Nacional de Administración de Bienes – ONABE –the effect its sale could have on the market, or what social sectors it could be directed to.

Land prices

1.121 At the end of the 1990’s, land was scarce in Buenos Aires city and prices were quite high, even for development companies.62 At that time developers were looking for lots for multifamily, small-size buildings, aimed at medium sectors that could access housing credits from private banks.

1.122 The dynamics of recent land prices in the city of Buenos Aires city63. The 2001-2005 variation of prices per m2 of the different zones in the City show that the city center recorded the greatest increase (78.3 percent) as a consequence of the revaluation of the area after the 2001 crisis, when values dropped (owing to the quantity of office buildings available, not to the housing market). In the South and West zones, the increase is slightly lower than that for the city as a whole64. Table 4.4 shows the distribution, according to size and number of offers for June 2005. It may be observed that most offers and the highest prices per m2 occur in land ranging between 201 and 500 m2. Prices per m2 range extremely - between USD 35 and USD 8,666.7, as the Table shows65. These data evidence a dramatic difference by submarket. The existing information, however, does not allow linking land price data to a specific subdivision..

1.123 The highest prices are in Retiro, Recoleta and Puerto Madero, whilst the lowest are in the South of the city (CoPUA, 2004). Map 1 shows ground prices by neighborhood, in the city, for 2005.

61 The privatization of services and more rationality in the utilization of land stalled the process for a large part of land while some lots were sold for investments. 62 For apartments aimed at medium-income sectors, the incidence should be between 120 and 130 dollars/m2, according to real estate agents. 63 Dynamics for land prices are related to real state dynamics, even at country level, while the increases registered during the first and second quarter of 2004 in relation to the quarters 2003, were 34% and 23% (UADE 2004). During the second quarter 2005, the level of activity increased by 13.2% in relation to the same period for the previous year. Such growth rate was higher than 3.4% the rate registered on the first quarter of 2005, compared to the same quarter of the previous year (UADE, 2005). 64 Source : dgSIG, 2005 a 65 Source : dgSIG, 2005 a

44 45 Table 4.28.:City of Buenos Aires. Average land price by m2, 2001-2005

Price Price Annual Annual Annual of of Exchange Year variation variation Variation land land Rate USD (%) (%) (%) (USD) (AR$) 2001 December 555 555 1.00 2002 March 272 652 2.53 June 213 809 3.74 47.8 September 242 897 3.68 -1.6 December 274 -50.6 969 74.6 3.53 253.0 2003 March 294 8.1 933 43.1 3.11 22.7 June 330 54.7 927 14.6 2.81 -24.9 September 342 41.3 1015 13.2 .97 -19.3 December 388 41.6 1153 19.0 2.97 -15.9 2004 March 434 47.6 1269 36.0 2.93 -5.6 June 459 45.7 1351 45.7 2.94 45.7 September 511 49.3 1538 51.6 3.01 1.3 December 534 37.6 1577 36.8 2.96 -0.3 2005 March 551 26.9 1628 28.3 2.96 1.0 June 591 28.8 1716 27.0 2.90 -1.4 Source: Own elaboration based on dgSIG, 2005 a.

Table 4.29.:Buenos Aires City. Distribution of lots offered, sizes and prices by m2, June 2005 Average Price Maximum Price Minimum Price (USD) Quantity of m2 offered (USD) (USD) offers

66-200 253 663.8 5555.6 92.5

201-500 773 556.5 8666.7 55.7 501-750 154 559.9 3231.0 67.3 751-1000 64 579.0 2777.8 72.9 Over 1000 103 664.5 5372.9 35.0 Total 1347 591.0 8666.7 35.0 Source: dgSIG, 2005 a

1.124 The dynamics of land prices in BAMA. In BAMA, the recovery of post-crisis prices has also been important. The June 2005 data show a 32.9 percent increase in land prices with respect to the previous year, excluding high-end urban development, which

46 increased only 1.7 percent. Due to an highly spread urban area, prices vary enormously. The highest average price is in the Vicente López district, North, at USD366/m2. The lowest is in the peripheral districts South of BAMA: Cañuelas, San Vicente and Coronel Brandsen, with an average of USD8/m2, which are mainly low-income areas. In all the districts of BAMA, there are wealthy pockets within poor areas and poverty pockets within wealthy areas. The La Cava slum, in San Isidro, is evidence of that. Map 2 shows the prices in the BAMA.

1.125 In 2000 and 2001, a legal urban lot without services of 200 or 300 m2 at intermediate distance from central Buenos Aires, cost between USD2,500 and USD3,500 (approx.USD12.50/m2). At a greater distant, it could fall to USD 8/m2. Even at this lower price, however, many low-income households can afford neither the downpayment nor the monthly installments necessary to buy, and lots remain unsold for years.

1.126 The informal land market for the poor. Since the 1980’s, the provincial government of Buenos Aires, by Law 8912, has prohibited the legal development of urban land without infrastructure. This restriction and a fall in real incomes of the poor have spurred the growth of informal land markets, especially in Greater Buenos Aires. The market value of a 150 m2 lot in an unserviced informal subdivision of rural land between the second and third BAMA rings was approximately USD1,200 in 1999 66 – that is, USD8/m2, which is similar to that of legal lots. In comparison, a room in a hotel may reach AR$300 (USD100). The minimum rent in Buenos Aires’ slums 67 is AR$60 (USD20) for a small room and shared bathroom, while the maximum price is AR$180 (USD60) for a room with private bathroom and separate kitchen68.

1.127 Response from NGOs. Various NGO initiatives have addressed the poor’s access to land. The Madre Tierra Foundation, for example, has purchased land – through grants from various international entities – in 6 municipalities of BAMA, subdivided it, extended infrastructure and sold it to very low-income households at affordable rates. For example, more than 300 lots are now being sold in Moreno, at monthly installments of AR$40 (a little more than USD13) for 10 years at fixed rates. In total, the Madre Tierra Foundation has made available 2,558 lots (including those currently planned).

66 A household income that covers the basic needs -- family basic basket-- in 1999, is US490. 32.4% of the population that live in the BAMA are below that value. 67 In a neighborhood in the urban area, around 35 Km from downtown, some rooms are rented for AR$30 (USD10) 68 Cravino, 2005.

47 Land-development industry structure and trade associations

1.128 In the 1990’s, the structure of the construction sector, in general, and residential land markets, in particular, changed. As in other sectors of the economy, construction and land development became more concentrated industries, with fewer but larger firms.

1.129 Developers main trade association is the Argentine Real Estate Chamber (Cámara Inmobiliaria Argentina). They are also grouped according to their specialization in various submarkets, such as those acting in the exclusive urban areas (country clubs, gated communities, private cities), etc.

Urban Planning and land regulation: legislation and flexibilization

1.130 Planning and regulation of the urban land market69 has a long history. However, the rules are seldom implemented. In contrast, the agents of the real estate sector, especially the most important, exercise great influence on land use. They have managed to cancel existing legislation, obtain a large number of exceptions, and prevent the implementation of some rules.

1.131 According to Province of Buenos Aires’ Constitution70, the provincial level sets the overall rules for land use.71

1.132 Subdivision regulations. The example of the Province of Buenos Aires is important, since much of provincial legislation has been elaborated on this model 72., The Decree- Law Nº 8912 on land use was approved in 1977, with the following requirements: subdivision in lots requires basic infrastructure73 – waterworks, sewerage and rain drains, road paving, electric networks; an urban lot needs to be at least 300 m2; and the municipalities need to identify for each area their specific use. In effect, these requirements price low-income households out of legal land markets into the informal sector

69 Because it is a federal country, it belongs to the province and municipalities to regulate the use of urban land 70 It was modified in 1994, but has not given autonomy to the municipalities in the use of land. 71 The institution that has traditionally dealt with it is the Dirección de Ordenamiento Urbano y Territorial, which reports to the Subsecretaría de Urbanismo y Vivienda within the Ministerio de Infraestructura, Vivienda y Servicios Públicos. In 1968, the Province elaborated principles directed to the local governments to determine “preventive zoning”, a kind of simplified urban plan. It was only in 1977 that the Decree-Law Nº 8912 defined the guidelines and terms for the municipalities to elaborate and implement urban plans, based on the simplified ones. Thus, most of the BAMA municipalities had approved their urban plans between 1978 and 1982,, and some of them have even revised them a few years ago.

In Buenos Aires city, the 1977 Planning Code is the first instrument with which the city regulates land production and land use, which is independent from the Building Code dating from 1944 and modified many times. As it would restrict high-rise constructions, exceptions have been numerous, since its approval until 1992 (over 700), until they were forbidden. As of the first autonomous government in 1996, the city began to outline the bases of its Environmental Urban Plan (PUA/EUP), whose project was completed in 2000, and still awaits approval of the legislative power. This project establishes, for the first time, besides the directions for the use and occupation of the land, some instruments for land management, such as a land bank and the possibility to use real estate tax to capture valuation through public investment or the modification of norms. 72 Or they even used the legislation without elaborating a specific one for their reality. 73 From the technical point of view, legislation is an advancement on the few former regulations. It is undoubtedly better that the land should have infrastructure, provided the population can pay for it.

48 1.133 In the context of land commercialization, the federal government enacted Law Nº 14005 of 1950, partially modified in 1984, to establish norms for the sale of lots in monthly installments; it specifies that the property to be sold have no ownership problems and provides for the registration of the purchase agreements in the relevant provincial entities, so as to ensure that the purchaser’s land shall not be the object of a new sale on the part of the commercial firms, as had often been the case up to then.74

1.134 The response to informality: regularization policies. The most important programs at the national level are: Arraigo (National Commission of Fiscal Land), for ownership regularization, and the Neighborhood Improvement Program – PROMEBA - , for urban environmental improvement and social development, through community action. The Arraigo Program regularizes occupied public land. The process – which involves a declaration that the property is surplus for the government or agency in question - is often complex and long, sometimes taking 10 years. The Program started in 1990, in the legal context of the Economic Emergency Law, with the aim of regularizing around 600,000 people in the country and, it is estimated that at the end of 2004 it had regularized around 350,000 people. The program faces many issues, such as frequent change of the staff of the public entities that own surplus land, lack of resources, etc., so it operates at a low pace. At present it is managed under the Ministry of Social Development.

1.135 PROMEBA is a national Program of USD300 million, 60 percent of which comes from a loan from the Inter-American Development Bank –IDB. It was approved in 1997 and the operation is due to end in 2006. While the main objective is slum upgrading, land regularization is also sought, and is part of provincial or local responsibility, depending on the province. Until the end of 2004, 188 projects had been developed (82 of which are still being designed) involving 60,067 families. The municipality of Rosario is carrying out a similar program ( ROSARIO HABITAT Program), also partially financed by an IDB project of USD71.7 million, which started in 2001 and has reached 3,575 families.

1.136 Regularization of occupied public land. As occupation usually targets government land, private land regularization is of less importance than regularization of public land. Various instruments have been used, depending on the stakeholders 75 that took the initiative, including: expropriation laws; direct purchase from owners with the State as intermediary; purchase from owners by the national government for subsequent sale to the occupants76; and - in the case of municipal land - through ordinances and other instruments (Cravino,2005).

Urban land titles and records

1.137 A wide range of intermediate rights to property exist between full legal title (with a registered property title) and illegal occupation. For example, in the Municipality of Moreno, the main forms of rights to property include a certificate (title deed), a registered purchase agreement, possession, a payment notebook (for the lots bought in installments), and an unregistered real-estate purchase agreement.

74 Clichevsky, 2001 b. 75 Is linked to the diagram of options of the state or social organizations. 76 The Conurbano Fund bought land for settlements on the Great Buenos Aires

49 1.138 Land rights resulting from possession have particular relevance for many low-income households. The population may obtain ownership through usucapión, - that is, peaceful occupation for 20 years, which has been reduced to 10 for cases incorporated into Law 24374/94. This process provides for an intermediate title deed. It was largely designed to regularize those cases where that started with a legal purchase-sale agreement, but subsequently lapsed into informality - after the death of the original owner, owing to the lack of heirs, or because the owner is unknown77, etc. As this law is national, provinces must also approve it for application within their jurisdiction. Most of provinces have taken this step, which enables regularization of ownership of numerous lots78. In the Province of Buenos Aires, around 160,000 lots are to be regularized, but deeds have not yet been granted (and it has been 11 years since passage of the Law) owing to frequent lack of the necessary documents.

1.139 Registry of purchase agreements. According to Law 14005/50, “purchase agreements” (boletos de compra-venta) have to be registered, so as to ensure the security of the transaction for the buyer. In practice, registration was rarely done, producing numerous complexities, including: long periods since the original purchase agreement (in some cases, decades) with some buyers never occupying the lot. With so many cases of unknown ownership, the above mentioned Law 24374/94, aimed at formalizing de-facto ownership based on peaceful possession, was approved at the national level.

1.140 The public deed grants full security of ownership. The system of property registration – where deeds are recorded through a public notary – is provincial in Argentina. Only the Autonomous City of Buenos Aires has a national registry (because it has not been decentralized yet). The basic norm for administrative proceedings at the Real Estate Property Registry is included in the Civil Code, the Civil Procedure Code and the Commercial Code of the Nation, as well as the specific legislation governing the matriculation of property. The period of registration, once the deed is submitted, is around 30 days. There is a complex relationship between the Property Registry and the cadastre, which complicates their operation. In the Province of Buenos Aires they both report to the Ministry of Economy, but in Buenos Aires city the Property Registry is within national authority, whilst the cadastre is under city authority.

1.141 Cost of Deed Registration. On sale of a lot through agreement or pay-notebook, the developer usually stipulates, in a compulsory clause, that the deed should be signed at a specific public notary’s office. Even if the buyer consents, the deed is often held up by the high cost of the registry process, which typically ranges at about 1 percent of the property value. A full cost would range from US$400 to US$700 with the titling expenses. Most buyers of lots in installments, in the 1950’s and 1960’s, have not signed their deeds (even though they could do so after 25 percent of the installments were paid up) owing to lack of funds for the relevant documents.

1.142 Some provinces have granted deeds at no cost for public land sales, or for ownership regularization. In the Province of Buenos Aires, if the deed is signed according to Law Nº 10830, through the Government’s General Notary Office, there is no cost.

77 Clichevsky, 2000; Carballo, 2002. 78 It is unknown how many properties can be registered based on this law (there are many numbers, up to two million lots.

50 Property tax policy

1.143 Property is taxed in various ways79, contributions and rates; the direct tax on urban land is, since 1860, the real estate tax; the contributions are for improvements and rates correspond to a special service. e.g. for public street-lighting and cleaning of public places. According to the Federal régime, tax policy is established provincially and municipally. It is for the provinces to collect direct taxes, such as the real estate tax, (in the last few years, some have delegated collection to the municipalities); the municipalities collect rates for services of street-lighting, cleaning, conservation and enhancement of public places.

1.144 The real estate tax applies to improved property80 (for built-on lots, the tax is broken down as land tax and building tax), with rates based on the type of construction, condition and age of building81. The valuation of land and constructions is not updated to market prices and the different rates for improvements and land remain unapplied. The level of tax recovery in most municipalities is very low – often around 30 percent. Fines for non payment are low and, in general, “whitewash” policies allow payment in installment plans and other negotiations with debtors.. Differential amounts between vacant and built-on lots are insufficient to influence an owner’s decision on building or selling. Partly as a result, vacant and under-utilized land has grown rapidly in Argentine cities for over 30 years. These gaps make infrastructure and transport costs more expensive and distorts the land market through land retention82.

1.145 Real estate tax in city of Buenos Aires. The real estate tax is one of the city government’s own resources83. At present, it is collected as a flat rate, i.e., without making difference among zones in the city – that is, without any redistributive or social equity criteria. In 2003, the more expensive properties were assessed at an average of 18 percent of their market value. This flattening of the property valuation pyramid makes the theoretical progressivity, implicit in the current rates, disappear in practice. As a result, the property tax is regressive and under-used.

1.146 The real estate tax as a resource for local government. The Real Estate Tax accounted for 18 percent of total city revenue in 1999, 19.14 percent in 2003, and 15 percent in 2004, as shown on Graph 1. The same Graph shows the evolution of the structure of tax resources in both jurisdictions. The different behavior over time (1991 to 2002 84) was significant: (see Graph 2). The decline of real estate tax participation in the tax resources of Buenos Aires city is even more noticeable when taking into account a

79 The taxes linked to property transfer – stamps and registration costs- do not relate to the value of the properties bought or sold, they are linked to a global fiscal policy (the need to receive more fiscal income through theses taxes) or to boost the construction market in general and housing in particular (in this case, these taxes have been modified, lowering the vendors lien to the cost of the transactions at a time where the market was stagnant, in 1994. 80 There are differences for the ones built, but very few, and have not meant a punishment to empty lots. 81 Clichevsky, 2001 a. 82 Problems generated by leaving vacant lots during decades, are not analyzed from the point of view of tax policy, 83 The others are: Tax on Gross Income- (ISIB, Ingresos Brutos); Payments for Street Light, Sweeping and Cleaning, (ABL, Contribuciones para Alumbrado, Barrido y Limpieza); and Vehicle Registration (RV, radicación de vehículos). 84 Last year where information was available

51 similar drop in the provincial real estate tax caused by large exemptions (absent in the case of the city)85 (Gaggero and Velardi, 2004)

1.147 The capture of surplus and added value by the Federal Government. Argentina has a weak tradition in the direct capture of real estate surplus profits. These taxes have neither been considered in urban studies, nor used so far as an instrument for redistributive fiscal policy86. The difficulty in applying a specific tax to surplus profits is directly connected with the right to individual property included in the National Constitution87 and in the Civil Code.. Two minor examples of a surplus value tax occur in the Greater Buenos Aires Metropolitan Area.88

1.148 In summary, urban land is a complex area. Systematic data and analysis are largely unavailable. Hence, further data collection and applied research on topics crucial to land policy and programs has considerable value. The analysis performed in this chapter with the anecdotal data available, however, has suggests two key themes with particular relevance for low-income housing.

1.149 First, the existing data demonstrate that BAMA contains large amounts of vacant and under-occupied land potentially suited to low-income housing. Two sets of actors own most of this property. First, individual households that have bought lots, and – sometimes – the original developer or subsequent land developers to whom the site has been sold – continue to own lots, portions of partly-occupied subdivisions, or entire subdivisions. Second, various public-sector entities own a substantial amount of vacant land within BAMA that they hold off markets. Accessing this vacant and under-utilized land holds an important key to affordable housing in the Capital Region.

1.150 Second, Provincial Government has leverage over many of the systemic problems that constrict local land markets and hamper housing development. Agencies of provincial or local government control the property tax, subdivision regulations (i.e. rural to urban land incorporation process), land-use planning and enforcement, and real property registration. Thus, provinces and localities potentially have a crucial role in improving the delivery of urban land for low-income residential development.

85 From this, we can conclude that the relative regression on property taxes would have been much higher in the City than in the Provinces 86 The other tax that is generally linked to capital gains is payment for improvements- CM (Contribucion de Mejoras)- although its intention is not to collect from capital gains but just to pay for said improvements. The function of the CM in the tax system is to collect from other parts and not only from public works, thus reducing the charge on tax payers. Those for whom public works generates prejudice, should be subsidized. 87 National constitution that dates from 1853 –base don Roman Law, modified in 1994, defines, in its Art.14, that all inhabitants have the same rights to use and sale their property; Art. 17, declares that property is inviolable; this right has defined the scarce taxes on them, and it would be unthinkable for most of the governments, to tax n capital gains that are product actions taken by the State. 88 The municipality of Malvinas Argentinas, as well as Vicente López (both belong to BAMA) both have ordinances that aim to capture suuplus value arising from public investment. In the former, these are oriented towards the creation of own resources, arising out of urban actions, promoted and executed by the Municipality, to generate an investment fund for infrastructure and equipment, capital recovery and new investment to enhance the condition of Urban Development in the District. It aims at capturing the increase in land value and the subsequent added value of real estate, in those cases in which it is 30 percent over the original value and is turned over to the real estate market. In the Municipality of Vicente López, the Urban Order Code has been reformulated, as well as the complementary tax norms, during 2001 and 2002, aiming to create mechanisms or institutions that may interact to complement and strengthen their results.

52 Graph 4.1.: Buenos Aires City. Evolution of taxes, 1991-2004 (in millions of constant pesos of 1999)

Note: Real estate refers to land and constructions. A breakdown of these is unobtainable. Source: Gaggero and Velardi, 2004.

Graph 4.2.:City and Province of Buenos Aires. Evolution of the compared structure of own TAX revenue, 1991-03 ( in % with respect to the total revenue of own revenue)

Source: Gaggero and Velardi, 2004

53 5. HOUSING FINANCE

1.151 Mortgage finance increased steadily in Argentina since in the 1990’s, reaching 6 percent of GDP (4 percent for housing purposes) in 200089. Helped by a favorable relationship between housing prices and incomes and declining interest rates, housing finance became accessible to a fairly large number of households. The Argentinean secondary mortgage market took off early and became the largest in the Region, with the participation of foreign investors. The context of macro-economic stability and growth that prevailed at that time buttressed both the demand, with a healthy growth of incomes, and the supply by fostering long term investments. Structural and institutional reforms like the creation of private pension funds, the development of capital market instruments, the strengthening of creditors’rights or the opening of the primary mortgage market with the privatization of the State Housing Bank, Banco Hipotecario Nacional, also played a major role in this development. The external monetary stability and the confidence in the convertibility rule had, however,an adverse impact: it induced borrowers to massively favor USD denominated debt (over 70 percent of residential mortgages) to benefit from lower interest rates. Although the dollarization matched the lending institutions’ liabilities, it was a major factor of fragility in the mortgage system, which amplified the impact of the 2002 crisis.

1.152 Following a deep economic recession, the financial crisis that unfolded from the end of 2001 on led to a collapse of housing finance. New lending came to a halt, and the stock of mortgage loans fell from AR$17billion at the end of 2000 to AR$9.2 billion at the end of 200390. The provision of long term finance disappeared for 3 years, both in the primary market and on the capital market. Activity started resuming mainly in the second half of 2004, long with the strong improvement of the macro-economic situation. But the crisis had a lasting impact on the foundations of the housing finance system. Also, it resulted in excluding of large portion of the population from the access to this basic financial service.

1.153 This chapter assesses the solidity of the housing-finance recovery, the remaining weaknesses of the market, and the conditions necessary to foster the expansion of market-rate private housing finance, particularly to lower income households.

The impact of the crisis on housing finance

1.154 The economic recession started in the last quarter of 1998. It became a financial crisis in particular through the widening of the public deficit (the government had induced banks to invest massively in its debt, that reached half of their assets in 2001), and through a general loss of confidence in the national currency that triggered a massive deposit run at the end of 2001. The government declared a default on its internal and domestic debt in December 2001, put in placea deposit freeze (“corralito”) and, through the National Emergency Law of January 7, 2001, put to an end the Currency Board , which included a USD-Peso peg and the inability of the Central Bank to act as a lender in last resort. After a short period of dual exchange system – devalued, but fixed rate of 1.4AR$/USD for commercial transactions, free float for financial transactions- the Peso was let entirely float and quickly depreciated by 66 percent (real exchange rate increased to 2.1 peso per dollar in October 2005 as compared to 1 peso per dollar in

89 See M. Cristini and R. Moya 2004 90 In the case of residential mortgages, AR$ 10.8 Billion and 5.5Billion respectively

54 Dec 2001, nominal exchange rate increased to 2.98 pesos per dollar over the same period) The crisis, and the measures taken to face it and to divide its cost between the various categories of actors, had deep consequences on the functioning of the mortgage market.

The surge of defaults and the regulatory response

1.155 The economic recession, then the financial turmoil, had a devastating impact on many households. Unemployment increased steadily up to a peak of 24 percent in early 2002, nominal wages were reduced especially in the public sector following drastic measures taken to cut public deficits, and inflation surged, reaching 40 percent in 2002. Real wages fell by 25 percent overall in a few months from October 2001 to May 2002. As a result, the volume of non-performing residential mortgage loans, which was already significant before the crisis91 , around 10 to 11 percent between 1998-2000, escalated to 30 percent92 in early 2003 – a deterioration relatively less acute than for other types of loans (peaks of 40 percent of all the loans to the non-financial private sector, and 50 percent in the case of consumer loans).

1.156 Eventually, given the effects of the economic crisis, the Argentinean government introduced a moratorium on foreclosure procedures against individual debtors. The Emergency Law of January 2002 suspended mortgage executions over properties that were the only family dwelling for 180 days. That period was extended twice, until September 2003 (Law 25.737 of June2, 2003). Thereafter, financial institutions collectively agreed to continue the stay on a voluntary basis, until the end of 2004.

1.157 There are two ways to enforce mortgage collaterals in Argentina: judiciary and extra- judiciary. The procedure applicable to pre-1995 mortgages regulated by the Civil and Commercial Code of the Nation ( second chapter, “Specific Dispositions”, Section I). It includes a preliminary request to a court, whose approval can take a long time and induces to delaying tactics. Moreover, the actual enforcement conditions can be considerably different from a jurisdiction or a province to another and the time for complete proceedings is said to vary from 1 to 4 years.93

1.158 The extra-judiciary procedure has been established by the Law 24.441 of January 1995, which created a new framework for the financing of housing and construction. It is applied either through an explicit provision to that effect in the loan agreement or automatically in case of loans funded through “letras hipotecarias”. The burden of the proof is reversed, and the contestation of a claim in a court is strictly regulated in terms of motivation and timeframe. The full process is said to take between 8 months and 2 years.

1.159 In both cases, eviction can be an obstacle to auctioning the property, although creditors can request from a judge a resolution to vacate it, which theoretically must be done within 10 days.

91 A general characteristics of the Argentinean market, where the overall rate of non-performing loans were twice the average level in Latin America (Banco Central de la Republica Argentina, Boletín de Estabilidad Financiera, first semester 2005) 92 Defined by arrears over one month 93 M. Cristini and R. Moya 2004

55 1.160 With the exit from the convertibility and the worsening of both employment rate and wages, the ability of mortgage borrowers to repay their debt was deeply affected. Although the asymmetric pesification helped those debtors who owed money to financial institutions, there were cases where the lenders were instead notarial firms, real estate agencies, etc.94 The contracts agreed between these entities and the borrowers were left outside the framework of the Decree No. 214/02. In this situation, the Law 25.737 extended the enforcement stay regardless of the nature of the lender. Pursuant to the same Law, the Ministry of Economy and Production issued the Decree No. 247/2003 and the Resolution No. 67/2003 which created a Registry for mortgage executions. This Registry had the sole aim of assessing the universe of debtors whose only dwellings were in danger of auction due to defaulted payments in their mortgage loans.

1.161 The mere inscription in this Registry does not warrant any kind of automatic subsidy, debt reduction, term extension, forbearance or any other right that could change the legal relationship between debtor and creditor. The only impact is on executions, and only on single residential dwellings. The law does not distinguish among creditors (financial institutions, notaries, or others) so that any person meeting the conditions above can be enrolled in the Registry, regardless of the nature of the creditor.

1.162 To exit the formal regime of foreclosure suspension, Law No. 25.798 of 5 th Nov. 2003, was sanctioned, creating the so-called “Mortgage Refinancing System.” This System provides for the right of refinancing (through the same institution that originated the loan) for all debtors declared delinquent between the 1st January 2001 and 11th September 2003, for a maximum loan amount of AR$ 100.000. Hence, this law provides a “rescue” to those delinquent mortgage debtors with an execution sentence already issued.

1.163 “ Fideicomiso” for mortgage refinancing. The law also created the Mortgage Refinancing Fideicomiso (Trust), a special Fund dedicated to the purchase of non- performing mortgages against the delivery of government bonds. To pay for those loans the fideicomiso is to issue f bonds backed by the State. After the defaulted loans have been transferred to the fideicomiso (administered by Banco Naciòn) , the borrower will be given the opportunity to refinance the debt at a lower interest rate and with a longer maturity. Although this mechanism was enforced, several lenders (mainly notaries) requested that the judiciary grant the right of foreclosure to recover the amount equivalent to the original debt in dollar terms or an amount determined by the judge under the judicial principle of “shared efforts by the participants” affected by the change of regime. Several courts declared the Law Nº 25798 inconstitutional and refused to recognize the payments made by borrowers to the Trust. Due to this event, in 2005, the Supreme Court ruled in favor of the suspension of housing foreclosures, thus reacting against the civil justice interpretation. The Congress then suspended mortgage foreclosures once more, this time for a year.

94 There are two sources of mortgage loans in Argentina: the formal one, the financial institutions and regulated by the BCRA, and an informal one, composed of a diversity of organizations that range from mutual organizations, to public notary offices that act as intermediaries between investors and loan takers, and capitalists that perform as individual lenders. This latter channel seems to have remained open through the crisis.

56 1.164 As an alternative several banks preferred to offer to their delinquent clients their own refinancing plans, with maturities and conditions similar to the ones provided for by the law. These banks seek to recover the relationship with their clients and, above all, avoid receiving bonds for their credits, particularly as they already have a very large exposure to the public sector. Private information of analysts and banks suggests that most private banks have used this latter method so that most debtors that make up the fideicomiso are those from the notaries.

Pesification, indexation and redistribution effects

1.165 Along with the repeal of the Currency Board , the emergency law converted into Pesos many financial instruments that were denominated in hard currency, includingmortgage loans and bank deposits. Conversion rates were fixed at 1:1 in the case of loans, and 1.4:1 in the case of deposits, in an attempt to limit the impact of the devaluation on individuals.

1.166 In addition to the conversion, the balance of mortgage loans was indexed, as an exception to the prohibition of indexation, set out by the Convertibility Law, which is kept in principle95. The index was first that of general inflation (Coeficiente de Estabilizaciòn de Referencia –CER ), and – then - the evolution of wages (Coeficiente de Variación Salarial –CVS) –This change sought to mitigate the effect of indexation on households, but amplified it in fact. Furthermore, interest rates on mortgages to individuals were capped96 in the case of mortgage loans below USD 250,000 used to finance principal residences of households who did not own any other property (Law 25713). Indexation applied until March 2004, then was suspended by law 25796.

1.167 Indexation of new mortgage loans is allowed and regulated by the BCRA (Comunicación A 3987). However market sources have pointed out that this regulation is complicated since it obliges banks to obtain borrowers’ explicit approval of maturity extension when installments are adjusted by more than 1 percent a month. Most of all, borrowers seem largely reluctant to contract indexed debt.

The aggregate amounts of mortgage loans outstanding evolved as follows: Table 5.30.: Evolution of Mortgage Loans

95 Convertibility Law 23.928 as amended by the Law 25.561 of January 2001, articles 7 and 10 96 Between 3.5% and 5% for CER indexed loans and at 12.3% for CVS indexed loans

57 Evolution of Mortgage Loans

Amounts in thousands of constant AR$ of July 2005(deflacted by consumer and wholesale price indexes) Years Total In local currency In foreign currency Total Housing Other uses Total Housing Other uses Total Housing Other uses Dec.1989 17.595.967 - - 17.595.967 - - - - - Dec.1990 8.386.956 - - 8.386.956 - - - - - Dec.1991 9.707.246 - - 8.494.439 - - 1.212.807 - - Dec.1992 13.999.183 - - 10.000.631 - - 3.998.552 - - Dec.1993 15.914.132 - - 8.435.333 - - 7.478.800 - - Dec.1994 20.840.800 12.266.304 8.574.496 8.502.046 7.402.379 1.099.667 12.338.754 4.863.926 7.474.828 Dec.1995 22.119.830 13.606.147 8.513.684 8.654.413 7.323.282 1.331.131 13.465.418 6.282.865 7.182.553 Dec.1996 23.813.474 14.822.842 8.990.632 7.946.181 7.259.680 686.501 15.867.294 7.563.163 8.304.131 Dec.1997 27.933.945 17.898.299 10.035.646 7.434.556 6.806.745 627.811 20.499.389 11.091.555 9.407.835 Dec.1998 35.752.684 23.579.079 12.173.605 9.381.872 8.273.072 1.108.800 26.370.812 15.306.007 11.064.804 Dec.1999 36.522.524 24.107.083 12.415.441 9.443.935 8.349.420 1.094.515 27.078.590 15.757.664 11.320.926 Dec.2000 38.130.590 24.133.301 13.997.289 8.091.646 7.048.241 1.043.405 30.038.944 17.085.060 12.953.884 Dec.2001 37.616.655 22.332.215 15.284.440 7.527.095 6.437.503 1.089.592 30.089.560 15.894.712 14.194.848 Dec.2002 13.217.923 7.918.719 5.299.204 13.119.172 7.915.707 5.203.464 98.751 3.012 95.739 Dec.2003 10.583.719 6.355.299 4.228.419 10.488.545 6.352.510 4.136.035 95.174 2.790 92.384 Dec.2004 9.315.591 5.577.290 3.738.301 9.157.757 5.567.995 3.589.762 157.834 9.295 148.539 July.2005 8.734.570 5.122.030 3.612.540 8.571.733 5.114.106 3.457.627 162.837 7.924 154.913

Source: BCRA Source: Own estimates based on BCRA

1.168 After the 2001 macroeconomic crisis, the financial system contracted severely. Loans to the private sector in real terms fell by 18 percent a year between the end of 2000 and mid-2005, affecting mortgage (long-term) loans more sharply. In fact, housing mortgage loans reduced by 26,5 percent a year in real terms, amounting to a historical minimum of 1 percent of GDP as compared to a maximum of 4 percent of GDP in late 2001.

1.169 The changes between the years 2001 and 2003 not only reflected the impact of the new foreign exchange rules and the fall of new lending, but also a wave of early repayments. This wave of prepayments was mostly funded by a “wealth effect”, a paradox linked to the existence of a large informal economy. In essence, at the time sovereign default was declared, a substantial share of the middle class population had savings in USD. amd kept this hard currency away from formal financial circuits (safe box or “mattress” savings, foreign deposits etc.). Following the devaluation of the peso the value in Peso, these dollar-denominated assets suddenly tripled - and even quadrupled at one point.

1.170 At the same time those who had taken out a mortgage loan saw their debt converted into pesos at the (then) very favorable rate of 1:1. As a consequence they quickly grabbed the opportunity to get rid of their entire debt at a large discount and prepaid. The match between holders of such assets and mortgage debtors cannot be estimated but market information suggests that mortgage borrowers applied to family and friend lending to prepay their loans when their own savings were not enough.

1.171 Moreover, owners of mainstream real estate properties in general benefited from another wealth effect. The two effects were additive in the case of mortgage borrowers. Prices of properties in urban real estate markets, at least in their middle and upper segments, were traditionally denominated in US dollars. The deterioration of the economic situation led to a decline of property values in dollar terms in the range of 15 percent to 50 percent depending on the location and the type of good. However, once

58 converted into Pesos, these values still were considerably higher than before the crisis- sometimes a twofold increase.

1.172 For the majority of households, however, the “wealth effect” was negative. Those borrowers who did not have USD denominated assets, especially off-shore financial assets or a property in the dollarized segment of the market, experienced a sudden “poverty effect”. Mainstream urban housing became unaffordable for first time buyers, or even for households that owned a unit if it was not valued in dollars. A more precise measure of the evolution of the affordability of housing prices is presented in Annex 1.

The Recovery

1.173 Since 2003, a normalization process has started, probably earlier and more vigorously than was generally expected. It began with the vigorous improvement of the macro- economic situation. Following a combination of external factors - Peso devaluation, increase of the price of commodities on world markets- and domestic policy –prudent macro-economic management, public development programs -, the economy started growing strongly (about 9 percent in 2003 and 2004) and unemployment decreased drastically (12 percent rate at the end of 2004). Wages have been increasing at a fast pace since early 2002, although remaining at early 2005 levels for about 12 percent.

1.174 In the financial system, a re-intermediation process has emerged. After the end of the “corralito”, money started returning to banks. Initially sparked by extremely high interest rates (during the second and third quarters of 2002, the rate for one month deposits oscillated around an annual 55 percent) and restrictions to capital outflows, this movement progressively became a normalization process. . Deposit inflows accelerated, leading for instance to a doubling of their aggregated amounts in private banks between mid-2003 and mid 2006. This was helped in particular by the growth of CER-adjusted time deposits that were very successful among institutional investors. The normalization also took place on the legal front, with a Supreme Court validation in October 2004 of the forced pesofication of deposits. The banking sector soon found itself extremely liquid, a turn around that was amplified by the reduction of minimum reserve requirements by BCRA . In addition, the exposures of banks to government debt, which was immobilizing a large share of their balance sheets started to fall, while the state of public finance improved – a significant primary budget surplus emerged, helped, but not limited to, to the far reaching public debt rescheduling.

1.175 As a consequence, interest rates declined drastically starting at the end of 2002. Rates that were still at around 20 percent on one month, non-indexed deposits at the beginning of 2003 stood at around 4 percent at the end of that year and reached a low point at 2.5 percent-3 percent in the middles of 2004. At this date, indexed deposits of 1-to 2 year terms yielded 1.5 percent-3 percent over CER. An opposite trend has taken place since then, but rates stay far away from their crisis levels.

1.176 The increase in liquidity and the fall of interest rates led to a hefty rise in bank lending to the private sector, the first increase since 1998. Lending to the private sector grew by 26 percent in 2004, the same pace as bank deposits. Also, the share of non-performing loans to the private sector declined from their peak of nearly 40 percent in December 2002 to 18.8 percent 2 years later, and less than 16 percent in March 2005.

59 Table 5.31.:Commercial Papers (Obligaciones Negociables Issued in September 2005) Company Issued Due Date Maturity Currency Total in in Years US$ Telefónica Arg Feb-05 Feb-06 1,00 $ 69,20 Telefónica Arg Feb-05 Feb-07 2,00 $ 17,30 Tarjeta Naranja Ene-05 Nov-05 0,82 $ 10,38 Tarjeta Naranja May-05 Mar-06 0,82 $ 6,92 Tarjeta Naranja May 05 Nov-06 1,49 $ 20,76 Tarjeta Naranja Sep-05 Sep-06 0,99 US$ 8,92 Camuzzi Gas Pamp. Mar-05 Mar-06 1,00 $ 12,11 Camuzzi Gas Pamp. Mar-05 Mar-08 3,00 $ 22,49 Tarjetas Cuyanas Feb-05 Dic-05 0,82 $ 8,65 Ribeiros Jul-05 Jul-11 6,00 $ 1,73 Cosetel Jul-05 Jul-06 1,00 $ 0,52 1,72 95.0% 179,0 Source: CNV y Banco Rio

1.177 On the capital market, the corporate bond segment reopened, although companies are not eager to participate probably due to the existence of abundant supply from the banking sector as compared to higher costs in the capital market.“Obligaciones negociables” issued in the first nine months of 2005 amounted to USD 3456 millions, but only 5 percent (USD180) corresponded to demand of fresh funds by companies, while 95 percent corresponded to past debt restructuring due to the crisis. Instead there has been an increasing offer of trusts or securities backed by credit card loans, banking personal loans, pledges, etc. In the last two years 85 percent of these “fideicomisos” have been bought by Pension Funds, Banks and Assurance companies. Fideicomisos backed by mortgage loans also reappeared. The main banks participating in the mortgage-backed securities market are: Banco Hipotecario, Banco Río, Banco Ciudad de Buenos Aires, Banco de Valores, Banco Patagonia y Citicor Capital Markets.

Table 5.32.: Corporate Bonds: Debt Reestructuring – September 2005

Company Total US$ Currency Date Average Maturity Sancor 88 US$ 23-Mar-05 5,05 Transener 274 US$ 30-Jun-05 10,73 Telecom 1807 US$, Euro 31-Ago-05 7,46 Yen y Pesos Telecom 470 US$ 31-Ago-05 4,63 Personal 252 US$ 21-Sep-05 8,73 CAPEX 385 US$ 07-Oct-05 8,83 Cablevisión Total 3276 7.5*

Weighted average by amount Source: CNV

60 Table 5.33.:Securities (Fideicomisos) and Mortgage backed securities (Fideicomisos hipotecarios de vivienda)

Duration Month Trust Trustee Asset Amount (MM $) Yield (Months) Sep-04 Total 124,0 6,92 5 Oct-04 Total 187,0 7,35 7 Nov-04 Total 232,0 7,56 7 Mortgage backed Securities Cedulas Hipotecarias Arg. II 2004-2 Banco Hipotecario SA Loans 50,0 Dic-04 Total 295,0 6,98 6 Ene-05 Total 118,0 7,59 10 Feb-05 Total 148,0 6,57 4 Mar-05 Total 331,8 6,92 24 Abr-05 Total 279,0 6,74 4 Mortgage backed Securities Cedulas Hipotecarias III Banco Hipotecario SA Loans 62,5 May-05 Total 154,0 7,87 7 Jun-05 Total 304,0 7,54 5 Mortgage backed Securities Cedulas Hipotecarias IV Banco Hipotecario SA Loans 64,0 Jul-05 Total 420,0 8,25 9 Mortgage backed Securities Super Letras Hipotecarias Banco Rio de la Plata SA Loans 83,0 CER + 1% 28 Supervielle Prestamos Hipotecarios Banco Supervielle SA PGN 76,0 CER + 0,75% 9 Total Trust Funds 2.592,8 September Mortgage backed Securities 335,50 2004 / July 2005 Mortgage backed Securities (as a % of Total Trust Funds) 12,94

Source: Own estimates based on CNV

1.178 An important development for the financial system was the creation of new hedging instruments. On the ROFEX market, a future contract on the government BODEN 2012 was launched and, at the end of 2004, more importantly for Pesos transactions, a future contract on the CER-index . Moreover, a market for interest rate swaps started to emerge.

1.179 Mortgage lending also enjoyed a recovery, but at a slower pace, and at a lesser degree than the general improvement of the financial sector. Early 2004, a very cautious, and rather nominal resumption started with a limited offer by a few banks (Banco Hipotecario, Banco Río, Banco Nación). The activity was first limited to short maturities for fixed-rate products, and the emphasis was put on floating rate loans (up to 10 year maturity). Commercial targets were mostly wealthy individuals and corporate clients.97 Net new lending (the balance between outstanding loans at the end of 2002 and 2003) remained largely negative.

1.180 The movement gained momentum later. New mortgage lending amounted to AR$ 130 million on average per month98 at the beginning of 2005 – 2/3 being allocated to households- , and the aggregate amount of loans outstanding stopped declining to stabilize at around AR$ 8.8 Billion. Mortgages became again a product by a wide range of banks, and the new lending gradually increased to come close to AR$ 300million a month, resulting in the resumption of the stock growth. The two factors driving this trend were the extension of maturities – up to 20-year loans became

97 Borrowings may have been used to cover the repatriation of of-shore funds after the devaluation or to justify an investment out of line with stated incomes . 98 New lending exceeded ARGAR$ 200 million for the month of June 2005

61 progressively available, and the fall of interest rates to a 10 percent to 12 percent range (fixed rate) in June 2005. This latter improvement related to the increase in the number of players, and renewed competition. Banco Hipotecario, the institution that was the most affected by the crisis because of its specialization and its reliance on capital markets, showed a strong resilience and lead the way towards recovery by offering new products at very attractive lending conditions (slightly below 10 percent mid 2005). It also resumed raising funds from the capital market. At the same time, it has engaged in a strategic turnaround aimed at diversifying its business lines and its funding sources (see table). The general economic recovery translated in a fall of delinquencies from 30 percent at the height of the crisis to slightly above 7 percent in December 2005, below pre-crisis levels. Further description of the primary mortgage market is presented in the Annex 4: “Current accessibility to Mortgage Finance”.

62 Box 5.1. The Case of Banco Hipotecario

Banco Hipotecario is a rare example of a successful conversion of a state housing bank into a commercially based operation that maintains a specific franchise in the moderate-income market segment, otherwise little served by the mainstream financial system. This has been achieved thanks to an original corporate governance structure – the government owns 54% of the company, but private shareholders appoint the majority of the Board members -, the quality of management and innovative partnerships with the public sector organizations involved in social housing programs.

An institution mostly engaged in mortgage lending (up to USD4 bln portfolio and about 35% of the market before its privatization unleashed competition) and funded through capital market, Banco Hipotecario (BH) was heavily affected by the 2001-2002 crisis. The crisis was particularly damaging for its capability of raising capital, a critical condition for an institution that does not avail on a large deposit collection network.. BH mostly relies on the capital markets for its funding, and had pioneered the emergence of mortgage securitization as well as the opening of international markets to Argentinean issuers. The crisis resulted in the bank defaulting on its USD and Euro debt. Even the mortgage backed securities, which are theoretically insensitive to the fate of their promoter, were fully affected. They probably could not have withstood the pesofication of the underlying portfolios, that divided by 3 the cash flows stemming fro the loan, a reduction that no credit enhancement can cushion. But anyway, the bonds themselves were quickly converted in Peso as they were subject to Argentinean law, generating a drastic loss for their holders.

BH reacted with a series of steps ranging from emergency measures to strategic realignment:  to avoid a liquidity crisis, it facilitated loan prepayments. Its aggregated mortgage portfolio (excl. securitized loans) fell from AR$ 4 Bln in December 2000 toAR$2.2 Bln at the lowest  at the end of 2003 It was the first entity to restructure its debt through a comprehensive and very successful exchange offer of USD900 Mln bonds, supplemented by the rescheduling of about USD400 Mln interbank debt. As a result of this move, which also achieved a lengthening of BH’s funding base and a lowering of its cost, the bank’s rating was lifted. Starting from below investment grade, it was again upgraded to reach the A level (domestic scale) in July 2005 To address its strategic challenges, BH:  started diversifying its products: creation of time deposits in Peso and inception of a savings-for-housing scheme as a new source of funding; development of consumer lending,  became a commercial bank, and started to work on expanding its deposit base, and in particular, tries to acquire a bank network for that purpose

BH resumed raising fund from the domestic capital market in 2004 which it reopened as soon as June 2004. To that end:  it reactivated the technique of covered bonds through “Cedulas Hipotecarias” and started issuing mortgage backed securities. It was able to achieve a AAA rating on the local scale, a strong signal even if the maturities were fairly short at first (18 months) and the volumes limited. The issues then evolved towards increased maturities and sophistication. BH MBS issues use the securitization conduit it created in 2000 with IFC support, Banco de Credito y Securitisación (BACS).  On the international markets, the Bank set up a USD 1.2 Billion issuance program of bonds maturing in 2013 in several tranches, one of them offering a return linked to the appreciation of its stock 63 1.181 Critical Obstacles still impede the widening of the outreach of housing finance. Nevertheless, as shown by the much slower revival of this type of credit than has been the case for lending to the private sector in general, the distribution of long-term loans to individuals secured by real estate has encountered acute obstacles in the aftermath of the crisis. Some factors are linked to the general context. They can be summarized as the necessity of restoring confidence. Long term commitments, by lenders, investors and borrowers alike, imply a minimum of confidence in the future to be taken. This involves not only the credibility of the macro-economic policy, specially the prospect for inflation and employment, but also the legal and judicial environment: definitive clarification of the status of pesofied and rescheduled deposits, renewed trust in the solidity of contracts and return to a normal protection of creditors’ rights. Besides background conditions, there are more specific issues directly anchored in the housing finance sector.

1.182 The first sectoral issue is the affordability of housing prices. Since 2002, households earnings have progressed, at a very fast pace for some groups. However construction costs have also increased significantly. Moreover, prices in the top market segment have resumed increasing, and the upwards pressure has been transmitted to the next segments down Various investors interested in real estate converged to selected areas in large cities (mainly Buenos Aires) in 2003 and 2004, provoking a rapid growth of housing prices and a consequent increase of building activity. Their financial sources varied from windfall gains in the prominent agricultural sector of Argentina due to the upsurge in soybean international price; repatriation of capital exported during the crisis, and current savings of high-income households that lacks other investment opportunities . Finally, the share of households in poverty, despite having recessed since the pinnacle of the crisis, is still considerably greater than before the crisis, affecting the capacity of many more families to afford a house and excluding them from banking services.

1.183 Another roadblock affects the supply by financial intermediaries: the existing mismatches between assets and liabilities, a problem that long term lending, especially with fixed interest rates, could aggravate. On an aggregate basis, the financial system as a whole suffers from three types of imbalance which are, in an increasing order of importance:

 An excess of USD denominated assets over liabilities  An excess of assets denominated in Pesos adjusted to inflation (CER indexation), bearing fixed real interest rates, over similar liabilities. This mismatch creates an exposure to the risk that interest rates increase in real terms  Maturity mismatches. Lenders mostly fund themselves with deposits, 80 percent of which have a term shorter than month. The provision of funds by the capital market remains limited, and moreover for medium term maturities at best (see below). Banks remain exposed to a new confidence crisis among savers.

64 Chart 5.2.: Balance Sheet Financial System June 2005

BALANCE SHEET MISMATCHES IN THE FINANCIAL SYSTEM JUNE 2005 140

120 Asset Liabilitie

100 i $

i R S n f r B 8o o A o U 0 6 0 4 0 2 0 0 In AR$ without In AR$ adjusted by In adjustment by CER USD CER

1.184 BCRA has imposed a capital adequacy requirement on market risks incurred by banks, a prudent move that increases the needs of finding specific funding if long term housing loans are to be developed.

1.185 The potential depth of the bond market remains uncertain. Institutional investors may still be wary about providing long term funds to primary lenders. Consider the aggregated portfolio of the pension fund industry, that amounted to a significant AR$66,4 Bl at September of 2005: 59 percent were invested in government debt, 14,6 percent in stocks, 5,7 percent in bank deposits, 1,8 percent in commercial paper and 0.6 percent in structured finance instruments out of which mortgage backed securities were a negligible amount . The fear of inflation remains, hampering long term investment. But the recent history of financial instability makes it difficult for banks to largely rest on their deposit bases to extend long term housing loans. Moreover, the still limited availability of hedging instrument hampers the matching of assets and liabilities through derivatives.

65 Table 5.34.: AFJP Investment Portfolio – As of September 2005 – ‘000 millions

Instrument Amount in Share (%) Pesos Cash 0,6 0,9% Public debt 39,2 59,0% Public bonds (not guaranteed) 10,7 16,1% Public bonds (guaranteed) 25,0 37,6% Guaranteed Loans 3,4 5,3% Bonds of Public Agencies 1,1 1,7% Commercial papers 1,2 1,8% Term deposits in banks 3,8 5,7% Stock 9,7 14,6% Stock in foreign markets 6,8 10,3% Investment Funds 3,6 5,4% Other 0,4 0,6% Total 66,4 100.0%

Source Superintendencia de AFJP

1.186 The difficulty to raise long term funding is the first challenge that the financial system faces to provide a volume of resources for housing more inline with the needs of Argentinean households. This raises the issue of reconciling the objectives of institutional investors – protecting the value of their capital, notably through indexation- with the widespread reluctance among would-be-borrowers to accept indexation of their long term debt. Other South American countries have developed schemes aimed at overcoming this gap: by hedging index discrepancies (Mexico), or capping floating interest rates in real terms (Colombia). Argentina should consider developing similar mechanisms without which lenders could not extend long term loans unless accepting dangerous balance sheet mismatches.

1.187 The second challenge for the development of housing finance is the rebuilding of confidence in the soundness of the activity. Little capital will be allocated to this type of lending unless it is widely recognized as having a low risk profile. This is especially true to attract long term investments, and also to expand the market outreach to lower income groups: such an expansion is only possible if proper tools are available to manage the incremental risks associated with these categories. This is why removing the suspension of mortgage enforcement that has been periodically renewed is a condition to the deepening of the market.

1.188 The third big challenge lies with the commercial strategy of lenders. Mainstream financial institutions mostly target upper income groups, leaving moderate income households underserved. The average mortgage loan extended by the leading commercial bank in this area is in the range of Peso 70,000, and the average borrowers’ income amounts to about 4,000 Peso per month. Balance sheet mismatches lead to rationing of the global supply of credit, and therefore to prioritizing loans to the top strata of customers – the wealthiest ones. Also, personal risk assessment tends to prevail where property collateralization is weak. Overall, national-level banks have yet to aggressively pursue cooperation with provincial IPVs or establishing connections

66 with national housing assistance programs. Only BH has an experience in this strategy: it has started establishing ties again with IPVs, in some provinces, including the Capital Federal. BH remains however contrained by funding issues. Other institutions that could potentially serve moderate-income people are some cooperative banks – for instance the biggest one, - or regional banks. However, these institutions do not engage in housing finance due to the lack of access to long term resources. A development strategy should include a non-exclusive support to the distribution channels that have the willingness and the capacity to serve moderate income groups.

1.189 The fourth challenge is to offer financial solutions to the lowest income groups. One route is probably to consider the development of housing microfinance in Argentina like it happened elsewhere in Latin America. Household savings is as important for funding progressive housing as is extending microcredit. Some Housing Microfinance (HMF) programs stimulate these savings through requiring families to open and make deposits into accounts for a time preceding the loan. Particularly when joined with support for savings and construction – the case of these leading programs – HMF can greatly shorten, reduce the cost, and improve the quality of progressive housing. Government could promote the development of this market through well-targeted assistance strategies.. A range of “smart” subsidy methods for this market are presented in Chapter 6.

1.190 Housing microfinance has expanded rapidly in some parts of Latin America over the last five years. The lead cases are those of the Patrimonio Hoy Program of CEMEX, the giant Mexican cement maker, and that of the MiCasa program of MiBanco – the largest microfinance lender in Peru. Argentina also has some experience in housing microfinance on which to build. See Box 2 for details on these cases.

1.191 These and other experiences in housing microfinance (HMF) demonstrate a number of crucial lessons that: (a) large-scale HMF can be profitable; (b) partnerships between building materials suppliers and microfinance lenders are key to ramping up loan volume as well as achieving good results with construction; and (c) the public sector can support HMF by providing liquidity through second-tier institutions – for example - to the system but must allow first-tier institutions to set loan terms and operate their programs commercially. Although interest rates are likely to start out high, competition will drive them down.

67 6. OPTIONS FOR AFFORDABLE HOUSING, URBAN LAND AND HOUSING FINANCE IN ARGENTINA

1.192 The preceding chapters have examined the importance of housing to the national economy, and detailed Argentina’s experience in affordable housing programs and policy, urban land, and housing finance This chapter applies these lessons to examine options for housing policy and programs in Argentina. In addition, Annex 6 presents an overview of housing markets and programs in Latin America in order to place the Argentine experience in context.

1.193 Thus, many worthwhile lessons can be drawn from the affordable housing experience of Latin America. Four approaches, however, appear particularly compelling for Argentina from this perspective.

1.194 Strengthen federal leadership of the housing sector. The experience of Mexico (see Box 3) and elsewhere demonstrates that strong federal leadership has proved crucial for improving housing conditions. The lead housing policy institution should have the strong support of the President in order to have the capacity to influence the wide variety of public and private-sector actors and agencies that compose the “housing sector.” Federal leadership best operates through persuasion in a strong federation such as Argentina. Nonetheless, the lead federal agency would also be able to enter into agreements for policy change with Provinces and IPVs, and establish broad parameters and operational models for the programs that it funds Development of an official national affordable housing plan can help galvanize a vision and the participation of a wide variety of public and private actors.

1.195 Delegate development and credit finance to the private sector. Other Latin American countries have found that using private-sector developers and financial institutions has quickly improved the efficiency and transparency of their affordable housing delivery system. The shift from government provision to using the private-sector also yields important developmental gains. In particular, it builds the capacity of and teaches a wide range of institutions how to provide low/moderate-income housing and, thus, helps create markets for the components of this process.

1.196 The shift from direct government provision to private-sector production and credit finance is a straightforward process for moderate-income households. Rather than develop directly, government specifies the characteristics of the housing project(s) in question and engages in a bid process to select the best offer to perform these development functions99 - including physical design, acquiring construction finance for building, arranging for permanent finance for purchase of the units by households, building, marketing, selling, acquiring and transferring registered title etc. Rather than attempt to originate and service loans (a highly problematic process for government that typically results in delivering a grant disguised as a loan), the public sector appropriately channels this funding through private financial institutions. At first, government often funds these privately-originated loans peso for peso. With time, government can influence and provide credit enhancements so that private financial

99 However, continuing government involvement in support of the private-sector may help with some aspects of the development process – particularly land assembly and acquiring development approvals for the project.

68 institutions fund these loans with their own resources and leverage government resources.

1.197 The shift from public to private provision becomes more demanding for low-income households. Program experience has shown that low-income housing delivery systems require that an intermediate organization work intensively with families to assist them in using the program (qualifying for the subsidy, saving a downpayment, getting a loan, identifying and getting support for acquisition of an appropriate parcel of land, working with developers, organizing “sweat equity” so that beneficiary households provide labor for unskilled aspects of the construction etc.). Often, NGOs (non-profits) have a comparative advantage in working with low-income households.

1.198 A second step for improving affordable housing production consists of establishing a demand-oriented subsidy program. As compared to the supply-oriented subsidies, the demand-driven subsidy system will be more adapted to Argentina. Indeed subsidizing housing directly is not needed in Argentina where input markets work well. On the contrary, subsidizing the consumer has been proved more efficient in the sense that it provides the consumer a larger choice, and it can be applied in specific segments of the housing market that will really benefit from it. Thus, households rather than developers or financial institutions decide on the location, the type of unit, the project, the developer, and other aspects of using the subsidy. Housing subsidies are often limited to the market of new housing. In Argentina, where filtering of housing units is possible and urban growth rates are not so high anymore, the low and moderate income resale market for existing housing should also be supported. The subsidy program should therefore encompass not only the flow but the stock of housing.

1.199 Demand driven subsidy programs add a number of key elements to sector development and credit finance. This class of subsidies intends to increase the willingness and the capacity of households to consume better quality housing or to become homeowners through leveraging their ability to obtain a loan or by lowering the cost of the loan. They can target the low to middle income beneficiaries in a precise way, and stimulate the corresponding market, with rules on which private actors can depend. Three decades of experience throughout Latin America has demonstrated that direct-design subsidy programs constitute the best housing delivery system for large-scale production of new units, particularly for moderate-income households, provided that they enjoy substantial continuous funding. Argentina’s earmarked gasoline tax provides the necessary resources.

1.200 Types of Individual Household Housing subsidies. Frequently used individual household subsidies include four types100, of which one lowers the upfront saving requirements and the three other ones allow beneficiaries to increase the amount of the loan or increase other expenditures. The policy preference is for individual subsidies in the form of upfront grants linked to savings or credit and/or upfront payments for private mortgage insurance or guarantee deposits that can be used when a beneficiary misses a payment. On the contrary, interest rate subsidies are often costly, non transparent and frequently regressive. Deductions of interest payments from taxes are

100 The four types are (i) up-front grants tied to credit or savings for housing, that can be applied to closing costs on a loan, the down payment, the premium for private mortgage insurance or payments into a guarantee deposit account; (ii) housing allowances linked to monthly mortgage payments and income levels, (iii) interest-rate subsidies to lower the monthly payments, and (iv) tax-benefits that lower the effective recurring cost of housing finance payments.

69 also usually regressive and could quickly become very costly in Argentina when a large proportion of its labor force files income tax returns.

1.201 Additional subsidies. While the upfront grants target a low to middle income population which can access the formal mortgage market, the subsidy program must be completed with other solutions that will address the need of population with low- income, informal employment, or collateral problems. Thus, the subsidy program should also seek other instruments: for the upper low-income segment which often lack regular income, their credit should be adapted, either with flexible terms or micro- financing, the government could finance blocked deposits available for temporary repayment problems. Microcredit systems could be developed with alternative collaterals and other government assistance to decrease risk. For the lowest segment of population, land subsidies, support for title registration or assistance in renting could be more adapted.

1.202 A nationwide uniform demand subsidy program under strong institutions. An Argentine Subsidy Program would function best if nationally funded with rules and systems established and maintained by a national agency.101 Argentine IPVs, provincial governments and municipalities would have a role in administering the Subsidy Program, particularly through the provision of rules and financing to favor land production (see next point below), . The size and continuity of Subsidy Program is the most crucial factor in gaining the interest and commitment of private-sector developers, lenders, intermediary organizations, and households to use DDS systems. Hence, this DDS program would function best by consolidating the resources and superseding other federally-funded moderate/middle-income housing programs directed at production of new units.

1.203 A nationwide Argentine Subsidy Program would have great social value. However, its principal developmental purpose would involve stimulating commercial credit and household savings, and re-activating the economy. An initiative (discussed below under the fifth point) to expand the scope of low/moderate-income lending would dovetail well with the creation of a nationwide Subsidy Program. In addition, the massive level of production generated by a uniform national system would help get ahead of demand for informal settlement and, thus, reduce the costs involved.

1.204 Strengthen the role of provinces and large municipalities in advancing systemic reform to unblock local land supply and in operating low-income housing programs. The new federal low-income programs have already begun to shift from producing new units for purchase – the highest-cost housing solution - to providing the wide range of low-cost housing solutions suited to low-income households. Provinces have even more compelling reasons for diversifying their production beyond new units to low- cost housing solutions and for targeting low-income families.102

1.205 Provinces and major municipalities with housing agencies or institutes could establish lines of support for the various steps in the progressive housing process, including access to land, titling procedures, home improvement, expansion, construction of a unit

101 In contrast, local governments typically have difficulty in ensuring on-going funding and the consistent rules necessary to gain the participation of private-sector developers and commercial financial institutions long-term in such an effort. 102 Indeed, in most Latin American countries, local and state governments focus on low-cost housing solutions for low- income households and the federal government on production of new units for sale to moderate-income households.

70 on a lot owned by the household, tenure regularization, infrastructure hook-up and extension etc.. This support could take the form of: (a) a direct grant that rewards family savings by matching the family’s resources (say, in a ratio of 1 to 1) or, in case of indigent households, a direct grant for land, or titling or construction material. In this latter case, the family provides the labor and the municipality technical and social assistance; or (b) support to poor households (those that are clearly beyond the reach of commercial microfinance) from a revolving fund operated by a neighborhood group (that this group then could recover to some extent through household contributions). 103 In contrast, delivering a subsidy through direct government extension of a below- market rate loan104 to employed low and moderate-income families will undermine the development of market-rate microcredit, and deserves to be strenuously avoided.

1.206 Application of the principle of leverage used by housing programs worldwide 105 could vastly improve the efficiency of provincial activities in housing. Currently, provincial housing institutes fund virtually the full cost of their affordable housing programs. Particularly when administrative costs are taken into account, the “credits” extended by IPVs are largely grants, households contribute little or nothing in the way of a downpayment, while other subsidies (such as the cost of public land dedicated to a housing project) remain unrecovered. Rather than pay for the full cost of affordable housing development, provinces could leverage their funding with other resources. These other sources include private-sector loans (both mortgage credit and microcredit), household savings, and contributions from employer and other governments. For example, provinces could match each peso of a qualified household’s contribution (from the household’s own savings, a loan secured by the household, the household’s employer, or financial assistance from another level of government to the household) with one peso of provincial support, up to a limit. 106 The household could then be free to spend these resources on a wide range of low-cost housing solutions (e.g. improvement, expansion, purchase of a new unit, construction of a unit on a lot owned by the family, purchase of a lot, building an accessory unit for other family members or to rent etc.). Such a program structure would likely result in greater and more efficient production of low-cost housing solutions, stimulate more commitment from households, galvanize housing credit locally, involve a wide range of institutions in local affordable housing, and help provinces escape from the vices of and full responsibility for direct production and credit finance of new affordable units.

1.207 Large municipalities and provinces have a strong comparative advantage in the implementation of neighborhood upgrading programs. Although detailed analysis of slum upgrading is beyond the scope of this report, one observation may be useful. The “integrated slum upgrading” approach used in the Southern Cone, particularly in Brazil and in the PROMEBA program of Argentina, spends large sums per-household, covers a small number of neighborhoods thoroughly at one time, and gradually incorporates new neighborhoods into the upgrading program. Another method consists of phasing planned investments over a substantially longer time – five to fifteen years - to a much

103 The revolving fund approach for poor households is already in use in Argentina – see Box __. It is also extensively used for upgrading houses in poor Venezuelan neighborhoods. 104 Originating and servicing small loans on a commercial basis – which is a highly specialized business – is often challenging for the private sector, and virtually impossible for governments to do well. 105 For example, Building and Loan Societies in Western Europe in the late nineteenth century were, in effect, cooperatives that required families to save each month for a downpayment over a significant period (around 7 years) in order to qualify for a low-interest loan up to a multiple (often, around three times) of the total amount of their savings. 106 The province’s support could be delivered in the form of a certificate – rather than cash – to the household, which the household could then assign to suppliers of low-cost housing or of building materials.

71 greater number of poor neighborhoods. This phased approach may have some advantages and is worth considering.107 In particular, the enormous cost of providing the services necessary to upgrade poor urban communities presents a daunting and unaddressed strategic challenge in Argentina. This cost has been estimated at 15 times the amount budgeted for housing, and appears to have received no budgetary allocation except for the resources of PROMEBA. Other Latin American countries and many cities have dealt with this financing challenge by phasing these costs in planned increments over a substantial period of time.

1.208 In addition to these options for funding and/or operating low-income housing programs, Provinces and localities have substantial influence over the key lever for development of urban land – the single greatest bottleneck for low-income housing. These levers include subdivision requirements and enforcement, real property registries, and the real property tax:

 Localities control subdivision requirements and enforcement. Allowing smaller lots and incremental infrastructure provision holds particular promise. Other countries – e.g. El Salvador – have stimulated an industry of massive formal-sector progressive subdivision for low-income households in this manner, which has largely replaced informal settlement. Through this and other means, land-use planning could become strategic and structural, rather than reactive.

 Provinces could reduce the cost of registering and maintaining full legal title, and increase its benefits in order to encourage formal tenure and the consolidation of low- income units and neighborhoods.108

 The real property tax plays a crucial role in conditioning the environment for land development in many upper-income countries. However, this tool faces well-known political obstacles beyond the scope of housing-sector reform in much of Latin America as well as Argentina.

1.209 The case of the metropolitan area of Buenos Aires. The current lack of coordination among the city of Buenos Aires and the municipalities of the urban area, which are part of the Buenos Aires province, have a direct effect on the housing sector. In an urban area of 12 million inhabitants, the issue of housing for the poor is currently addressed at the level of each municipality. Land is almost inexistent in the City of Buenos Aires while in the urban edge of Greater Buenos Aires, vacant and under-utilized areas could spur the development. Nevertheless, due to the federal system in which province and city are autonomous, coordination is not legally required and depends on individual initiatives. Thus, the area does not benefit from a regional approach in urban development, land policy or housing for the poor. In most of other countries, the urban area of the capital city is either managed by technical entities on key issues such as transport, regional development or urban infrastructure or is part of an autonomous political entity. In the case of Argentina, the creation of a regional housing agency would be a first step in improving the metropolitan coordination.

107 The Habitat program of Mexico phases upgrading expenditures over a longer period in many communities at once. The phased, broader-scope approach has some benefits that Argentina should consider. In particular, the phased approach can: (a) better stimulate investment of residents in their own neighborhood that complements public expenditures; and (b) works in a much larger number of neighborhoods at once. 108 Guayaquil, Ecuador is a leading example of a municipality that has systematically decreased the costs and increased the benefits of registering and maintaining property title.

72 1.210 Finally, IPVs can join land policy reform. Vacant and under-utilized parcels often have complex ownership histories that complicate their upgrading and use. Although much of this land is privately-owned, substantial tracts are also owned by a number of government agencies. Particularly in the greater Buenos Aires, but also in other large cities, the IPV could: (a) inventory the largest vacant or under-utilized subdivisions and parcels; (b) establish their ownership if unclear; (c) create incentives for their development, both through working with landowners and by application of existing legal and fiscal tools; and (d) broker parcels – if necessary - between existing landowners and affordable housing developers interested in using them.

1.211 Thus, many good options for low-income housing programs exist for provinces, IPVs and major municipalities. The federal government could make an important contribution by developing models for local low-income housing programs among which provinces could choose in order to create their own initiatives suited to local conditions. This is essentially the approach used in two other strong federations in the hemisphere – Mexico and the US.109

6.21 Develop a strategy to expand the provision of housing finance, including to moderate and low-income groups. Two fundamental obstacles must be overcome for the financial system to channel resources towards the housing needs of a large number of households. The first one is to secure long term finance on a sound basis. The second one is to induce financial institutions to serve low/middle to middle income strata. The experience of other countries in Latin America suggests that the following orientations:

 Secure a sound ground for long term housing loans . A major achievement would be to reconcile the request of indexed instruments by investors and savers, and the reluctance of mortgage takers to assume the symmetrical risk. Possible options for that purpose include: (i) the development of adjustable rates, possibly combined with capping mechanisms- an instrument that the market cannot offer for the time being and that implies some form of external support; (ii) the devising of new hedging instruments to protect intermediaries against indexation gaps, beyond the mere capacities of the recent CER future contract; and (iii) the design of REIT-like investment vehicles, both for rental accommodations and mortgages, which could combine fixed returns with an adjustment to asset price appreciation. For the portion of loans not funded by resources of matching maturities, devices to help lenders manage the liquidity risk could be set up, like a specific, non-monetary discount window or a repo facility like exists in Colombia110

 Establish new tools and schemes in order to facilitate the access to housing finance of moderate-income groups and increasingly reach low-income households. A variety of

109 This is essentially the approach in use for local and state government support of affordable housing in the U.S., which – as Argentina and Mexico – is a strong federation in which states’ rights (local “autonomy” in Latin America) and decentralization to the local level have a long tradition. This system, called “Community Development Block Grants” for housing (also the HOME program), starts with formula-driven federal transfers to local and state governments. These local and state governments can use these transfer funds with some discretion, but within certain parameters. The federal government agency involved – the U.S. Department of Housing and Urban Development – creates models for use of these funds for various types of housing. Local and state governments usually choose among these models in creating the local programs best suited to their needs, rather than try to invent their own methods. The uniformity of these models nationwide allows private-sector actors (financial institutions and developers) to better understand and participate in their use. “Community lending departments” have developed within major financial institutions that specialize in working with governments, private developers, and non-profit developers in using these and other housing programs. 110 FRECH swaps for a limited period housing loans against liquid Treasury paper

73 measures can be contemplated for this purpose: (i) Introduce mortgage insurance for loans to first buyers or moderate income earners; (ii) develop credit enhancement mechanisms for securitizing mortgage portfolios focused on such groups; (iii) Combine federal or local subsidy with commercial credit and household savings in order to leverage public funding and enhance private savings, following the principles elaborated in section 201; and (iv), develop a contractual, non-exclusive policy of supporting financial institutions or networks, like Banco Hipotecario or second tier institutions (Casa Financiera, regional banks) whose commercial strategy is geared toward households underserved by the mainstream banking sector. In addition, it must be stressed that inducing a “down-market” movement implies that lenders are confident in the enforceability of mortgage collaterals, short of which personal aspects, and before all income level, will prevail among lending criteria.

6.22 In both cases, the government has an important role to play, especially in sponsoring the setting up of hedging mechanisms, in reinstating the credibility of mortgage collateral, and in supporting the development of credit enhancement instruments with the view of widening the access to housing finance. However, it would be critical that this function be carried out without generating additional risks, in particular by inducing moral hazard situations, nor creating contingent liabilities that would jeopardize the future soundness of public finance. To that effect, government support must be guided by principles like risk sharing, adjustability to market developments so that rent seeking situation be avoided once policy goals are met , and initial funding of future commitments.

74 ANNEXES

1. HOUSING AFFORDABILITY ANALYSIS

1. Household wealth and income situation was deeply affected by the 2001 macroeconomic crisis, particularly as refers to the incidence of poverty and unemployment in total population and the reduction of wages in real terms. At present, economic recovery has allowed a slight household income improvement and a more significant reduction in poverty and unemployment rates. On average household standard of living is still below the 1998 situation, but has been recovering slowly.

Table 1: Argentina: Socioeconomic Conditions and Housing Price - Selected Indicators

Argentina: Socioeconomic Conditions and Housing Price Selected Indicators

May 1998 May 2001 May 2002 May 2003 1º Sem. 2004 1º Sem. 2005 Poverty (% of Total Households) 1/ 22,5 26,2 41,4 42,6 33,5 28,4 Indigent (% of Total Households) 1/ 5,5 8,3 18,0 17,9 12,1 9,5 Unemployment Rate (%) 13,1 16,4 21,4 15,6 14,6 12,5 Wage (Median - $ current) 480,0 400,0 350,0 340,0 450,0 500,0 Wage ($ constant - 1º Sem. 2005) 741,5 629,8 447,9 380,6 488,2 500,0 Housing Prices (M2 Apartments in USD) 2/ 1.043,0 1.038,9 503,5 586,2 718,3 858,4 Housing Prices (M2 Apartments in $) 1.043,0 1.038,9 1.661,6 1.676,5 2.097,4 2.515,0 Wage Purchasing Power in m2 (Buenos Aires City) 0,7 0,7 0,4 0,4 0,3 0,3 Memo: CPI 101,83 99,9 122,91 140,52 145 157,3 Exchange Rate ($/USD) 1 1 3,3 2,86 2,92 2,93 Wage (Median - $ current - Buenos Aires City) 700 700 600 600 700 800 Notes 1/ Total, except may 98 that corresponds to GBA. 2/ 1998 and 2001 corresponds to new dwelling units, other data to new and old dwelling units in Caballito area. Source: Own based on Households Permanent Survey

Own estimates based in EPH and real estate market information

2. The change of regime from the convertibility rule to a “pesified” economy, (i.e. an economy under an administered floating exchange rate regime) modified relative prices deeply, particularly in the housing sector. Housing is closed to a dollar denominated asset in Argentina, specially in large cities where half of total population lives. After the 2001 crisis, the evolution of housing prices per square meter showed a quick recovery in dollar terms after a very short period of declining prices when the housing market was functioning on a very precarious basis ( few operations and only cash sales).

75 Figure 1: Dwelling Units in Buenos Aires City

Dwelling units in Buenos Aires City Price per M2

3.500,00 (Recoleta) US dollar and Constant pesos of 1993 (GDP Deflator)

3.000,00

2.500,00

2.000,00

1.500,00

1.000,00

500,00

(*) July 2005

- ) 0 1 2 3 4 5 6 7 8 9 0 1 2 3 4 5 6 7 8 9 0 1 2 3 4 * ( 8 8 8 8 8 8 8 8 8 8 9 9 9 9 9 9 9 9 9 9 0 0 0 0 0 5 9 9 9 9 9 9 9 9 9 9 9 9 9 9 9 9 9 9 9 9 0 0 0 0 0 0 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 2 2 2 2 2 0 2

Constant Price in pesos Nominal USD Price

Source: Own estimates based on real estate market information

3. Family income and housing prices have reflected the structural relative price adjustment that followed the sharp devaluation of local currency. Household purchasing power in terms of square meters have decreased from approximately 1,4 m2 (a month) in 1997 to 0,3 in 2005. This has created an affordability problem restricting the access of households to housing ownership and their capacity to be qualified for mortgage lending. The impact of this situation has been different by region in the country due to differences in construction costs and urban land availability on the supply side and to differential household income recovery, unemployment and informality incidence on the demand side. (see chart below and Table 1 in Annex)

76 Figure 2: Argetina: Housing Prices relative to Household Total Income by Main Cities

Argentina: Housing Prices relative to Household Total Income By main Cities (excluding Greater Buenos Aires) (Months needed to buy one m2 - number of inhabitants)

2,40 Rosario 2,20 Córdoba Capital Paraná

2,00 Santa Fe Capital 2 m

n Resistencia

o 1,80

o Mendoza Capital t 1,60 d San Salvador de Jujuy e d e e n 1,40 s h

t Mar del Plata

n La Rioja Capital o

M 1,20 Comodoro Rivadavia San Fernando del Valle de 1,00 Catamarca San Juan Capital

0,80 Río Gallegos

0,60 - 200.000 400.000 600.000 800.000 1.000.000 1.200.000 1.400.000 Number of Inhabitants

Source: Own estimates based on real estate market information.

4. In the following exercise an assessment on the potential size of the mortgage market in Argentina is made using data on household income distribution as reported by the Continuous Household Survey. This exercise allowed to identify and analyze 5.3 million households potentially qualifying for mortgage loans living in 28 main cities of the country, equivalent to 50 percent of total households.

5. A first step of our estimation was to characterize the total survey population, that amounts to 23,4 million people111 (Survey expanded population) living in relatively large urban centers, in terms of their income and labor condition (see Table 2 below). Out of them, 17,8 million people conform 5,3 million households reporting a head of the family and incomes of any sort (formal or informal). Notice that only 2,4 million households out of them report to earn formal incomes.

111 63% of total Argentine population.

77 Table 2: Population and Households by Income Decile 1/ Population included by decile Labor conditions Total Number of Income Population Households Decile Employed Unemployed Other Adults Children belonging to with formal an identified income household 1 480.804 179.413 683.315 399.993 1.743.525 28983 2 465.713 127.043 730.189 385.096 1.708.041 58255 3 602.258 118.710 747.988 384.945 1.853.901 131156 4 615.049 116.138 751.875 332.891 1.815.953 183369 5 675.844 103.549 750.283 334.727 1.864.403 243854 6 722,116 111.145 720.807 340.879 1.894.947 315324 7 779.818 89.173 651.707 278.544 1.799.242 326.701 8 848.868 75.254 619.586 285.575 1.829.283 369.456 9 870.681 59.205 526.228 250.737 1.706.851 370.206 10 856.011 29.685 477.671 205.977 1.569.344 375.240 Total 6.917.162 1.009.315 6.659.649 3.199.364 17.785.490 2.402.544

1/ Household Permanent Survey reports 5,340,814 Households Source: Own estimates based on Permanent Household Survey-2nd semester 2004

6. Total family income by decile is highly disperse, ranging from AR$186 a month to AR$4020 a month in the sample. Comparison of the last two columns of the following table shows that income informality is widespread affecting all deciles, but it clearly poses a major problem for households under the 8th decile.

Table 3: Average Income by Group of Earnings – Year 2004 – Second Semester Group Average Average household Average household formal household total formal income (including income (excl. households income total households) with no formal income) 1 186 23 491 2 346 47 478 3 478 162 707 4 621 176 531 5 771 288 641 6 955 440 743 7 1.170 560 877 8 1.497 816 1.105 9 2.031 1.098 1.421 10 4.020 2.316 2.793 Total 1.124 541 1.204

Source: Own estimates based on Permanent Household Survey-2nd semester 2004

7. To qualify for a mortgage loan in Argentina, banks are required to check on the formal labor condition of the borrower. Monthly payments cannot exceed 25 percent of total family income (formal labor plus other regular income sources as "presumed" by the bank). Accordingly

78 we estimated the number of households in our sample that complying with both conditions by decile, are able to repay alternative loans from AR$10.000 to AR$150.000 charging a range of nominal interest rates from 5 to 13 percent. The first exercise considers only formal income and the second one, total income.

Table 4: Potential Market for Mortgage Loans

Potential market for mortage loans Percentage of Households with formal incomes

Interest rate / Loans to 10 years Loans to 20 years Amount 5 7 9 10 13 5 7 9 10 13 10.000 40,0% 38,6% 36,0% 35,7% 34,3% 43,5% 42,7% 42,0% 41,6% 38,6% 20.000 23,5% 21,3% 18,0% 17,6% 15,9% 35,7% 31,2% 27,3% 26,1% 17,4% 30.000 13,7% 12,3% 9,6% 9,3% 7,6% 26,0% 21,3% 17,4% 16,1% 11,6% 60.000 3,5% 2,9% 2,1% 2,0% 1,5% 9,3% 6,9% 5,0% 4,3% 2,0% 90.000 1,3% 1,0% 0,9% 0,8% 0,5% 4,2% 2,9% 2,0% 1,3% 0,8% 120.000 0,6% 0,5% 0,3% 0,3% 0,1% 2,0% 1,3% 0,8% 0,5% 0,5% 150.000 0,3% 0,2% 0,1% 0,1% 0,1% 1,2% 0,8% 0,5% 0,5% 0,2%

Potential market for mortage loans Percentage of Households according to their total income

Interest rate / Loans to 10 years Loans to 20 years Amount 5 7 9 10 13 5 7 9 10 13 10.000 76,2% 73,2% 69,1% 68,3% 65,1% 89,9% 85,1% 81,8% 80,4% 73,2% 20.000 47,1% 42,8% 37,4% 35,7% 31,4% 68,3% 61,1% 54,5% 51,7% 35,3% 30.000 28,0% 25,1% 21,0% 20,1% 16,5% 51,1% 42,8% 35,3% 32,0% 23,9% 60.000 7,7% 6,5% 5,0% 4,6% 3,4% 20,1% 15,0% 11,1% 9,6% 3,0% 90.000 2,8% 2,2% 1,8% 1,7% 1,0% 9,3% 6,5% 3,0% 3,0% 1,8% 120.000 1,3% 1,0% 0,7% 0,7% 0,4% 4,6% 3,0% 1,8% 1,8% 0,9% 150.000 0,6% 0,5% 0,4% 0,3% 0,2% 2,6% 1,8% 1,1% 0,9% 0,5%

Source: own estimates

8. Each percentage in the tables indicates the share of households in our expanded sample that are able to repay the corresponding loan. For instance, to buy a new dwelling unit of around 50 m2, a new household will need to invest around AR$90.000 and the bank will cover only 70 percent of that value, around AR$60,000.- Considering only the formal income, around 2 percent of the households in the sample will be able to repay a 10 year loan at a 10 percent annual interest rate (current market conditions). Considering total income this figure more than doubles to 4,6 percent, which continues to be a very low figure comprising only half of the higher income decile and also presuming that previous savings by the family are enough to cover 30% of the property value not covered by the bank loan.

9. In the calculation, changes in shares are more responsive to the shift from formal to total income than to interest rate or loan maturity. The extremely low percentage of households able to pay for a mortgage loan corresponding to a new dwelling unit may be seen as dramatic for the development of the market in the future112. In contrast, the current development of the market do not appear to be restricted by this constraint due to the slowly take off of the mortgage operation by banks and to the presence of mortgage borrowers that are owners and/or have enough savings to cover the down payment. On top of it, between 2003 and 2005 many individual investors decided on real estate investments as a way to diversify their portfolios in view of expected capital gains in this kind of asset and lack of financial alternatives. They have used banking loans only partially to complete their financial needs taking advantage of a very low real interest rate. Considering that banks active in mortgage business will provide less than 50.000 new housing

112 The formation of new households is estimated in around 140.000 a year. According to our estimates most of them will be facing affordability problems to become new owners.

79 mortgage loans in 2005, the number of 100.000 to 243000 households able to repay for a AR$60000 loan results large enough. (see Table A-2 with number of households in Annex).

10. Finally, considering that our sample involves roughly half of the households in the country, we characterized the housing situation of the households included as regards the total according to the 2001 Census data in order to assess for any bias. The following chart compares the households in the cities belonging to the sample to the total. Notice that the sampled cities show a slight bias towards a better housing condition (and larger income), suggesting that our shares may overestimate figures (slightly) when extended to total households in the country.

Figure 3: Quality of Houses by Province

Quality of houses by Province

60,0% Census Household Survey

50,0% l a i r e t 40,0% a m

y t i l a u q

l 30,0%

s e s u o h

20,0% %

Source: 2001 Population Census

80 Table 5: Purchasing Power of Salary in terms of Housing prices (monthly salaries needed to buy one m2)

Housing price $/m2 / Total Household Income(formal) Housing price $/m2 / Total Household Income(informal) Argentina: Main cities Houses Dwelling units New Dwelling units Houses Dwelling units New Dwelling units San Salvador de Jujuy 0,55 0,75 1,19 1,06 1,44 2,28 Corrientes 0,72 0,90 - 1,29 1,61 - S. Del Estero 0,59 0,66 - 1,47 1,66 - Resistencia 0,75 0,91 1,24 1,75 2,14 2,92 Comodoro Rivadavia 0,60 0,72 0,92 1,00 1,20 1,53 Santa Fe Capital 0,78 0,99 1,55 1,36 1,73 2,72 Chacabuco Mar del Plata 0,63 0,85 1,02 1,19 1,62 1,95 Mendoza Capital 0,63 0,82 1,26 1,11 1,44 2,22 San Juan Capital 0,39 0,53 0,85 0,65 0,87 1,42 Neuquén 0,81 0,97 - 2,09 2,51 - Trelew Paraná 0,76 1,13 1,81 1,13 1,69 2,70 Rosario 0,83 1,25 1,87 1,38 2,07 3,11 Río Gallegos 0,45 0,58 0,76 0,65 0,84 1,10 La Rioja Capital 0,53 0,67 1,00 0,80 1,00 1,50 San Fernando del Valle de Catamarca 0,52 0,60 0,86 0,96 1,11 1,60 Córdoba Capital 0,70 1,08 1,66 1,21 1,86 2,88 Santa Rosa 0,61 0,92 - 1,22 1,83 - Posadas 0,51 0,75 - 0,99 1,45 - Salta Capital 0,46 0,61 - 0,99 1,30 - Ciudad de Buenos Aires - Caballito 1/ - - 1,11 - - 1,41 Ciudad de Buenos Aires - Recoleta 1/ - - 1,39 - - 1,77 Ciudad de Buenos Aires - Zona Sur 1/ - - 0,95 - - 1,21 Ciudad de Buenos Aires - Sur 2/ - - 0,80 - - 1,02 Ciudad de Buenos Aires - Oeste 2/ - - 0,96 - - 1,21 Ciudad de Buenos Aires - Norte 2/ - - 1,48 - - 1,88

1/ Toribio Achabal 2/ Cedem. IV T04

81 Table 6: Potential Market for Mortgage Loans

Potential market for mortage loans Number of households with formal incomes

Interest rate / Loans to 10 years Loans to 20 years Amount 5 7 9 10 13 5 7 9 10 13 10.000 2.134.085 2.063.394 1.922.603 1.908.944 1.833.024 2.321.405 2.277.646 2.240.857 2.219.768 2.062.788 20.000 1.253.436 1.138.269 963.462 940.015 846.612 1.909.011 1.668.298 1.455.691 1.394.893 931.642 30.000 733.764 659.120 515.088 494.419 405.592 1.387.950 1.138.269 931.642 859.863 616.853 60.000 184.975 157.197 112.194 106.999 80.590 494.489 368.372 265.392 229.490 106.999 90.000 68.473 54.746 46.704 41.564 25.611 226.687 157.197 106.999 72.052 45.158 120.000 30.608 25.611 15.789 13.710 6.602 106.999 72.052 45.158 28.257 24.385 150.000 13.710 10.234 6.602 4.807 3.583 64.022 45.158 28.257 24.385 8.194

Potential market for mortage loans Percentage of Households according to their total income

Interest rate / Loans to 10 years Loans to 20 years Amount 5 7 9 10 13 5 7 9 10 13 10.000 4.068.598 3.911.533 3.688.580 3.647.205 3.474.557 4.798.683 4.544.731 4.369.624 4.291.204 3.908.012 20.000 2.513.614 2.283.196 1.994.691 1.908.997 1.677.909 3.647.205 3.260.604 2.908.308 2.758.459 1.886.252 30.000 1.492.646 1.338.792 1.120.463 1.074.941 880.113 2.729.313 2.283.196 1.886.252 1.710.260 1.277.219 60.000 411.437 345.928 264.602 243.286 183.309 1.075.196 801.243 590.810 510.036 159.533 90.000 149.547 117.364 98.197 92.261 50.868 498.930 345.153 159.533 159.533 96.506 120.000 68.839 50.868 37.317 35.780 19.884 244.067 159.533 96.506 96.506 46.371 150.000 34.471 28.339 19.884 18.386 9.506 139.650 96.506 57.458 46.371 24.477 Source: Own estimates

82 2. SMALL-SCALE LOW-INCOME HOUSING PROGRAMS

1. Chapter 3 describes and comments on the larger-scale low-income housing programs recently created by the federal government. The following describes a number of small-scale low-income housing programs created under new federal initiatives.

2. Housing Improvement and Basic Infrastructure. The AR$3.3 million program finances completion, extension and improvement of housing units. The methodology is self construction and mutual assistance with technical assistance from NGOs, which has proved to be very successful. The program offers technical and financial assistance to see to the demand of housing solutions to households with unsatisfied basic needs, and vulnerable groups which are in emergency situations, risk of marginalization. The program granted funds ( refundable or not) for the purchase of construction materials, counting on labor and land provided by the beneficiaries, organized in communities through non governmental organizations, provincial governments, municipalities or Provincial Housing Institutes ( IPVs).

3. Urban Services (PROPASA). The AR$15.6 million program finances water services, social assistance, and wastewater for the inhabitants of frontier provinces of the “Cuenca del Plata”, whith a high rate of unsatisfied basic needs. The program is financed by a loan granted by FONPLATA, Financial Fund for the Development of the “Cuenca del Plata”. It gives financing and technical assistance to small works of basic community infrastructure through non refundable subsidies.

4. Social Development in the Northwest and Northeast Provinces (PROSOPA). The planned investment of AR$32.6 million, with IADB resources, will target housing and urban infrastructure in rural areas and small cities in the La Plata area and the Northwest and Northeast Provinces. The 2004-2008 program is planned for USD45 million. The program includes the offer of basic services and activities for training for the efficient use and keeping of the works to be built, improving community development to increase the sustainability of the actions.

5. Subprogram for Urban Habitat Improvement in “Villas” and Informal settlement. It covers the Great Buenos Aires area. In its first phase it plans the construction of 15.800 housing units and 1.800 housing improvements from the Federal Programs, representing a total investment of AR$550 millions and the social inclusion of 15.000 households.

83 1.212 3. FONAVI AND FEDERAL PROGRAM PERFORMANCE INDICATORS

1. The Federal government has published an annual audit report on FONAVI performance at provincial level. The most recent information is for 2003. As regards FONAVI operation a summary of performance indicators may be found in the Table 1. Column (a) and (b) show the amount and share in the total of FONAVI funds transferred automatically to each province, column (c) allows the comparison of previous data with the effective use of funds for housing investment net of funds diverted by provincial government to other uses. In 2003 only five provinces made use of this discretional power. However it was an often used resource over the 1999-2002 period. Column (d) reports the recovery coefficient that amounts to 43 percent on average, half of the provinces report recovery coefficients lower than the average. Administrative expenses are presented in columns (e) and (f). The first version estimates these expenses as a percentage of total expenses, instead the second version estimates administrative expenses as a percentage of funds applied to housing investment,i.e., relates managing expenses to the amount that is to be managed. Average expenses in program management amounts to 13 percent and 18 percent, respectively. Only three provinces exhibit percentages under two digits.

Table 1: FONAVI 2003 – General Performance Indicators

FONAVI 2003: General performance indicators

Administrative expenses Province Funds transferred Share of total Funds used in Recovery (%) (2) as a percentage of As a percentage of housing as % of Fund (%) funds transferred total expenses housing investment a b c d e f Buenos Aires 78.776.945 14,67% 42,17% 27,2% 10,1% 20,7% Catamarca 11.664.453 2,17% 100,00% 59,3% 13,8% 16,9% Córdoba 31.441.657 5,86% 100,00% 33,9% 19,4% 24,0% Corrientes 26.892.819 5,01% 100,00% 57,4% 25,1% 34,4% Chaco 23.963.585 4,46% 63,49% 56,3% 14,6% 18,1% Chubut 17.382.118 3,24% 100,00% 41,9% 8,7% 9,9% Entre Ríos 20.553.207 3,83% 100,00% 31,2% 28,8% 55,0% Formosa 21.692.068 4,04% 100,00% 13,5% 14,1% 20,8% Jujuy 15.993.411 2,98% 100,00% 58,0% 15,7% 24,5% La Pampa 10.865.784 2,02% 100,00% 34,2% 15,5% 30,1% La Rioja 10.540.107 1,96% 100,00% 52,1% 16,5% 21,0% Mendoza 22.036.548 4,10% 100,00% 49,4% 10,1% 12,7% Misiones 25.534.597 4,76% 100,00% 56,2% 12,4% 15,7% Neuquen 23.453.877 4,37% 100,00% 37,7% 11,7% 14,6% Río Negro 23.715.245 4,42% 100,00% 0,1% 10,2% 11,6% Salta 21.731.570 4,05% 73,22% 35,7% 14,9% 17,9% San Juan 19.830.058 3,69% 100,00% 57,7% 12,0% 13,7% San Luis 19.830.056 3,69% 100,00% 82,7% 1,3% 1,4% Santa Cruz 17.385.257 3,24% 100,00% 51,0% 2,1% 2,2% Santa Fe 30.695.843 5,72% 67,79% 39,6% 25,0% 45,8% Sgo.Estero 22.661.231 4,22% 100,00% 44,5% 12,1% 14,0% Tucumán 19.029.502 3,54% 100,00% 42,1% 21,0% 34,0% T.del Fuego 14.434.666 2,69% 57,42% 70,4% 36,6% 62,7% Cap.Federal 6.851.069 1,28% 100,00% 36,1% 40,5% 71,7% TOTAL 536.955.673 100,00% 85,82% 43,0% 13,2% 17,6% (1) Funds for free application according to Law 25.570. (2) effective repayment as a share of due ones.

84 Source: FO.NA.VI Auditory Report-2003 , Subsecretaría de Vivienda y Urbanismo. 2. Another interesting information available from the auditory reports are the prices per housing units in each province. Figures show a large dispersion and in some cases the maximum values approaches market values, indicating a potential leakage of the program. In comparison with past performance, prices have been diminishing showing a certain improvement in program monitoring. ( Table 2)

Table 2: Prices Corresponding to FONAVI Housing Units

Prices corresponding to FO.NA.VI housing units (Two bedroom houses) 2003 - AR $ MAX MIN Buenos Aires 25.470 17.095 Catamarca 19.088 18.103 Córdoba 36.000 12.312 Corrientes 30.641 16.195 Chaco 28.673 28.370 Chubut 46.667 17.371 Entre Ríos 46.230 7.807 Formosa (1) 23.577 n.d. Jujuy 23.975 15.581 La Pampa 21.028 n.d. La Rioja 23.800 19.964 Mendoza 44.120 18.750 Misiones 32.000 7.000 Neuquen 36.631 36.631 Río Negro 23.696 n.d. Salta 26.532 5.000 San Juan 23.402 13.523 San Luis 22.500 n.d. Santa Cruz 35.189 13.794 Santa Fe 65.602 16.662 Sgo.Estero 15.990 n.d. Tucumán 33.615 30.142 T.del Fuego 91.599 18.694 GCBA 43.120 n.d.

Source: FO.NA.VI Auditory Report-2003 , Subsecretary of Urban Development and Housing .

3. Dispersion in the average construction cost for housing units across jurisdictions has also been a persistent feature of FONAVI, associated to the same leakage problem than in the prices case, but also related to inefficiencies in monitoring of service providers (construction companies, inputs providers, etc) and the type of operation that is being implemented. Decentralized housing unit provision is less expensive in most of the jurisdictions. (Table 3)

85 Table 3: FONAVI, Total unit Cost built by type of operation, 2003

Total Cost per unit built by the FONAVI Houses finished in 2003

Operations Free Demand Co-financed Decentralized Mean Buenos Aires 16.181 16.181 Catamarca 22.778 18.749 20.763 Córdoba 29.561 17.212 23.386 Corrientes 18.488 18.764 13.238 16.830 Chaco 18.051 22.114 20.082 Chubut 53.714 33.612 12.293 33.206 Entre Rios 20.658 21.384 14.776 18.939 Formosa 23.577 23.577 Jujuy 25.057 22.547 23.802 La Pampa 25.722 25.722 La Rioja 20.052 10.950 15.501 Mendoza 29.192 20.269 16.488 21.983 Misiones 28.703 39.444 6.894 25.013 Neuquén 30.993 18.871 24.932 Rio Negro 22.669 21.849 22.259 Salta 12.159 12.159 San Juan 23.659 18.197 15.589 19.148 San Luis 14.791 18.277 16.534 Santa Cruz 51.457 33.687 42.572 Santa Fe 22.270 15.315 18.792 Santiago del Estero 22.970 22.970 Tucuman 12.718 25.257 18.988 Tierra del Fuego n.d. GCBA 54.525 54.525 Weighted average 22.850 25.855 17.349 22.018

Simple Mean 27.219 24.121 17.186 23.713 Max 54.525 39.444 33.687 54.525 Min 12.718 18.197 6.894 12.159 Standard Deviation/ Mean 43,4% 33,0% 35,9% 38,9%

Source: Auditory report-2003, Subsecretary of Urban Development and Housing

4. Comparison of key indicators prior, during and after the crisis, do not show any improvement of the situation. In 2003, the average percentage of recovery coefficients raised back to the pre-crisis values, while the investment as a percentage of total revenues steadily decreases, reaching its lower values in 2003.

86 Table 4: FONAVI Recovery Rate and Ratio of Investment to Total Revenues, 1999-2003

Recovery Rate (1) Investment / (Total Revenues– Other Expenses) Province 1999 2001 2003 1999 2001 2003 Buenos Aires 38.1% 26.2% 27.2% 89.2% 97.4% 82.8% Catamarca 49.2% 62.5% 59.3% 87.3% 99.9% 71.6% Córdoba 37.4% 36.5% 33.9% 172.4% 55.3% 58.0% Corrientes 14.5% 35.6% 57.4% 78.7% 107.5% 69.2% Chaco 36.7% 35.9% 56.3% 81.0% 94.8% 95.5% Chubut 39.4% 35.1% 41.9% 102.4% 88.4% 93.2% Entre Ríos 26.5% 24.0% 31.2% 61.6% 74.1% 65.0% Formosa 21.5% 16.0% 13.5% 92.1% 87.0% 69.6% Jujuy 61.0% 34.6% 58.0% 79.0% 91.8% 68.5% La Pampa 48.9% 42.9% 34.2% 135.3% 90.5% 93.8% La Rioja 56.1% 45.5% 52.1% 90.8% 92.9% 78.7% Mendoza 50.7% 36.8% 49.4% 88.2% 103.5% 94.1% Misiones 43.9% 32.8% 56.2% 91.9% 81.0% 82.1% Neuquen 26.0% 19.3% 37.7% 74.4% 116.4% 86.5% Río Negro 28.2% 8.0% 0.1% 97.1% 110.0% 74.0% Salta 48.7% 36.0% 35.7% 83.8% 84.6% 71.6% San Juan 57.4% 50.6% 57.7% 88.7% 97.3% 90.1% San Luis 60.9% 39.5% 82.7% 160.3% 33.8% 70.7% Santa Cruz 48.3% 53.6% 51.0% 113.9% 93.2% 91.6% Santa Fe 57.1% 37.2% 39.6% 82.0% 76.3% 45.5% Sgo.Estero 43.0% 22.5% 44.5% 91.1% 108.7% 99.0% Tucumán 61.0% 57.5% 42.1% 128.4% 86.2% 73.0% T.del Fuego 66.1% 72.1% 70.4% 100.1% 81.7% 65.2% Cap.Federal 78.9% 42.3% 36.1% 88.2% 62.7% 54.6% TOTAL 43.7% 36.2% 43.0% 100.0% 87.0% 80.2% (1) Revenues as % of due payments. Note: Other expenses include debt repayments and other non-operational expenditures. Overall Expenditures include operational and other expenses. Source: Own estimates based in Subsecretary of Urban Development and Housing , FONAVI Auditories, 2001 -2003

5. Administrative/operational expenses have increased both as a percentage of total expenditure (including investment) and as a percentage of effective investment. Only seven provinces were able to reduce these expenses after the crisis. On average management of housing programs reduced funds available for investment in 14-17 percent over the period.( Table5)

87 Table 5: FONAVI. Operational Expenses as percentage of total expenditure and investment and Overall expenditures to investment, 1999-2003 Operational Expenditures/ (Overall Overall Expenditures/ Investment Expenditures + Investment) Province 1999 2001 2003 1999 2001 2003 Buenos Aires 8.1% 9.1% 10.1% 15.1% 16.3% 20.7% Catamarca 5.7% 14.3% 13.8% 6.1% 17.2% 16.9% Córdoba 2.2% 10.9% 19.4% 2.3% 12.3% 24.0% Corrientes 23.9% 17.1% 25.1% 31.5% 22.8% 34.4% Chaco 18.0% 14.8% 14.6% 25.1% 17.8% 18.1% Chubut 8.6% 10.2% 8.7% 11.6% 14.0% 9.9% Entre Ríos 38.4% 26.1% 28.8% 64.7% 41.2% 55.0% Formosa 9.5% 11.3% 14.1% 11.7% 17.7% 20.8% Jujuy 13.2% 13.0% 15.7% 24.2% 19.7% 24.5% La Pampa 11.7% 14.9% 15.5% 16.8% 24.5% 30.1% La Rioja 4.9% 16.2% 16.5% 5.2% 19.3% 21.0% Mendoza 10.4% 10.3% 10.1% 11.9% 12.4% 12.7% Misiones 11.4% 15.3% 12.4% 15.0% 22.7% 15.7% Neuquen 16.9% 8.9% 11.7% 22.0% 10.1% 14.6% Río Negro 11.9% 6.6% 10.2% 13.9% 7.3% 11.6% Salta 14.2% 13.6% 14.9% 16.7% 15.9% 17.9% San Juan 10.4% 9.3% 12.0% 11.6% 10.4% 13.7% San Luis 0.1% 0.0% 1.3% 0.1% 0.0% 1.4% Santa Cruz 6.4% 6.3% 2.1% 6.9% 7.2% 2.2% Santa Fe 9.5% 19.6% 25.0% 11.2% 29.5% 45.8% Sgo.Estero 15.4% 9.5% 12.1% 18.2% 12.3% 14.0% Tucumán 8.9% 12.4% 21.0% 9.9% 16.3% 34.0% T.del Fuego 21.4% 24.2% 36.6% 27.2% 34.1% 62.7% Cap.Federal 26.2% 33.3% 40.5% 37.4% 52.9% 71.7% TOTAL 11.0% 13.1% 13.2% 14.2% 17.8% 17.6%

Source: Own estimates based in Subsecretary of Urban Development and Housing , FO.NA.VI Auditories, 2001 -2003

Efficiency in provincial management

6. Comparing the share of housing units supplied by each jurisdiction on total housing units supplied with the percentage structure of automatic transfers as assigned by Law 24.464 /95, for the 1996-2003 period sheds light on the efficiency of the fund management by jurisdiction. ( Table 6 ) Thus, Mendoza is the province registering the best performance of the “transferencias automaticas “ funds assigned, receiving 4 percent of funding and supplying 7.5 percent of the total units. Likewise, taking into account that in this province the decentralization of the funds have reached up to the municipal districts and the diversification of operations with the instrumentation of non- conventional housing solutions, the said achievement is not surprising. In addition, the performance of the cooperatives of housing have been historically significant at this jurisdiction. Likewise, San Luis, Misiones y Entre Rios registered good performance as to the use of the resources of FONAVI. Santa Cruz and Tierra del

88 Fuego, Formosa and Neuquen made averagely less housing works in relation to the quota of funds received. At the same time, the importance of FONAVI. construction in total regional supply of housing units shows great variability. Those provinces that underperforms in terms of construction share (comparison of column 1 and 2 of the Table 6 ) and exhibit an important contribution of FONAVI construction to their total supply of housing units in the market, like Tierra del Fuego are probably receiving an excess of public funds for housing purposes. Those that perform over or equal to their quota and also have an important share of the housing market publicly provided might be “crowding out” the private sector participation. Those underperforming and with low market share may suffer from poor management and results.

Table 6: FONAVI Provincial Funding Distribution and Housing Investment . Comparison among provinces. 1996-2003 FONAVI Performance Provincial Funding Distribution and Housing Investment

Funding Distribution Provincial Housing FONAVI Cosntruction / Law 24.464 - Art.5º Construction (as % of Total Provincial Housing (1995) Housing Contruction) Construction Buenos Aires 14,5 14,7 11,8 Santa Fe 5,7 5,3 19,8 Córdoba 5,7 6,8 17,6 Corrientes 5,0 4,6 38,2 Misiones 4,7 5,7 51,8 Chaco 4,6 4,3 41,1 Río Negro 4,5 3,7 50,4 Santiago del Estero 4,3 5,1 48,8 Neuquén 4,3 2,5 37,8 Tucumán 4,2 4,0 25,2 Salta 4,0 4,4 32,0 Mendoza 4,0 7,5 37,6 Formosa 4,0 1,1 25,8 Entre Ríos 3,9 4,5 24,5 San Luis 3,7 5,5 73,5 San Juan 3,7 4,0 51,2 Santa Cruz 3,2 2,0 52,3 Chubut 3,2 3,2 67,8 Jujuy 3,0 2,2 33,0 Tierra del Fuego 2,7 1,0 61,0 Catamarca 2,1 2,2 49,1 La Rioja 2,0 2,6 38,6 La Pampa 2,0 2,2 56,9 C.A.B.A 1,3 1,3 3,9 Total 100,0 100,0 25,0

Source: Own estimates based on Subsecretary of Urban Development and Housing .

89 Table 7: Federal Housing Programs. Housing Units Distribution and Socio-economic Indicators. 2005 Federal Housing Plan 1/ August 2005 Number of Housing Units

Federal Plan of "Solidaridad Housing Federal Plan of Housing Total Housing Households with Unemployment Housing "Mejor Vivir" Province Habitacional" Emergency (*) Construction II Solutions UBN (%) 2/ 3/ Construction I Buenos Aires 43.000 47.800 3.002 92.500 186.302 13 18 Catamarca 2.350 2.000 1.750 6.000 12.100 18 16 Ciudad de Buenos Aires 5.000 - 4.550 6.000 15.550 7 11 Cordoba 8.000 160 9.910 16.000 34.070 11 17 Corrientes 2.900 2.040 4.660 110 10.000 19.710 24 14 Chaco 2.900 2.076 6.760 130 10.000 21.866 28 9 Chubut 4.000 499 1.600 6.000 12.099 13 11 Entre Rios 2.900 1.940 4.430 400 9.900 19.570 15 14 Formosa 1.400 2.000 3.500 6.000 12.900 28 8 Jujuy 3.000 2.186 3.500 1.204 6.000 15.890 26 21 La Pampa 1.400 - 850 3.600 5.850 9 13 La Rioja 2.000 - 1.520 6.000 9.520 17 14 Mendoza 4.000 - 5.360 11.000 20.360 13 9 Misiones 2.900 2.030 6.650 202 10.000 21.782 24 8 Neuquén 1.400 - 1.750 5.000 8.150 16 13 Rio Negro 3.000 30 2.220 5.000 10.250 16 15 Salta 2.000 2.025 5.710 12.000 21.735 28 16 San Juan 5.000 387 2.220 910 10.000 18.517 14 13 San Luis 1.000 - 1.510 5.000 7.510 13 16 Santa Cruz 3.000 - 1.100 6.000 10.100 10 3 Santa Fé 10.000 - 10.500 21.000 41.500 12 18 Santiago del Estero 4.000 - 4.900 10.000 18.900 26 13 Tucuman 4.000 2.118 6.650 420 10.000 23.188 21 12 Tierra del Fuego 1.200 600 16 5.000 6.816 16 13 TOTAL 120.350 19.491 140.000 6.394 288.000 574.235 14 15 (*) Figures corresponds to housing completed at 6/2004 1/ Does Not Includes FONAVI Automatic Transferencies and Completion Plans I & II. 2/ Unsatisfaied Basic Needs 3/ Corresponds to May 2003.

Source: Own estimates based on Subsecretary of Urban Development and Housing

90 4. CURRENT ACCESSIBILITY TO MORTGAGE FINANCE

1. By mid-2003, mortgage loan market started a slow recovery in Argentina , led by public banks and the Mortgage National Bank that at the time held 62 percent of total mortgage stocks (housing plus commercial). Several private banks resumed these operations by the end of the year. As of the end of 2004 a picture of participants in the mortgage loan market is shown in the following table. Even though separate information for housing and commercial loans is not available by lending institution, after the crisis public banks kept a relatively higher stock of commercial loans (Banco Naciòn, Banco Provincia) while BHSA, Banco Ciudad and large private banks became relatively more active in housing mortgage loans.

Table 1: Market Share in Mortgage Loans – End of 2004

Banks 2004 Public Banks 45,10% De la Nación 24,69% De la Provincia de Buenos Aires 11,96% The others 8,46% Private Banks 54,9% Hipotecario 18,44% Rio 7,64% De Galicia y Buenos Aires 6,30% BBVA Banco Frances 4,58% Bankboston 4,38% Banca Nazionale del Lavoro 2,80% Citibank 1,96% HSBC 1,77% Patagonia sudameris 1,69% The others 5,33% Total 100,00%

Source: Own estimates based on BCRA

2. As for the market structure, since 1998 and up to the 2001 crisis, competition had increased and larger (public) banks witnessed a reduction in their share of the market. This trend towards de-concentration ended at the time of the mortgage loan collapse during the crisis. This effect was due to the fact that prepayment was more usual for mortgage loans of private banks (probably due to the targeted high and middle income households of these institutions). In 2002 the first 10 banking institutions represented 90 percent of the market, though this trend toward concentration has diminished slightly with market recovery. (Table refers to total mortgage loans -commercial and housing).

91 Table 2: Concentration in Mortgage Loans Market Concentration in Mortgage Loans Market Amount 10 Largest Banks 5 Largest Banks (Billions of Share (%) Share (%) $) 1995 9,99 77,90 66,80 1996 10,97 78,30 67,30 1997 12,56 79,40 64,20 1998 15,46 82,50 65,30 1999 6,03 79,50 62,90 2000 7,05 74,80 59,20 2001 16,06 79,40 62,80 2002 11,41 90,20 70,30 2003 9,34 88,70 70,30 2004 8,84 84,52 69,03

Source: Own estimates based on BCRA

3. Increasing activity in mortgage loan business improved market conditions providing demand with broader loan options. Interest rates charged to this kind of loans are on average 13,6 percent a year (October 2005) , ranging from a maximum of 19 percent to a minimum of 10,2 percent. Insurance (life and fire) and other charges related to the granting of the loan add around 3 percent a year. These costs are significant and though they had been decreasing before 2001, at present the difference between maximum and minimum charges has widened. Most loan maturity is 10 years or under, but there are also 20 year loans available.

Table 3: Mortgage Loans: Interest Rates and Financial Cost among Banks

Mortgage loans: interest rates and financial cost among banks. Amount: AR$ 40.000 – Variable Interest Rate – 10 years June 2004 June 2005 Nominal Interest Total financial Nominal Total Rate cost Interest Rate financial cost Simple Average (1) 9.9% 12.7% 9.8% 13.6% Standard Deviation (2) 1.6% 1.8% 2.5% 2.4% (2)/(1) 16.6% 14.0% 25.5% 17.6% Max 13.5% 16.0% 17.0% 18.9% Min 8.0% 9.6% 6.9% 10.2% Obs. 13 13 20 20 Source: Based on Revista Temas del Consumidor, Undersecretary of Consumer Defense.

92 Costs over the interest rates on mortgage loans Percentage High Low 1998 4.9 1.1 2001 2.3 1.8 2004 4.7 1.1 2005 6.8 1.7 Source: Based on Revista Temas del Consumidor, Undersecretary of Consumer Defense.

4. Analysis of lending conditions by bank shows differences not only in nominal interest rates and additional costs but also in frequency of adjustment of the variable interest rate and the adjustment factor used for that purpose. Noticeably, public banks are not among the cheapest in the ranking by total financial cost of the loan. Most banks prefer to relate adjustment of loan variable interest rate to term deposit interest rate, in order to match their charges to the cost of their main source of funds.

93 Sample of active financial entities in the mortgage market Mortgage loans to 10 years with variable interest rate - August 2005 Bank Nominal Total Frequency Adjustment factor Interest rate Financial of (% annual) cost (% adjustment annual) BNP PARIBAS 8.5 10.23 Quarterly BAIBOR (Buenos Aires interbank offered rate) BANCO RIO (1) 7.5 10.94 Quarterly Survey of interest rate on term deposits (BCRA) BANCO CREDICOOP 7.4 11.16 Each 4 Survey of interest rate on term months deposits (BCRA) BANCO CIUDAD 8 11.19 Each 2 Survey of interest rate on term months deposits (BCRA) BBVA BANCO 6.85 11.43 Monthly Survey of interest rate on term FRANCES (2) deposits (BCRA) BANCO PATAGONIA 8.5 11.94 Each 2 Survey of interest rate on term months deposits (BCRA) BANCO ITAU 8.4 12.29 Monthly BADLAR (Rate on large term deposits) BANCO PROVINCIA 9.75 12.55 Monthly Survey of interest rate on term DE BUENOS AIRES (3) deposits (BCRA) BANCA NAZIONALE 8 12.75 Quarterly Survey of interest rate on term DEL LAVORO deposits (BCRA) BANCO DE GALICIA 9 12.88 Quarterly Survey of interest rate on term deposits (BCRA) NUEVO BANCO 9.45 13.37 Mensual BADLAR (Rate on large term SUQUIA deposits) BANCO DE CHUBUT 9.72 13.41 Monthly Survey of interest rate on term deposits (BCRA) BANCO 9.45 13.56 Monthly BADLAR (Rate on large term MACROBANSUD deposits) BANCO HIPOTECARIO 8 13.91 Monthly Survey of interest rate on term deposits (BCRA) BANCO NACION 10.9 14.67 Quarterly Survey of interest rate on term deposits (BCRA) BANCO SUPERVIELLE 9.9 14.74 Monthly Encuesta Prest. Emp. 1º Línea BCRA BANKBOSTON 10.78 14.75 Monthly Survey of interest rate on term deposits (BCRA) BANCO DE LA 9.9 14.96 Monthly Survey of interest rate on term PROVINCIA DE deposits (BCRA) CORDOBA BANCO DE 9.87 16.71 Monthly BAIBOR (Buenos Aires interbank CORRIENTES offered rate) BANCO DE FORMOSA 14 17.01 Monthly BAIBOR (Buenos Aires interbank offered rate) BANCO DE TIERRA 17.03 18.92 Monthly "Market conditions" DEL FUEGO Source: Based on Revista Temas del Consumidor, Undersecretary of Consumer Defense. (1) Banco Río: TFC with the program Super-Recompensa: 6.85% - (2) Banco Francés: TFC with special programs: 7.07%. (3) Banco Provincia de Buenos Aires: TFC with payroll paid in the bank’s account: 11.42%

94 5. Fixed interest rate lending in the mortgage market is much more less usual and its costs is higher exceeding current rates by 1,5 percent a year. Though loan composition as regards variable or fixed interest rate depends on each financial institution strategy, private information suggests that loans under fixed rate are less than 20 percent of total lending supply.

Table 4: Sample of Active Financial Entities in the Mortgage Market Mortgage loans to 10 years with fixed interest rate – August 2005

Nominal Interest rate Total Financial cost (% annual) (% annual) BANCO PATAGONIA 9.75 13.33 BANCO DE GALICIA 9.5 13.44 NUEVO BANCO SUQUIA 10.5 14.55 BANCO MACROBANSUD 10.5 14.75 BANCO RIO 11.95 15.66 BANCO HIPOTECARIO 9.75 15.79 BANCO CREDICOOP 11.8 15.92 BANCO CIUDAD 12.5 16.35 Source: Based on Revista Temas del Consumidor, Undersecretary of Consumer Defense

6. One feature of the market that is called to potentially restrict growth in the future is the interest rate risk. At present cost of funding is extremely low considering that the main funding source are term and saving deposits that are charged an average of 3,4 percent annually (30 days- interest rate). This nominal rate turns into negative in real terms. The following table shows the evolution of interest rates by type of financial instrument in pesos. Notice that 2005 nominal rates are in all cases lower than the ones prevailing in 1997, the best year under the Convertibility plan. At the same time, inflation rate is estimated to approximate 11-12 percent this year while it was only 0,53 percent in 1997.

Table 5: Interest Rates on Loans in AR$

INTEREST RATES ON LOANS IN AR$

Prime Overdraft Document Mortgage Pledges Personal Rate (30 s s (4) loans days) Discounts (3) (5) (2) 1993 10,3 36,6 20,06 15,5 21,0 38,5 1994 10,1 34,7 18,71 16,8 22,4 35,9 1995 17,8 41,6 19,14 16,6 24,9 37,0 1996 10,5 32,7 12,69 15,8 19,2 33,3 1997 9,2 28,2 10,72 14,3 17,4 30,4 1998 10,6 28,8 11,23 13,7 19,6 30,4 1999 11,0 30,6 11,78 14,0 19,5 33,1 2000 11,1 30,0 11,95 14,9 19,8 34,9 2001 26,5 40,4 28,61 15,4 18,8 36,4 2002 53,0 63,2 40,72 14,6 26,7 40,5 2003 19,1 40,6 16,82 13,5 20,7 44,9 2004 6,8 16,3 10,82 10,9 13,5 30,0 2005 6,8 15,2 10,01 10,7 9,9 27,4 (1) Average interest rate, fixed and variable. (2) +90 days. (3) 5-10 years. (4) +1 year. (5) +180 days.

95 7. In brief, the evolution of the mortgage loan market since the crisis was characterized by a moderate growth as compared to other financial instruments. At first , households showed reluctant to demand loans of any kind in spite of the low (variable) interest rate charged to mortgage loans, that are denominated in pesos as the only option in the market. Currently, a moderately increasing loan supply matches an also increasing loan demand. Perspectives of growth are uncertain taking into account the affordability problem on the demand side and the interest rate risk on the supply side.

96 5. HOUSING MICROFINANCE IN LATIN AMERICA AND ARGENTINA

1. The Patrimono Hoy Program of CEMEX , the giant Mexican cement maker, serves self-help homebuilders, who account for 40 percent of the consumption of cement in Mexico. Research of this market by CEMEX found that self-help construction has strong drawbacks when unguided. Building materials dealers often sell these households poor quality materials left over from large customers at high prices. Homebuilders often waste materials by buying too much or too little, and also hoard them, leading to their deterioration by weather and loss from theft. Home design and construction is often poor quality. Finally, household savings often go for festivities rather than construction materials. In this context, the CEMEX Patrimonio Hoy program organizes small groups of families who commit to a 70- to 86-week saving program, arranges with local building materials suppliers to deliver high-quality product at competitive prices, and advances microcredit to these families in the form of delivering building materials well prior to payment by households. CEMEX operates this program through establishing offices located in low-income communities, and local “promoters” – 98 percent of them women - to inform local households about the program. Patrimonio Hoy has proved astonishingly successful. While the typical self-help homebuilder in Mexico spends US$1,527 and takes four years to build an average size room of 100-square-feet, Patrimonio-Hoy participants construct the same size room, with better quality, in less than half the time (1.5 years) at two-thirds the cost (US$1,038). Patrimonio Hoy reached 100,000 people in its first two years and plans to expand this number to 1,000,000 in the next 5 years.

2. The MiCasa program of MiBanco, the largest microfinance lender and one of the largest banks in Peru, lends to households earning from US $260 to $900 per month for home improvement and expansion. Credits – averaging US $1,000 to $3,000 - go up to 5 years at interest rates of 40 percent (June 2003) – somewhat below the market rate for microenterprise finance, although competition from other microlenders is driving rates down. MiCasa supports households with construction through an initial design and budget, a technical report on feasibility, and one visit at the start of building. MiCasa informs households, extends credit, and collects repayment through loan officers, who each manage a portfolio of 250 loans and get paid largely on commission for loan origination and collection. Co-signers, personal collateral, and custody of households’ proofs of ownership typically secure loans, rather than mortgages. However, assiduous methods of loan collection joined with borrowers’ desire to maintain good credit constitute the main incentives for repayment. From its start in December 2000, MiCasa had made 41,893 loans by June 2003; 30-day arrears rates were at 1.74 percent and return-on-equity at 7 to 9 percent per annum, which – when leveraged by the institution’s capital-to-asset ratio - resulted in a return-on-assets of over 20 percent. In 2004, MiCasa established partnerships with local building materials suppliers to achieve better prices and product for its borrowers, and in order to ramp up loan volume.

97 3. Fundacion Pro Vivienda Social has operated since 1992, in the Argentine municipalities of Moreno and Jose C. Paz through three programs: a) housing improvement financed by microcredit; b) urban infrastructure expansion; and c) titling. The housing improvement program makes loans starting from AR$300 to AR$500, repayable over half a year, with installments of once to twice per month, mainly to low-income and informally-employed households. The program includes technical assistance for construction. The urban infrastructure program extends services to low-income households - for example, through organizing families for extension of gas networks. A trust helps secure the flow of payments from recipient households, while a guarantee fund covers delays in payments. Solidarity groups help secure these credits. In total, 8,000 families in 200 groups accessed loans totaling US $12 million with 96 percent repayment.

4. Credit facilities program for minimum housing and home improvement in Cordoba - implemented by the Argentine Center for Economic Housing - started in 1996. It grants micro-credits to support progressive housing on urbanized land plots with tenure security (but not necessarily full legal title). Borrowers had average incomes of AR$700, 150 pesos below the poverty line but still with some repayment capacity. At first, the program tried to foster use of innovative building methods (such as pre-fabricated concrete panels provided by a specialized NGO). After some time, the program surrendered to households’ strong preference for traditional methods. CAVE started with a revolving fund of US$535.000 lent by the Federal Government and the NGO AVE/CEVE, which also managed the program. A commercial bank collected the repayments. Operacion Sitio, in Chile (1970/80) and Servivienda , in Colombia (ongoing from 1980) served as models. Loans come in the form of building materials, not cash. These credits are interest-free, although an extra 2.5 percent to 4.25 percent is charged to cover the program’s costs. Direct access to a paycheck constitutes the preferred security for these credits, although “solidarity debtors” are also used. Loan amounts varied from AR$2.000 to $6.300 ($1.150 on average), with repayment periods from 6 to 36 months. This loan program granted 659 credits over 5 years; 71 percent went to the improvement of existing houses, and 29 percent funded new progressive houses. The arrears rate hovered around 6 percent.

5. The experience of MiCasa and Patrimonio Hoy demonstrates that: (a) large-scale housing microfinance can be profitable; (b) partnerships between building materials suppliers and microfinance lenders are key to ramping up loan volume as well as achieving good results with construction; and (c) the public sector can support HMF by providing liquidity to the system, and must allow institutions to set loan terms and operate their programs commercially. Although interest rates are likely to start out high, competition will drive them down.

98 6. HOUSING MARKETS AND POLICY IN LATIN AMERICA

1. Housing is a “merit good” with special characteristics, particularly in Latin America. Economic theory considers housing a “merit good” with special characteristics. Equity in housing represents the largest asset of most households and homeownership a crucial method of wealth creation in high-income as well as low-income countries. Housing – and, in particular, homeownership – holds particular importance in Latin America and Argentina. 113 In addition to providing shelter, about one-third of dwellings in low-income communities in the Region contain home-based enterprises. Once they have consolidated tenure and their own home, many low- income families add rooms or new units to their property, which typically house grown children and their families, or renters. From a social perspective, homeownership in Latin America provides: security for old age (particularly in countries with weak pension systems); a hedge against unemployment, sickness, and other risks of the low-income environment; and the most important financial legacy from one generation to the next. Once they acquire and consolidate a home, families typically stay in the unit the remainder of their lives, and pass it on to the next generation. In contrast, rental housing is scarce in many countries in Latin American for a wide range of reasons. 114

2. Highly-segmented markets. Housing markets are highly segmented throughout Latin America. The funding, property tenure, land development, and physical housing solutions of low- income families differ radically from those of upper-middle income households. These submarkets often operate in separate hermetically-sealed fashion, as does the land market in Greater Buenos Aires. For high-income families, housing is typically a product consisting of a complete commercially-built unit, developed and financed by a traditional mortgage with full infrastructure, and officially-registered property title.

113 . For these and other reasons, the social benefits of housing exceed the private costs. Thus, investment in housing has positive externalities that justify government involvement, and most governments do intervene in this sector. 114 Rent control and other regulation as well as lack of credit finance constrict formal-sector rental markets. Rental of rooms and units in informal communities is much more common, but of creates serious quality and social problems. The scarcity of rental housing of all types raises the price. Public provision and support of rental housing for low/moderate-income households – particularly multi-story buildings - present large challenges in Latin America, and require investigation to tailor programs to the conditions of cities and countries. A number Latin-American countries and cities – including Caracas and Panama City – have built multi-story rental buildings in an attempt to house low- income families in centrally located urban areas.. However, these buildings have generally turned into high-rise slums. Neither the low-income renters nor government are suited to and can afford the high cost of operating and maintaining multi-story buildings in most of Latin America.; and (b) no other organizations have developed to fill this role. Western Europe, U.S., and Canada have supported and developed the capacity of networks of non-profit affordable housing and municipal corporations to own and manage low-income rental housing, which is the main type of government-assisted affordable unit in these countries.

99 3. For low-income households, housing is usually a progressive process. 115 As a result, most households must develop their home incrementally in order to spread the costs of homeownership over time and to make them affordable. The progressive process typically starts with acquiring a low-cost “housing solution”, and proceeds by physically and legally upgrading this housing solution over time – often, 5 to 15 years. “Low-cost housing solutions” consist of a wide range of options that compose the steps of the progressive process. They include serviced and unserviced lots, rehab and improvement, expansion, construction of a core unit on a lot already owned by the family (for replacement, to add a unit, for rental), tenure regularization, infrastructure and service upgrading etc116. These incremental housing solutions cost a small fraction of purchasing of a new unit, thus represent a fundamental key to large-scale provision of affordable shelter and housing policy.

4. Moderate/middle-income housing typically mixes aspects of both the “product” and “process” methods. Government programs often focus on making moderate-income families bankable in order to move formal-sector systems downmarket to serve this group and to spur economic growth. Physically, the prototype moderate-income housing solution consists of a core expandable unit that families upgrade and expand in programmed steps, as need and available resources dictate. The balance between the product and the process approach to housing changes with the level of real household income, the terms of credit finance, and other factors. As in Argentina, an economic crisis can greatly increase reliance on progressive housing for a time. However, progressive housing continues to serve a substantial part of the income distribution throughout much of economic development. In addition, an over-reliance on the “product” approach to housing also holds pitfalls.117

5. The best approach for most low-income shelter and settlement programs consists of strengthening progressive housing to make this process a solution rather than a problem. Progressive housing has allowed the bulk of low/moderate-income families in Latin America to get on the bottom rung of the ladder of homeownership and move up. Largely as a result, homeownership rates in Latin America far exceed those of most high-income countries.118

115 The great bulk of low/moderate-income households (45 percent to 65 percent of the population of Latin American countries) cannot afford to purchase the least costly commercially-produced unit for many inter-related reasons firmly rooted in national economies. This lack of affordability comes from low-incomes of much of the population, relatively high interest rates, and rigidities in supply – land, basic infrastructure, communal services etc – that raise the price of a house. These reasons include: (a) low incomes of much of the population – even in middle-income countries, median family incomes are around AR$300 to AR$400 per month; (b) limited supply of mortgage credit; financial institutions ration, in effect, mortgage lending to their best customers, as macroeconomic instability results in little long-term funding and highly short-term liabilities create interest-rate and liquidity risk with long-term mortgage loans; (c) high real interest rates, due to many of the same macro-economic causes; Argentina is temporarily an exception here; (d) resistance of low/moderate-income households to borrowing substantial sums for lengthy terms (i.e. mortgages) because of the uncertainty of their personal situation and/or national macro-economic instability; and (e) 116 For example, in much of Latin America, the cost of substantial improvement to or extension of a basic unit home (AR$3,000 to AR$5,000) or constructing a new basic unit on a lot already owned by the family (AR$5,000 to AR$8,000) constitutes only one-fifth to one-third the cost of purchase of a new basic unit (AR$15,000to AR$30,000).

117 In the U.S. housing market, for example, it is now possible to finance over 100% of a house with an interest-only loan with payments set at an interest rate far below market in the first one to three years but which rises quickly and negatively amortizes in subsequent years. About half of new home finance over from 2003 to 2006 occurred with interest-only loans that do not amortize. Economists, housing experts and common sense suggest that this over-reliance on home credit places many households in substantial risk of foreclosure, and makes the housing and macro-economic system increasingly vulnerable to shock. 118 Homeownership rates in Latin American countries (averaging 71%) – with Argentina at 77% - exceed those of high-income countries (61% in Western Europe, 67% in the US, 69% in Canada)...

100 However, progressive housing often generates tremendous private and public costs if unguided and unsupported. From a public-expenditure perspective, studies have shown that provision of basic infrastructure119 to informal land development typically costs two to three times the amount as in formal-sector development. The public sector eventually absorbs the high costs of improving or replacing the infrastructure of these communities, and of selective resettlement through upgrading programs. From a private perspective, the construction process of the home is often inefficient, exhausting for families, and takes many years (an average of 11 years to construct a 4-room small home in Mexico) during which households must live in inferior and dangerous environments.

6. In this context, a number of measures can help guide and strengthen progressive housing to turn it into a solution rather than a problem. These include: (a) most important, providing land and guiding the location of low-income settlement; (b) phased infrastructure upgrading over time of low-income communities; (c) housing microcredit – the type of credit best suited to fund the progressive housing process; (d) organizing household savings; and (e) support and guidance of the construction process. These are the components of effective low-income housing programs in Latin America. The process of low-income housing programs typically involves the participation of intermediary organizations – particularly municipalities, NGOs, and Cooperatives – rather than commercial developers and mortgage lenders. The housing improvement program of CEMEX, Patrimonio Hoy (see Box __), illustrates how to combine a number of these components effectively to make progressive housing much more efficient. Another example involves Mexican state housing institutes120, which reach low-income families through 10 to 15 lines of support of different types of low-cost housing solutions.

7. Delegating development and lending to the private sector joined with direct-demand subsidies constitutes the best strategy for moderate/middle-income families. Extensive international experience has shown that the private sector has a strong comparative advantage in making home loans and performing most phases of the development and construction process, particularly for moderate/middle-income housing. In contrast, government “turnkey development” has resulted in high construction and development costs, poor location, and inferior quality. Turnkey development also typically delivers units and subsidies mainly to middle- income rather than low-income families throughout Latin America. Typically, these subsidy levels well exceed 50 percent due to the subsidized rates at which loans are written, poor cost recovery, discounts for paying loans on time, failure to include and charge for the cost of land in the price of the house etc.

8. The poor performance of turnkey production occurs largely because supply agents (government and the private-sector construction firms contracted by government) control the use of the subsidy, and not the household. These supply agents have a captive market, and usually take advantage of this situation by absorbing a substantial share of the program’s benefits. 121 Conversely, families must accept the location, type of unit, project, and quality offered to them in

119 Metrovivienda of Bogota, Colombia has done the best quantitative comparison of the high cost of uniguided informal-sector. The high cost of infrastructure provision to informal settlement results from the following as well as other factors: (a) location distant from existing infrastructure distribution lines, often on difficult terrains and soils; (b) the costs of re-arranging the physical lay-out of informal settlement, and replacing the existing clandestine service lines and road network; and (c) the time-consuming process of working in low-income neighborhoods. 120 Although they effectively target low-income households through supporting a wide range of low-cost housing solutions, the performance of Mexican State Housing Institutes varies widely in other senses (including administrative efficiency, production volume, and cost recovery). 121 Often in the form of lower quality or lower-cost land in more distant location, as the price and size of the unit are specified and regulated by government.

101 order to get supply-side subsidies. Thus, the weaknesses of FONAVI are those of turnkey development, in general, and have parallels in other parts of Latin America where this method continues to be used (Venezuela, Brazil, Dominican Republic). Improving outcomes has involved two broad steps in Latin America:  The first step consists of delegating to the private sector the functions of home developer and lender. Typically, either the financial institution (SHF in Mexico) or the developer (Ley de Politica Habitacional in Venezuela) wins a competition or bid from the national government subsidy agency for a package of subsidies. In turn, this private-sector entity qualifies households as eligible for receipt of the subsidy and for the accompanying loan. The developer then builds the project and the financial institution makes the construction loan and the long-term take-out mortgage loan to the household.

Delegation to the private sector improves outcomes compared with direct government production and finance. However, this method still allows developers and financial institutions to make most decisions about project design, location, and quality, and – thus - to largely control the use of the subsidy.

 A second step involves designing a subsidy program adapted to the needs of population. The government should indeed develop a subsidy program as a support to its housing policy objectives when the market alone cannot meet these objectives. Generally, from the five different types of subsidies122, the government will need to choose the subsidies that reach the best efficiency in terms of cost per subsidy, and have a strong effect on housing market. When the subsidy system proves transparent and equitable, the great bulk of subsidies target the families and the housing production system benefits from it by inducing competition among supply agents. The government will also look for administrative simplicity to decrease the implementation costs. A subsidy program will be best designed once some basic questions are answered: What to subsidize, housing stock or flow? Who should be subsidized? Which institutions should be involved?

9. Rather than develop and lend directly for housing projects, the optimal role of government consists of funding programs and enabling housing markets to function. Beyond the very short term, government’s role as a funder and enabler of housing far exceeds in importance that of direct lender or producer.123

10. Effective housing programs leverage national-government resources with commercial credit, household savings, and the participation of a wide variety of institutional actors. Housing-finance systems have relied on leveraging three sources of funding: household savings, market-rate credit, and government subsidy. Historically, Building Societies in Western Europe required participating households to save regularly for a specified number of years and then receive credit finance in a fixed multiple of the amount saved, while many governments have

122 The five types of housing subsidies are: production/rehabilitation (land grants, infrastructure, labor, material, capital grant to owner, cross subsidy), finance (subsidized construction loan, subsidized investor instruments), operating expenses (public housing or employee housing, housing allowance, utilities provided free), real estate tax deduction, rent control. 123 “Enabling” in housing refers to the immense job of funding at appropriate levels, regulating the home-finance sector – both primary and secondary home-finance institutions, setting and enforcing appropriate building and subdivision standards, efficient and cost-effective operation of real property registries, the real estate and betterment taxation necessary for property markets to function well, and insuring the provision of many kinds of physical infrastructure and public services at competitive rates. Direct home production and lending tends to distract the public-sector from these much more crucial enabling functions, and sometimes serves as an excuse for performing poorly these critical functions of government .

102 complemented these family savings and credit with a programmed subsidy. 124 In similar fashion, direct demand subsidy (DDS) systems throughout Latin America seek to stimulate and leverage household savings and loans with an upfront grant from government (the subsidy). DDS emerged as a response to the poor performance of turnkey government production. The Chilean DDS system was the first, and remains so well known that its basic design needs no elaboration here.125 From a developmental perspective, the main purpose of housing subsidies is to stimulate commercial credit and household savings126 in order to complement and increasingly replace government subvention. Extensive experience over three decades now exists with direct-demand subsidy programs in Latin American countries.127 This experience demonstrates a number of crucial lessons for the design and operation of DDS, summarized in Annex 5.

Box 1:– The Case of Mexico

The boom and bust cycle undergone by Argentina in housing occurred in similar fashion in Mexico during the 1990’s. In the early 1990’s, Mexican banks rapidly expanded mortgage lending and housing boomed. The Mexican Tequila Crisis of 1994 brought an abrupt devaluation of the currency, skyrocketing mortgage interest rates, a large drop in household real income, massive losses on mortgages by home lenders, an exit of commercial banks from the mortgage market, a steep reduction in formal-sector housing production, an increase in informality, and loss of confidence. Similar to Argentina, an earmarked levy- a mandatory salary contribution in the case of Mexico - continued to generate an amount equivalent to about 2 percent of the federal budget for affordable housing investment. The vehicle for channeling these funds – INFONAVIT – lent directly, mainly for new units to moderate/middle-income households, and recovered only about half the repayments on these heavily below-market loans. In addition, a government housing liquidity facility, FOVI, was also delivering subsidized credit largely for moderate/middle-income housing construction and purchase of new units, although through mortgage banks rather than directly.

124 A method that continues to this day in the Bausparkasen system of Germany and elsewhere. 125 In brief, the Chilean DDS solicits applications from households for the subsidy in rounds, and uses a point system to qualify households for the subsidy that rewards “effort” in the form of the amount saved and the time period of savings, and “need” (as measured by income level, size of family, characteristics of existing unit etc.) Selected families must then open a bank account to deposit these savings, thus mobilizing resources for housing credit. In turn, these households join a loan with their savings and the subsidy in order to complete the financial package to purchase a unit. Thus, stimulating credit and household savings is the central developmental purpose of DDS programs. These households also shop among developers, projects, and types of housing solutions in order to decide on using the supply. 126 Household savings presents an apparent paradox that program experience has resolved.. Low and moderate-income households save and invest substantial resources over long periods of time to upgrade their dwellings. In effect, these groups build most of the city without much formal-sector support. However, government affordable housing programs sometimes face serious problems when the intended beneficiaries cannot save the required downpayment. Latin American experience with DDS has shown that creating clear incentives (continuity in funding the subsidy over years and clear rules that reward household savings to access the subsidy) and sufficient time (after a transition period necessary to get the program working, the minimum savings period should be one year) will stimulate significant savings even by low-income households.. 127 DDS programs have operated in Ecuador, Venezuela, Colombia, Mexico, El Salvador, Nicaragua, Paraguay, and Uruguay.

103 As Argentina’s provinces, all of the 23 autonomous states of the Mexican federation (and some of the larger cities) had established housing institutes (SHIs). These SHI’s operated with highly varied efficiency and effectiveness. During the late 1980’s and much of the 1990’s, a federal government low-income housing agency - FONHAPO_ - provided many of these SHIs with the bulk of their funding via loans on terms far below market, which remained largely unpaid. Mexican state governments also operated the real property registry and control foreclosure laws and enforcement – both of which vary greatly in efficiency and effectiveness throughout the country. Two-thirds of developable land on the urban fringe of Mexican cities consisted of a form of communal rural landownership, ejidos, whose use for development is restricted by federal law. Largely as a result of these land-development and property-registry problems and costs, over half of Mexican households hold informal title to their home.

On entering office in 2000, President Fox established an overall goal of producing 720,000 housing solutions per annum (the rate of new household formation) by the end of his term in 2006. This goal has now been met through a doubling of production. In particular, mortgage lending for new housing units increased from 326,757 in 2001 to 575,000 in 2004 and to over 600,000 projected for 2006, while a national upgrading program is phasing improvements into the bulk of poor urban neighborhoods. The trajectory of housing reform, assisted by the World Bank, has included:

First, establishment of strong institutional leadership at the federal level. The National Housing Commission – CONAFOVI has provided effective leadership for other federal housing-related agencies, promoted reform of State Housing Institutes, influence federal social housing agencies, and private-sector lenders and introduced a real property registry initiative implemented by states.

Second, Mexico has transitioned from a highly-subsidized housing finance system towards market-rate home credit. In essence, Mexico used the massive subsidized credit-provision capacity of INFONAVIT to satisfy immediate social needs, and stimulate the economy. The increased loan volume of INFONAVIT has bought time so that market-rate credit finance lead by FOVI and, then, the newly created housing development bank, SHF, could take off as macro-economic conditions improved. Meanwhile, INFONAVIT has greatly improved its loan recovery, brought its interest rates substantially closer to market, and established mechanisms for transforming its supply-side credit subsidies into a demand-side portable voucher.

Mexico provided SHF with the powers necessary to develop market-rate primary and secondary home lending. SHF has : (a) funded an expanding industry of mortgage banks – the SOFOLES - that re-activated market-rate home lending after the Tequila Crisis; (b) introduced a double-indexed mortgage covered by a hedge charged to borrowers; (c) influenced state governments to improve mortgage foreclosure laws and execution; (d) created primary mortgage insurance and credit enhancements for debt issues (securitizations) of primary lenders; (e) absorbed FOVI, and transformed the interest-rate subsidy of FOVI into an upfront subsidy program for low/moderate-income borrowers, and (f) established a liquidity facility for housing microfinance.

Third, Mexico has leveraged housing subsidies with credit finance and home savings, and federal resources with local support. The country has increasingly moved in the direction of demand-side subsidies. The subsidy programs are funded by national government. They use private-sector developers and financial institutions for moderate-income housing, or operate through municipalities for low-income households, and display varying degrees of portability. However, the supply-side subsidies of INFONAVIT – which still continues to fund 60 percent of Mexican mortgages - have also strongly leveraged credit, household savings, and the resources of local and state governments.

A national upgrading program – “Habitat” - designed and funded by the Secretariat of Social Development and operated by municipalities phases in a package of improvements over time in many poor urban neighborhoods.

104 1. LESSONS FROM THE DESIGN AND OPERATION OF DIRECT-DEMAND SUBSIDY PROGRAMS IN LATIN AMERICA

1. The following distills key lessons from the design and operation of DDS programs in a dozen Latin America countries over thirty years:

2. A substantial on-going source of funding is the single most crucial element for success of DDS and for housing subsidy systems, in general. Continuous funding and stability of program rules allows the economic agents involved in the process (developers, financial institutions, families, NGOs.. municipalities etc.) to learn to use DDS well and to build operational capacity. Both these factors are best ensured by a national program with uniform rules.

3. Direct demand subsidies have worked well in Latin America for moderate and middle-income households if continuous funding is available. This positive performance occurs mainly because developers and mortgage finance institutions can make a profit by building and extending purchase credit for core expandable units to this income group..

4. DDS programs have strong economic goals that justify a relatively high per-unit subsidy. DDS programs typically deliver a large subsidy ranging from AR$5,000 to AR$10,000 to moderate/middle-income households for the purchase of new units. This substantial per-unit subvention often far exceeds the subsidy amount delivered to low-income households for low-cost housing solutions. Thus, the high per-unit subsidies of DDS are difficult to defend solely on social grounds. Their impact on economic growth and employment, stimulus of commercial mortgage credit and household savings, and generation of tax revenue by expanding the scope of formal-sector development constitute the key justifications for DDS programs.

5. DDS have functioned poorly for low-income families for two reasons.128 First, the business model and level of costs of most commercial developers and mortgage finance institutions create problems for serving low-income groups profitably. Thus, the subsidy fails to stimulate lenders to extend credit and developers to build new units for low-income families during normal times. 129 As a result, governments must assist in the supply of units to low-income families as well as increase these families’ effective demand in order for subsidy programs to work for low-income families.130 The involvement of effective intermediary

128 The Chilean government has had to use turnkey production and direct lending to reach low-income groups. 129 However, when moderate/middle-income housing markets collapse, commercial agents will go downmarket to serve low-income groups if subsidies are available for them – e.g. Ecuador from 1998 to 2002. 130 The Costa Rican DDS program, for example, works through a wide variety of “authorized entities.” These intermediary organizations include a network of sophisticated housing NGOs and housing cooperatives. The “authorized entities” organize groups of low-income families to save a downpayment, help them qualify for the subsidy and a credit, act as developers for the resulting projects, and provide bridge finance for construction.. DDS programs for low-income households are, however, the exception rather than the rule. Most core expandable unit programs for low-income households in Latin America involve direct development of the project by an intermediary organization that assembles and acts on behalf

105 organizations – such as NGOs and municipalities – is the key to assisting supply and to reaching low-income households.

6. In order for DDS programs to work well long-term, government must also relieve systemic supply bottlenecks – in particular, that for urban land. If supply bottlenecks remain unaddressed, the subsidy will largely increase urban land prices rather than benefit households. Rising real land prices now consume a large part of the Chilean DDS program’s benefit and present the most difficult barrier to its successful function.

of groups of low-income households, and no credit (only the subsidy and a family downpayment).