Capitalism begins at home

Providing better and more affordable housing could be the next “capitalist achievement”

JOSEPH SCHUMPETER argued that the miracle of capitalism lies in democratising wealth. Elizabeth I owned silk stockings, he observed, but the “capitalist achievement” does not lie in “providing more silk stockings for queens but in bringing them within reach of factory girls.” In most areas of life this miracle has been working magnificently: in America the number of hours of work that it takes to buy a car, or a wardrobe full of clothes, has halved in the past generation. But in three big areas it has singularly failed to operate: health care, education and housing.

The last few years have seen a ferment of ideas for improving productivity in medicine and teaching. Smart devices will let us monitor our health constantly and help doctors speed their diagnoses. Open-enrolment online courses will give everyone a free college education and iPads will provide universal schooling in Africa. The same cannot be said of housing, where the scope for a digital revolution is limited and productivity has been heading the wrong way: in America, labour productivity in the construction industry fell by 22% in the 20 years to 2009, even as it rose by 45% in the rest of the economy. In the rich world 60m people spend more than 30% of their income on housing; and in the emerging world 200m households live in slums. The combination of population growth and rapid urbanisation means that the numbers in each of these undesirable situations look set to swell.

But is the future so grim? A growing number of big companies are bringing capital and management expertise into the area. Tata, India’s biggest company, established a division devoted to affordable housing, Tata Value Homes, in 2009. Mahindra & Mahindra has a similar venture, called Lifespaces. Other organisations—from NGOs to management consultants—are bringing new ideas or rethinking old ones.

A report by the McKinsey Global Institute (MGI) provides a good summary of one approach to the problem: applying economies of scale and scope to a fragmented industry. Value & Budget Housing Corporation, a privately owned Indian firm, mass-produces aluminium modules that can be slotted together into apartments of various sizes. China’s Broad Group can build a 30-storey block on a completed foundation in just 15 days, again using many factory-made parts. The MGI report notes that there is still vast scope for cutting the cost of building materials. Indian builders are making significant savings by using bricks made from fly ash, a waste product from coal-fired power plants. Britain has reduced the cost of raw materials for social housing by up to 30% since 2010 by establishing purchasing consortia.

There are some obvious objections to this sort of top-down approach. The rich world’s great post-war experiment with the mass-production of housing was a disaster. Much of it soon degenerated into little more than vertical slums. This was partly because of shoddy construction: some blocks of flats from the 1960s and 1970s were so badly built that they were demolished in the 1980s. But it is also because people like their houses to have a human touch: nobody wants to live in something that feels as if it were built by a machine. Many of the solutions to the housing problem will need to come from the bottom of the pyramid. Slum-dwellers are constantly fixing up their dwellings and many NGOs now prefer to work with them to make incremental improvements rather than designing new homes from scratch.

However, system-built housing does not have to be shoddy or impersonal. Huf Haus of Germany has been building high-end prefabricated houses since 1912. Adaptahaus, a British firm, specialises in homes that can be reconfigured as a family’s needs change. IKEA of Sweden sells flat-pack houses that can be customised. Furthermore, big companies can help people to self-build a personalised home while enjoying economies of scale: Cemex of Mexico provides self-builders with access to cheap fixtures and fittings, and cheap finance, as well as cement.

Not in my backyard

The report acknowledges that to fix the housing problem one has to solve a lot of others: obtaining land and getting permits; persuading banks to provide mortgages to poorer people; and getting sluggish utility firms to provide electricity and water connections. Land is particularly tricky. People want to live where the jobs are, usually in the middle of cities, and once they are entrenched they want to make sure that they are not overlooked or overcrowded. But the report includes several good ideas for improving the supply of land. For instance, governments frequently own large chunks of undeveloped land in city centres, if they only bother to look. Turkey’s national housing agency, TOKI, has assembled 4,120 square kilometres (1,600 square miles), equivalent to 4% of the country’s entire urban area, by buying it from other state bodies. Property speculators often sit on chunks of prime city land; to discourage this, China’s government slaps a 20% tax on the value of tracts left undeveloped for a year. Giving slum-dwellers formal title to their properties can also encourage them to join in efforts to redevelop run-down districts.

However, putting all this together is hard and, particularly in democracies, provides plenty of scope for NIMBYs and vested interests to block progress. (Authoritarian China bulldozes through such opposition—but many of the buildings it has thrown up over the past couple of decades are ageing badly.) Even so, this is an argument for advancing on several fronts at once, not a counsel of despair. Big firms such as Tata can use their muscle to solve problems such as the supply of land and the availability of cheap finance. NGOs such as Habitat for Humanity have become good at persuading governments to provide the small sums that will help slum-dwellers improve their homes with such things as indoor toilets. There is no reason why the “capitalist achievement” cannot be applied to providing people with decent housing, just as it has provided them with a limitless supply of stockings.