traditional lending and program focus that has generally favored homeownership.

This paper seeks to outline the existing tenure patterns across Latin American and

Caribbean (LAC) countries, identify the prerequisite features of effective rental

sectors—based on experience in developed OECD countries—, and outline the

necessary steps to develop and expand the rental sector in LAC countries. This

includes consideration of both the private (private investors) and community

rental sector (community based nonprofit and cooperative ownership).

*

housing. He worked in housing projects in Algeria (2000), in Burkina Faso (2007), Mali (2001 and 2007)

and in Morocco (1997 and 1998). The authors would like to thank the peer reviewers Inder Ruprah (senior

economist at the IDB) and Bob Buckley (senior fellow the New School and advisor at Rockefeller

Foundation) for helpful suggestions and comments on the draft paper. Many thanks are also due to the

Quebec Government for their support through the Secondment of Marc Godbout at the IDB.

Table of Contents

1! Introduction ................................................................................................................... 1!

2! Setting the Context ........................................................................................................ 2!

5! Consolidation: some proposed options for consideration in LAC countries. ............. 34!

6! Conclusions and Possible Directions .......................................................................... 37!

Bibliography ..................................................................................................................... 40!

1 Introduction

The Inter-American Development Bank (IDB) wishes to identify and help implement

opportunities to nurture and expand formal rental tenure across the Latin American and

Caribbean (LAC) countries in an effort to expand shelter opportunities for lower income

households, especially in urban markets. The rationale for the Bank’s involvement includes the

sites and services, slumps upgrading, housing finance, etc).

• To enable the Bank to provide technical assistance to help government authorities in

establishing an appropriate regulatory environment in which to plan the development of

rental market projects that will be delivered by the private sector.

This paper will help LAC countries to better understand the implications of developing a

rental housing market as an integrated part of the overall housing system.

Traditional development and shelter assistance programs have focused on either large

scale public housing development, which have largely fallen out of favor, or on homeownership

assistance. Even though 20 to 40 percent of people in the LAC region rent their dwellings, only a

negligible proportion of any subsidy is directed to renters (Sunil, 1996; Buckley and Kalarickal,

demands and needs. As such, it is appropriate to explore the opportunities for the IDB to support

the rental options alongside the traditional lending and program focus that has generally favored

homeownership.

prerequisite features of effective rental sectors—based on experience in developed OECD

countries—, and outline the necessary steps to develop and expand the rental sector in LAC

countries. This includes consideration of both the private (private investors) and community

(58 percent of all housing programs approved by the Bank), direct demand subsidies, and the

development of mortgage markets (with a focus on mortgage loans for homeownership, not for

investor lending).

These programs have improved the housing stock in the LAC region, and have expanded

access to new houses for families with moderate income. However, they have had limited results

in the provision of policy alternatives to prevent the formation of new slums and to

accommodate the demand for new houses for low-income families. The prevalence of informal

settlements in the region has affected not only housing market outcomes, but also the

sustainability of cities.

The policy response to housing problems (quality and affordability) in the LAC region

past six postwar decades has similarly emphasized the social rented sector and the owner

occupied sector (Whitehead 1996).

and programs. The Bank’s main policy response in the region has been towards improving the

informal housing stock with slum upgrading programs and improving affordability through

direct or indirect subsidies to low- and moderate-income families for the purchase of a new

housing unit. Recent evaluations of housing programs in Latin America and the Caribbean have

(Rojas, 2009).

Subsidy programs (emphasizing improved conditions) have been less effective in reaching

low-income families and have encountered problems such as the unsustainable levels of subsidy

requirements, the lack of private mortgage financing for the targeted groups, the greater distance

and segregation of social housing developments, the increased pressure on public services and

infrastructure, and the limits on social and work mobility (Ruprah, 2009). There are several Bank

studies underway focusing on public housing policies, housing finance, land markets, and

municipal provision of housing services, but the studies of the rental housing market are limited.

The Bank wants to fill an important gap in this sector and support its housing and urban

housing markets and make it affordable for low-income families.

2.2 Current Tenure Patterns

Data on tenure reveal that the rental sector in most LAC countries is small; typically less than

and (RG-K1153) Municipal Provision of Housing Services.

contracting.

Unlike the situation in developed northern countries, either there is little formal

regulation and many tenants do not enjoy secure tenure or there are overly restrictive occupancy

regulations that discourage investment and create an illegal secondary market as original

informal ownership, wherein dwellings are occupied without a title deed or services, and which

housing surveys, identify formal rental tenure; however this may under-represent the total as many may rent their

homes on an informal basis. Such households are recorded here in the category “other.”

one in which investors and producers of housing stock are indifferent to building properties for

owner occupancy or rental use and consumers are similarly indifferent to owning or renting. This

is clearly not the case in most developed countries. Together, housing subsidies, tax treatment of

Another major failure of housing policy and programs in developed countries is a

segmented intervention rather than a systemic intervention. Policies in many countries, notably

singular policy goal). This is reflected in the more favorable tax treatment of homeowners, such

Similarly, in developing countries, international multilateral and bilateral organizations

have centered most of their interventions on increasing homeownership levels, but it is not clear

financial crisis in the United States). The UN-Habitat (2003) has suggested that it is not possible

the effect of stereotyping renters as second-class citizens. Other countries, such as Austria,

Germany, and Sweden, have sought to maintain a more tenure neutral framework (including

regulation, subsidy, and taxation) to achieve and sustain more balanced housing systems with a

wider choice across social renting, private renting, and homeownership. Policy initiatives in

developing countries should seek to emulate these more balanced and complementary

approaches. However, in the short term it may be necessary to emphasize and favor policies and

Housing is an inherently expensive good and requires a significant capital investment.

Ideally, housing systems should enable and encourage private investment to the greatest extent

substantially across countries. This includes significant differences in:

• The characteristics of consumers, encompassing only the lowest-income populations

versus a broader range of incomes;

• The physical form of the rental stock—individual homes or attached houses versus

multiunit apartment blocks; and

• The characteristics of landlords, including both social and private operators as well as a

significant variation between small individual investors (usually renting a single

dwelling), corporate professional developer-landlords (that create purpose built rental

institutional and regulatory arrangements, and then design policy interventions to either optimize

or correct existing conditions. It is also important to examine and define the nature of the

housing problem. Is there an absolute lack of supply, in which case measures may be required to

stimulate construction? Why is there a lack of supply; are there land constraints, labor constraint,

or lack of financing? Is there a group of investors that is willing to participate in creating purpose

built rental supply? If there is sufficient supply (stock) but also difficulties in terms of access and

affordability, rental assistance, rather than supply stimulus, may be necessary. It could also

involve acquisition of existing stock by special purpose corporations, such as community-based

In short, it is possible to create and implement policies to influence and manage issues related

to both supply or demand. However, to do so it is important to define policy issues, objectives,

systems include both a set of prerequisite conditions as well as a set of ancillary features that

help sustain and enhance the private rental sector.

• Established and effective urban land market

• Effective land title registration and regulatory framework (to facilitate registration of

mortgages and secure property rights)

• Subsidy system that stimulates and encourages private investment and supports non-

profit community based development and ownership

• Planning system to facilitate rental options (Linkage and inclusionary requirements).

4.1 Elaborating on Prerequisite and Ancillary Conditions

The issue of well functioning land markets is fundamental to housing supply and a broad concern

beyond the narrow scope of this conceptual paper. To the extent that a supply issue exists in any

country, there is a need to enable production and this may be in the form of either owner

occupation or rental, but either case requires an underlying system of land management and

servicing.

Even with effective land management, in liberal market systems there is an ongoing

introduction of three-dimensional “strata titling” has enabled the creation of legal parcels and

thus the ability to sell parts of buildings as individual properties (commonly labeled as

“purpose built” rental sector does not really exist in many countries—notably Australia, New

Zealand, and the UK. Moreover this system is disappearing in North America as condominium

apartments now dominate multiunit apartment construction.

What is emerging, however, is a transformation in the type of supply, which is now often

constructed as tenure neutral stock. Sweden prides itself on a tenure neutral system (Van Heiden

and Boulhouwer, 1996; Connelly et al., 2010). Properties, including detached homes and

apartments in multiunit structures, are sold on the free market and may be purchased by an

is that a well functioning planning and development system must be established to address

demand for new supply in the rental market.

century, housing finance systems have been developed to provide the capital necessary to fund

the purchase of properties. The housing finance system is premised on a sound system of land

titles and registration in order to clearly identify ownership and concurrently to enable

registration of deeds and liens against these titles as a basis of security for the capital loans

provided to purchasers. Policies to facilitate access to mortgage finance have favored the

ownership sector, but in some countries the benefits of a sound housing finance system have

extended to the rental sector—both for private investors and in the public and social rented

sectors. This was especially the case in Canada, where initially direct government loans (1964–

1978) and subsequently public mortgage insurance enabled developers of rental properties to

readily access mortgage financing.

facilitate registration of mortgages and secure property rights

As renters in all developed countries include a lower-income population, there has traditionally

analysts have associated high levels of regulation with the steady decline in rental tenure. Most

Western European countries experienced a dramatic decline in the postwar period, with the

private rented sector declining from over half of all housing to less than one-fifth (Van Heiden

that protects occupancy rights of tenancy without imposing excess risk on investors or

suppressing rent levels to the point that return on investment to property owners is unattractive.

which essentially establishes duration of occupancy as well as limits opportunities for landlords

to remove tenants except for specified and usually limited reasons. The closely associated second

element is a control on levels of rent increase, intended both to preserve affordability and to

preclude de facto economic eviction, which would occur if rents increase well beyond the

These rent control regimes tend to establish the amount and frequency of rent increase

(typically limited to a single annual increase) and the rate of increase often set by regulation and

linked to some measure such as the consumer price index. In some jurisdictions, restrictions on

rent increase are maintained only during a sitting tenancy, but once a unit is vacated there is no

restriction and rents may be adjusted to a level that the market will bear (vacancy decontrol);

however the controls are put back into place once a new tenant occupies the unit/dwelling. Few

jurisdictions have found a way to balance efforts to protect tenant rights with the necessity to

concurrently enable investors to generate a sufficient rate of return to remain invested in this

sector, and more important, to invest in additional production.

Canada provides a useful contrast of rent regulation regimes wherein some provinces

rental housing production (e.g., in the provinces of BC and Ontario) mainly because of the

regulatory reform since 1975. Those of the late 1990s were specifically intended to deregulate

legislation and a general trend to deregulation, there is lingering doubt and concern that controls

will be reintroduced. This uncertainty in the market has resulted in a highly cautious, if not

disinterested, rental investment community. The key insight from this experience is that it is not

As part of it regulatory regime, the province of Quebec has established a quasi-judicial

board, the Regie du Logement (RDL), to help manage the regulatory process (see Box 1). Other

revised its mandate under the 2006 Residential Tenancies Act).

The tax treatment of rental investment income has proven to be a critical factor in either

discouraging (United States, Canada) private rental investment. Typically, more favorable

regimes permit accelerated depreciation and the ability to use both cash and paper (depreciation)

losses to reduce taxable net income for passive investors whose income is generated from outside

of the property sector. This tends to have a more significant impact on small investors compared

numerous high-income individuals and produce multiunit apartment developments.

Both Canada and United States significantly reduced and constrained tax advantages for

rental investors in the early to mid-1970s, although in both countries temporary measures

restored attractive tax regimes and helped to temporarily stimulate investment (augmented by

subsidy initiatives). These typically included restoring and accelerating depreciation allowances

as well as permitting actual as well as paper losses (notional depreciation) to be deducted from

non real estate income.

Over the past decade in some developed countries, such as Canada and Australia, there

has been great debate over the introduction of targeted tax measures to help investors or

provincial finance ministries conducted an analysis on this matter to determine whether new tax

participants was an inefficient (the loss of tax revenues for the government outweighed the

or below 60 percent of the area median family income, and preference is given to households

earning only 50 percent of the area median income. The main purpose of the tax credit is to

induce private equity investment and thereby reduce debt servicing costs to ensure a sustainable

treated also has some influence on the rental sector. For example favorable treatment of the

Most developed nations have, at various times, sought to encourage expanded housing supply

specifically through rental development. This includes a wide range of mechanisms directed to

expansion of the social rental sector.

In the private rentals sector, when subsidies have been used, this has taken the form of