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A Proposed LGU Program for Affordable Housing

Presented at the
CSHFI/DILG/HUDCC-LGU/Private Sector Housing Conference
Manila, 30 July 2004
By
Nathaniel von Einsiedel
Principal Urban Management Adviser
CONCEP, Inc.

There is no question that the need for affordable housing in Philippine towns and
cities are rising rather than declining, especially in recent years of seemingly
unbounded urban
population growth and housing price inflation. As the population in our towns and
cities continue to rapidly increase, the gap between housing needs and supply,
particularly for low- and moderate-income families, is widening and reaching
alarming proportions.
The reason housing in our towns and cities are in painfully short supply hinges
on the simple disconnect between supply and demand. While urban areas gain
large numbers of new households every year, only a very small number of
affordable housing units are being built. A host of factors are driving up housing
prices and holding down construction of more housing units; high land and
construction costs; slow-moving bureaucratic processes for review and approval
or denial of construction permits; complex and often inflexible codes and
regulations; the absence of residentially zoned land for affordable housing; and
limited government funds to subsidize construction of low- and moderate-income
housing.
Yet, in the midst of this housing crisis, residential construction continues. The
problem, however, is that such construction are often either a) for upper-income
groups, in the case of medium-rise or high-rise condos in urban centers; or b) too
far away from centers of employment and livelihood, even if the housing units
may be lower in price. For both cases, the challenge of affordable housing should
be viewed not only in terms of the price of a housing unit but also its location

relative to centers of employment and livelihood where a large number of lowand moderate-income households derive their income.
To address the issue of affordable housing in Philippine towns and cities, a
program of INCLUSIONARY HOUSING is needed. INCLUSIONARY HOUSING
is a critical part of comprehensive efforts to meet the growing need to address
the problems that accompany rapid urbanization. It addresses the concern for not
only housing price but also of location.
Inclusionary housing involves local ordinances that either encourage or require
residential developers to incorporate affordable units in market-rate projects as a
condition of project approval. It is similar in objective to the 20% socialized
housing requirement for subdivision projects under the Urban Development and
Housing Act (UDHA). However, the UDHA requirement is applied to residential
subdivisions which are almost always developed in urban fringe areas that are
often far away from employment centers. There is no equivalent requirement for
urban centers where a large number of low-income households find their means
of livelihood.
In other countries, affordable housing advocates are increasingly succeeding in
persuading local governments to adopt inclusionary housing programs. Cities
that have adopted such programs have enacted laws that encourage or require
residential developers to incorporate affordable housing units in market-rate
projects as a condition of project-approval. Many cities all over the world
administer inclusionary housing programs, and an equal number are involved in
negotiating inclusionary agreements with developers on a case-by-case basis.
Those cities where inclusionary housing programs exist have enacted laws
requiring local governments to plan and enforce zoning ordinances in a manner
that will provide a fair share of low-income housing to meet housing needs. The
experience so far shows that inclusionary zoning can help expand the stock
affordable housing and can generate projects profitable enough to get
developers to participate in the programs.
However, the experience also shows that these programs have their fair share of
problems. The most frequently asked questions are:
Why is it legally sound to require developers rather than the city government (and
the community at large to shoulder the burden of providing low-income housing
units for needy households? How do such programs avoid raising prices of
market-rate housing and undermining the economic feasibility of residential
projects? Predictably, the answers are mixed, supporting both sides of the issue.
To reduce the objections to inclusionary housing and zoning ordinances, several
approaches can be adopted. First, inclusionary housing ordinances should allow
property developers to make a reasonable return on a proposed project and

eCREBA Online Library

Concept Paper ~ LGU Housing Program, by Dr. Nathaniel von Einsiedel

receive some form of regulatory relief, such as density bonuses, that partially or
wholly compensate for the affordable housing units required. Second, cities
should prepare a compelling case for adopting mandatory programs. It should
demonstrate that construction of private, market-rate housing units have impacts
on specific community interests that are addressed by the inclusionary
requirement for example, that new market-rate housing creates a need for
workers who can afford only lower-cost housing or that it displaces low-cost
housing needed for existing residents.
The cost impacts of inclusionary housing would depend on the relative
desirability of the community in the metropolitan housing market. In a highly
desirable community such as cities which are regional trading centers, for
example, developers could raise unit prices to provide at least part of the
subsidy. In a less desirable community, constraints on housing price increases
would force developers to absorb the cost of affordable units except that in time
as developers factor subsidies into their pro-forma calculations, they would pay
less for housing sites, in effect passing the cost back to property owners.
The significance of economic impacts becomes almost moot, if an inclusionary
housing and zoning program provides incentives that largely offset cost
subsidies, such as density bonuses, fee waivers, reductions in code standards
for subsidized units, and expedited approval processes. These contributions to
reducing development costs, while not always making up for all the cost
differences between market-rate and lower-cost units, can allow developers and
builders to make sufficient profit to warrant housing production.
For most rapidly growing cities, which are highly desirable housing markets,
builders should regard inclusionary requirements as a cost of doing business,
and that builders can make such projects profitable. From an economic
standpoint, each inclusionary project must be considered as a whole whereby
cost and income trade-offs relating to the number of units of all types, land and
site development costs, sales prices and rents, and other factors combine to
generate a bottom-line financial picture. Developers and local governments need
to work out feasible incentives for inclusionary programs. This should produce
positive results.
The pros and cons of the legal and economic issues raised by inclusionary
housing will likely not be easily resolved. But everyone concerned with crafting
workable inclusionary programs can make certain the following principles guide
program administration.
1. Linking inclusionary housing to comprehensive development
programs.
Inclusionary housing programs should be viewed as one of the battery of
mutually reinforcing housing programs that make up a comprehensive and
community-wide, public non-profit/private effort to construct and improve

eCREBA Online Library

Concept Paper ~ LGU Housing Program, by Dr. Nathaniel von Einsiedel

affordable housing. Local government units (LGUs) can use existing

housing finance programs of the national government (such as PAG-IBIG
and the Community Mortgage Program) to subsidize low-income housing
construction and redevelopment programs. They should also encourage
and support the work of non-profit housing groups (such as Gawad
Kalinga and Habitat for Humanity) and take the initiative to form hosing
trust funds and community land trusts to assist in housing production and
improvements.
2. Make requirements and procedures transparent and predictable.
Inclusionary programs should be carefully crafted to create a zone of
comfort for developers and builders required or encouraged to create
affordable housing. Requirements should be clearly spelled out in local
ordinances and administrative guidelines. Staff should be trained to work
with applicants to design appropriate projects. Developers will want that
inclusionary programs should establish expectations that all builders are
expected to meet, giving them a level playing field for competitive
development.
3. Provision of incentives. Inclusionary programs should provide incentives
such as density bonuses, expediting zoning and building permits, fee
reductions and tax holidays that go at least partway toward compensating
developers for incorporating low income units in their projects. Developers
can be encouraged to participate in these programs if they can work with
local government staffs who are willing and able to make cost-cutting
design and procedural decisions to keep a project moving forward. For
example, spelling out specific incentives help developers estimate
development feasibility.
4. Establishing community support for affordable housing.
Inclusionary programs are best initiated and sustained as a result of
long-term efforts of local political leaders and non-profit housing groups to
address a lack of affordable housing. This means having the city or
municipal council involved and passing the appropriate local ordinance to
give these efforts the legal framework. Such programs can assemble a
valuable constituency that can support inclusionary projects and assist in
overcoming occasional political and technical hurdles. They can create
housing trust funds and other programs that can benefit inclusionary
projects.
5. Defining the market. Determining the desired income range of
households to be served by affordable units is one of the critical decisions
for any inclusionary program. If public subsidies for low or very low
income households are in short supply, program may need to be aimed at
producing units that moderate-income households can afford to rent or
buy. Appropriate household income levels will vary from one community to

eCREBA Online Library

Concept Paper ~ LGU Housing Program, by Dr. Nathaniel von Einsiedel

another. Establishing financially feasible income and price/rent levels for

projected units to be created by private market forces is a key to
successful inclusionary programs.
6. Shaving cost of design and development. It is possible to whittle down
development costs to make inclusionary projects feasible. Slight design
alterations and efficient approval processes can help projects measure up
to financial expectations. When developers and local government staff
work closely together to identify and secure approval of design options,
waivers, variances, and special funding sources, development costs can
be brought in line with projected sales and rental income levels.
To ensure that an inclusionary housing program is sustainable and effective, it
will need to be backed up by an ordinance adopted by the city or municipal
council, together with appropriations for a dedicated office to manage the
program. This office can also serve as the technical secretariat of the
City/Municipal Housing Board which is required of all LGUs under the Urban
Development and Housing Act (UDHA). If qualified staffs are in short supply, this
office can initially be manned by staff seconded from other departments and
supported by external consultants who can advise as well as train the staff.
Inclusionary programs are not a panacea to overcome affordable housing needs,
nor are they easy to create and administer. Nevertheless, the cities and towns of
the Philippines, can find them beneficial as part of comprehensive efforts to meet
the growing need for housing, especially of the large number of low income
households.
Nathaniel von Einsiedel is an Urban Management Specialist as well as a licensed Urban
Environmental Planner and Architect in the Philippines. He has over 30 years experience in urban
development planning and management in government and the private sector as well as in
technical assistance programs in developing countries. His government experience includes
urban development policy, land use planning, housing for low-income families, and capital
investments programming. His private sector projects have involved master-planned mixed-use
communities, residential, institutional, and recreational developments. He also has served as an
urban development consultant to international development agencies such as the Asian
Development Bank, World Bank, USAID, UNCRD, and UN-ESCAP. From 1990 to 2003, he
focused on capacity building for urban management as the Regional Coordinator for Asia-Pacific
of the United Nations Urban Management Programme. He has been conferred the status of
Fellow by both the United Architects of the Philippines (UAP) and the Philippine Institute of
Environmental Planners (PIEP). He has a bachelors degree in Architecture from the University of
the Philippines, a masters in Urban Planning from Columbia University (New York, USA), and a
PhD in Public Administration from the Pacific Western University (Hawaii, USA). He is past
President of CREBA for 2 terms.

eCREBA Online Library

Concept Paper ~ LGU Housing Program, by Dr. Nathaniel von Einsiedel