The Potential Role of Tokenization in Affordable Housing

May 08, 2019

Adequate access to affordable housing is a worldwide challenge. Rising costs of key inputs (i.e. land and building materials), widening income gaps and urbanization combine to create a stubborn headwind against which it is difficult to make progress. Simply stated, the number of lower income households is growing, but the quantity of affordable housing is not keeping pace in most parts of the world. Responses vary widely by country and region and include direct government subsidies and mandates, market reforms designed to stimulate private investment, self-help programs, and a wide variety of other mechanisms designed to suit unique, local circumstances.

In the US, housing policy has evolved over many decades starting with Roosevelt’s New Deal in the 1930s where public housing was provided directly by the federal government. After WWII, the GI Bill helped returning veterans with guaranteed loans to buy housing. In the 1960s, the Johnson administration elevated housing to Cabinet level status and created the Department of Housing and Urban Development, expanding the federal role but shifting the focus to subsidizing private investment. In the 1970s, Nixon instituted a voucher program to subsidize rents, a program which continues to this day. Together with the Low-Income Housing Tax Credit, these incentives presently constitute the main pillars of US government support for low-income housing.

European governments got into the business of providing public or “social” housing after WW II as part of post-war recovery efforts. This trend continued until the 1980s when many Western European governments began selling units off to their occupiers for little or no cost. A similar pattern occurred in Eastern Europe some 10 years later after the fall of the Berlin Wall. But due to a larger wealth gap, the state of this housing in Eastern Europe is significantly deteriorated. Since the transition away from direct provision of social housing, European governments at the national and local level have deployed varied strategies across the region including rent subsidies, mandates and tax incentives.

In Asia, the most significant trend is rapid urbanization which is causing the population of cities to swell across the region, driving up the price of land. High land prices combined with the lack of housing finance are major constraints in accessing adequate and affordable housing. Formal housing finance mechanisms are, in general, inaccessible and unaffordable to low-, and many middle-income households. In countries where finance is available, down payment requirements are high, as are interest rates, and loan periods are short, all of which limit the ability to secure formal housing finance. The result is that the lower income segment of the population has been forced into the “informal” housing sector causing urban slums to proliferate.

While there is clearly no silver bullet to the affordable housing challenge, we suggest an additional approach that, in many cases, we believe can be a powerful private sector-led complement to existing, predominantly government-led programs. The alternative approach involves tokenizing privately-owned housing, a technique where undivided ownership interests in the real property are created and represented by a virtual currency or “token” that freely trades on a regulated security token exchange. This approach can generate two important outcomes not otherwise accessible with existing affordable housing incentive schemes:

  • To create capital market efficiencies and expand the potential pool of capital available to finance affordable housing; and
  • To incentive tenant behaviors favorable to private property owners such as timely payment of rent and utilities, reduced consumption of utilities, and even property upkeep.

2. The US Perspective

2.1 Affordability

Access to affordable housing is a challenge for an increasing share of the population across the world. In the US, housing costs have risen 20% faster than inflation and 41% faster than incomes over the past 25 years. In 1988, the national home price-to-income ratio was 3.2; by 2017, that ratio rose to 4.2. An estimated 38.1 million households spent more than 30% of their incomes on housing, the standard definition of “cost-burdened” – 20% higher than in 2001.

Figure 1. US Price-to Income Ratios

Note: Home prices are the median sale price of existing homes and incomes are the median household income within markets. Source: JCHS tabulations of NAR, Metropolitan Median Area Prices and Moody’s Analytics Forecasts.

The rental market has not picked up the slack. Although rental construction is up overall as is the number of occupied rental units, the supply of low-cost rentals has actually diminished (see Figure 2). Adjusting for inflation, the median rent payment rose 61% between 1960 and 2016 while the median renter income grew only 5%. Figure 3 shows that nearly half of renters are cost-burdened and half of those are severely cost-burdened. Persistently rising costs place home ownership further and further out of reach for the rental population, and especially so at the lower end of the income spectrum. Further exacerbating this problem is the fact that, between 2000 and 2017, real prices for the lowest cost homes (selling for 75% or less of the median sales price) rose almost 80% compared to 28% for homes selling for 125% or more of the median sales price.

Figure 2. The National Rental Housing Stock Continues to Shift to Higher-Cost Units

Notes: Rent cutoffs are adjusted for inflation using the CPI-U for all items less shelter. Data exclude households paying no cash rent. Source: JCHS tabulations of US Census Bureau Decennial Census and 2016 American Community Survey 1-Year Estimates.

Figure 3. The Sharp Divergence in Housing Costs and Incomes Has Fueled a Long-Term Increase in Cost-Burdened Renters

Note: Rents and incomes are adjusted for inflation using the CPI-U for all items. Source: JCHS tabulations of US Census Bureau 1960-1990 Decennial Censuses and 2000-2016 American Community Surveys.

2.2 Societal Trends

Societal trends are also unfavorable. Despite substantial gains at the low end of the income spectrum, the rich-poor gap continues to widen in the US, as does the net wealth gap between homeowners and renters. The median net wealth of homeowners has been rising as home prices have increased, standing at $231,400 in 2016. By comparison, the real median net wealth of renters dropped to $5000 in 2016 – 46 times less than homeowner net wealth.

Rising numbers of households with low incomes and low wealth has driven up the number of people living in poverty. Between 2000 and 2016, the number of high-poverty census tracts (poverty rates of 20% or more) increased by 53% and the number of people living in those tracts grew by 10 million. These are staggering figures.

A National Low Income Housing Coalition study found that for every 100 extremely low-income renters, only 35 rental units were affordable and available in 2016 – a nationwide shortfall exceeding 7 million units.

Whether they own or rent, lower income households are overwhelmingly cost-burdened. For households making less than $30,000, 80% of renters and 63% of owners were cost burdened in 2016.

Rapidly rising costs for land and building materials is partly to blame for the affordability problem and the dwindling supply of buildable lots, especially in urbanized areas, creates an incentive for developers to favor the higher end of the market where margins are better. Although the persistent low interest environment has mitigated some of the pain of rising costs, the underlying rising cost trend is clear and is expected to continue.

Figure 4. Lowest-Income Renters Increasingly Outnumber the Supply of Units They Can Afford

Notes: Extremely low-income households earn no more than 30% of area median income. Affordability is defined as paying no more than 30% of income for rent and utilities after adjusting for household size. Unavailable units are affordable but occupied by higher income renters. Source: JCHS tabulations of National Low Income Housing Coalition, The Gap: A Shortage of Affordable Homes, 2018

2.3 Incentive Schemes

Over 38 million households are cost burdened in the US, leaving little left to pay for food, healthcare and other necessities. Federal assistance is vital, but housing vouchers reach just 25% of low-income renters. Even in these voucher households, almost one-third of households are still cost burdened due to voucher program restrictions if the renter lives in a unit that costs more than the Fair Market Rent as determined by HUD. HUD’s Worst Case Housing Needs report indicates that the number of very low-income households with severe cost burdens or living in adequate or overcrowded conditions rose from 6 million in 2005 to 8.3 million in 2015.

The Low-Income Housing Tax Credit (LIHTC) program is now the largest source of assisted rental housing. Since its inception in 1986, the program has supported the construction, rehabilitation or acquisition of nearly 2.5 million affordable rentals. But budget pressures have limited funding for this program and the recent lowering of corporate tax rates reduced the value of low-income housing tax credits to investors.

In sum, the National Low Income Housing Coalition reports that the gap between supply and demand for rental units affordable and available to low-income households stands at 7.7 million and could become much worse due to threats to the affordable supply. Over the past 30 years, the number of low-income families has increased by 6 million to more than 19 million while federally subsidized rental housing has increased by less than 1 million units. As a result, the share of lowest income households with assistance has fallen from already low levels, and even moderate-income families are finding it difficult to secure rentals they can afford in the private market.

3. The European Perspective

Similar to the US, affordability of housing is a fast growing and pervasive housing challenge. But availability of affordable housing across Europe varies widely owing to the significant economic, cultural and historical diversity of the region, as well as the presence of specific national and regional government housing policies and programs.

Similar to the US, affordability of housing is a fast growing and pervasive housing challenge. But availability of affordable housing across Europe varies widely owing to the significant economic, cultural and historical diversity of the region, as well as the presence of specific national and regional government housing policies and programs.

In Western Europe, the supply-demand imbalance is especially acute in five countries. In Belgium, Spain, Portugal and Greece, it is estimated one quarter of households have significant financial difficulties due to housing costs. In Italy, this share is 42 per cent. (See Figure 5)

Owing to decades of socialist-minded policy in Western Europe preceded by a communist Eastern Europe, national governments have historically placed a proportionately greater emphasis on providing social housing than the US, but the historical context is useful to understand where things stand today.

Figure 5. Household Experiencing Financial Difficulties in Select Countries Due to Housing Costs

Source: Eurostat, 2007; CMHC, 2007; JCHS, 2007

3.1 Historical Context

At the end of World War II, Western Europe entered a “recovery phase” starting in 1945 and lasting until the early 1960s. During this period, emphasis was placed on repairing war-damaged areas and alleviating severe housing shortages. Large-scale social housing projects, heavily subsidized by national governments, prevailed due to the urgent demand for large quantities of low-cost housing.

Eastern Europe followed a similar path where housing was viewed as a “social entitlement” guaranteed by their communist governments. At the end of the war, housing in the region was dominated by low-rise, two or three-story wood and brick structures. High-rise housing blocks began to emerge in the mid-1950s as the dominant source of new housing units, following a similar transition in Western Europe and North America as new construction technologies, such as prefabricated and pre-cast concrete, came into practice. However, for the most part, the quality of buildings constructed with these technologies in Eastern Europe was poor.

During the 1960s and 1970s, construction of large-scale public housing reached a peak across Europe. In Western Europe, much of this new housing stock was subsidized public rental housing managed by municipalities and local councils, whereas national governments maintained a central role in Eastern Europe.

During the early 1980s, a paradigm shift occurred in Western Europe and the role of government to subsidize rental housing came into question. Governments began to retreat from their role as a provider of subsidized housing units favoring instead deregulation, private sector involvement and demand-based subsidies, mimicking the approach taken in the US. Although some countries resisted this shift and remained committed to public rental housing, significant inventories of public housing units were sold to occupiers for a low or nominal cost.

Eastern Europe maintained its focus on centrally planned and administered housing until the early 1990s with the fall of the Berlin Wall when the region began a wholesale transition from centrally planned to market-based economies. Similar to Western Europe 10 years earlier, the practice of selling public housing units to occupiers at zero or nominal cost became widespread.

The shift in responsibility for maintaining housing from government to private homeowners came with consequences as homeowners struggled to pay rapidly rising utility costs supplied by newly privatized utilities. Building maintenance and upkeep became a lower priority as compared to the need to pay for food and utilities. Across the region, housing costs rose disproportionately to incomes. Many families had to sell or move out of their home to take a smaller home and pay off their debts, often accumulated unpaid utility bills.

Today, prefabricated housing dominates the residential landscape of post-communist cities. And although home ownership rates are high in Eastern Europe, the building stock is extensively deteriorated and poorly managed because many households cannot afford the ongoing maintenance expenses. Local authorities are left with the worst-quality stock in a poor state of repair and with the poorest tenants. Rehabilitation of multi-family housing is potentially one of the largest problems facing municipalities in countries in transition, since failure to carry out repairs will result in massive structural problems in more than 40% of the urban housing stock. Recently, most countries have introduced laws to regulate the operation of homeowners’ associations, but the implementation has been very slow and inadequate.

Some countries in Western Europe also have a large share of high-rise prefabricated panel housing, mostly a legacy of post-war renewal and reconstruction efforts. Although the quality of such housing in Western Europe is substantially better, today this housing typology is often the first to be marked for demolition and urban regeneration projects.

Exacerbating the rehabilitation problem is accumulated arrears on utility bills which are widespread. A lack of discipline regarding utility bill payments is common, particularly in transition countries, and studies have reported a lack of respect for the law as well as refusal to pay regular contributions for the maintenance and modernization of common areas in privatized residential buildings.

Fuel poverty is a major challenge. BPIE (Building Performance Institute Europe) data from 2014 suggest that between 50 million and 125 million people are unable to achieve adequate thermal comfort at home. Housing Europe notes that, in 2012, almost 11% of the EU population was unable to adequately to heat their home. This figure more than doubles to over 24% for low income households.

Data from Eurostat on government expenditure on “housing and communities amenities” indicate that, on average, government support for housing in the EU decreased, from 1.1% of GDP in 2003 to 0.8% in 2012. Data provided by Housing Europe members suggest that new social housing construction was lower in most EU countries between 2009 and 2012. The notable exception is France, which produced 116,000 new social housing units in 2012 compared to 98,000 in 2009.

Evidence suggests that waiting lists of those registered for social housing have increased across Europe, especially in France, where waiting lists for social housing increased from 1.2 million to 1.7 million between 2010 and 2012.

In its report “The State of Housing in the European Union 2015”, Housing Europe notes specific shortages, for example, in England where estimates suggest that some 245,000 new homes are needed each year, while only about half that amount is being built, and the Netherlands where estimates indicate a shortage of some 300,000 dwellings by 2020.

3.2 Affordability

Somewhat ironically, home ownership rates in post-Communist cities are the highest in Europe, often exceeding 90%, due to mass privatization of public housing. By contrast, capital cities in Western Europe have considerably lower rates of homeownership, e.g., Vienna (17%), Paris (28%), Helsinki (45%), London (58%). Homelessness in the EU stands at an estimated 3 million, about the same as in the US.

Unlike the private rental market in the US, the rental sector in most European countries is subject to more extensive regulation and rent control. Rents are regulated both by broad central government rules and by the policies of municipalities. Rents are freely negotiated at the time when a household rents a dwelling. After that, however, rent controls apply. They may be linked to inflation or to rent levels in comparable dwellings.

In most transition countries, social housing is not really defined in legislation. The remaining public housing stock tends to be owned by local governments and concentrated in urban areas. It is often funded with municipal or government/public enterprise funds and managed by municipal maintenance companies, which collect rents and handle tenant agreements. Rents are generally controlled and determined at the local level with some direction from central government. But the private rental market has increased significantly in Central and Eastern Europe largely as a result of rent control elimination and privatization.

Across the region, the changing demographic, social and economic composition of the population has contributed to a widening income and wealth gap, which has in turn influenced housing demand dynamics. Similar to the US, poverty and homelessness is on the increase and there is a general shortage of affordable housing that is not decrepit and has all essential utility services, particularly in urban areas.

3.3 Incentive Schemes

Financial incentive programs in Western Europe have followed the trend in the US with tax incentives and demand assistance (e.g. vouchers). With some variance by country, these incentives have generally been inadequate in the face of demand due to price inflation and the widening income gap.

Many subsidy regimes favor home ownership through mortgage interest tax relief (Ireland, Netherlands, UK and Spain.) France offers subsidies on savings schemes for many newly built and renovated properties and provides a quarter of a million zero interest rate mortgages annually.

Housing subsidies and tax breaks are common in Austria, Germany, Russia, Croatia, the Czech Republic, Hungary and Poland. But subsidy schemes in CEE have been criticized for supporting the most affluent housing consumers rather than households in need.

Demand-based subsidies to low income renters have generally failed to keep pace with rising housing costs. In most transition countries, such assistance is non-existent and where such programs exist (e.g. Czech Republic, Poland, Romania, Estonia and Latvia), it is inadequate to meet demand.

In Western Europe, social housing continues to play a major role in increasing access to affordable housing of a decent standard, but, as stated earlier, approaches vary. In countries where there is a significant share of social housing (e.g. France, Denmark, Finland, Sweden, and Netherlands), rents are closer to cost recovery for landlords and low-income households receive government subsidies. In countries where the social housing sector is small (e.g. Ireland, Spain, Portugal, and Greece), rents are held low since social housing is used as a social safety net.

In Western Europe, the data suggest that in countries where the social housing sector is significant, there is an ongoing commitment to maintain relatively high levels of supply. Austria (30%), Denmark (21%) and Sweden (16%) have the highest rates of new social housing production, followed by Finland, UK and the Netherlands with rates in the range of 12%.

Several transition countries (Poland, Czech Republic and Slovakia) have also initiated new social housing programs in recognition of their importance for the vulnerable portion of the population.

While affordability constraints are growing, less overall social housing is being provided for low-income households. In this context, it is not surprising that new social housing is not provided in most countries across the region. The sector is significant where there is an ongoing government commitment to maintain adequate supply. The data presented in Figure 6 demonstrate the share of social housing in selected countries as well as the share of renters receiving housing allowances.

In countries with mature land markets, the shortage of land in high growth regions has contributed to the increase in house prices. England, for example, is heading for a property shortage of more than one million homes by 2022, mostly concentrated in London and the South East. In response, government policies strive to drive up to 60% of new residential developments to recycled ‘brownfield’ sites through proactive planning, land assembly and government subsidies.

Several countries have introduced initiatives to supply social housing with more shallow subsidies and private involvement (e.g. England, Denmark, Ireland, Netherlands, Finland and Germany). These mechanisms depend on local government to supply free or low-cost land and the use of the planning system to enable land provision. In Dublin, private developers must transfer 20% of new dwellings on large development sites to the city for use as social or affordable housing. Cities such as Munich are also requiring private developers to include a certain percentage of social housing in new developments. In England, between 20% and 50% of larger new and regeneration developments must be affordable housing.

Figure 6. Social Housing: Existing Stock and Tenant Support, 2004

Source: MooIIR, 2006

Finally, a number of European countries address the provision of affordable and adequate housing through area-based urban renewal and regeneration programs. Commitments at the national level, particularly in Western Europe, have created a supportive institutional and regulatory framework for local action. A large number of local authorities have managed to create coalitions and partnerships to increase the supply of affordable housing and to assist vulnerable groups through urban regeneration projects. Local governments, working in partnership with non-profit housing providers and community groups, have experimented with inner city regeneration, brownfield redevelopment, and waterfront redevelopment schemes.

The Asian Perspective

Asia is defined as a diverse region stretching from the Arabian Peninsula to the shores of the Pacific. Within this vast territory sit the two largest countries by population, China and India, together with highly wealthy countries, such as Singapore and Hong Kong, to the desperately poor, like Yemen and Bangladesh. Despite this diversity, access to adequate and affordable housing is a current and growing problem in all but the wealthiest Asian countries. In some cases, it is not that housing is too expensive but rather that incomes are too low. In other cases, incomes are relatively high, but housing supply and finance is limited and therefore expensive. Across Asia, the lowest income segment of the population lives in slums and informal settlements due to a lack of supply of better quality housing at an affordable cost.

Although Asia is still predominantly rural, it is urbanizing at the fastest rate in the world. Between 1950 and 2000 eight out of the world’s ten fastest growing cities were in Asia: Tokyo, Mumbai, Delhi, Dhaka, Jakarta, Karachi, Seoul and Kolkata. Over half of the world’s urban population currently lives in Asian cities. Predictions suggest that between 2010 and 2050, the urban population in Asia will nearly double to reach 3.4 billion. Asian cities will need to accommodate approximately 120,000 new residents per day, which equates to a daily housing demand of at least 20,000 housing units.

Figure 7. Regional Urbanization Trends

Source: UNDESA, 2009

4.1 Historical Context

Since the 1950s, housing policy in Asia focused on direct government provision of public housing for rent or sale. High-density, multi-storied apartment blocks became the dominant housing approach to replace low-rise, slum housing inhabited by low- income households. These capital-intensive projects were largely planned and financed by governments and aimed to provide housing at a large-scale to reach the greatest number of people to stem the growth of informal slums.

While the approach of large-scale public housing was deemed a failure in most developing countries, Singapore and Hong Kong proved an exception. Their success is attributed to several factors, including:

  • Relatively centralized form of government with well-regulated economies
  • Steady and consistent economic growth
  • Lack of large migrant inflows due to absence of large surrounding rural areas
  • Relatively high proportion of government-owned land on which housing developments could be constructed
  • Government commitment to, and efficient execution of, large-scale public housing initiatives

The success of Singapore in providing affordable housing to most of its population has been based on home ownership through subsidized loan payments. The Housing and Development Board has housed 80% of the population of whom 95% are owners.

The success of Singapore in providing affordable housing to most of its population has been based on home ownership through subsidized loan payments. The Housing and Development Board has housed 80% of the population of whom 95% are owners.

In Hong Kong, the Housing Authority increased its rental housing stock by 18,000 units between 1991 and 2001 despite simultaneously selling public rental housing units during this period. This was a result of the Housing Authority continuing to build and also increasing the entitlement threshold in real terms, thereby raising the number of potential beneficiaries. Housing is highly subsidized, with tenants paying about 9% of their income in rent compared to 29% in the private sector.

The housing experience of Hong Kong and Singa- pore are as unique as are their geographies. For the rest of the region, the experience is vastly different. Urban growth has fueled a lack of housing options that are affordable and well located resulting in the widespread proliferation of slums and informal settlements in most Asian cities. For example, over 70% of the Bangladeshi population lives in slums as do nearly half the population of Pakistan. China and India have the most slum dwellers in the world – some 300 million people – almost the size of the entire US population. And the urbanization pressure is projected to continue with some 65% of Chinese residents predicted to live in Chinese cities by 2030.

Figure 8. Urban Population and Slum Proportion in Asian Countries, 2007

Source: UN-HABITAT, 2006b:23

Outside Hong Kong and Singapore, government- pro-vided housing has had limited success and has been a drain on public funds. Root causes include:

  • The economies were not well-regulated, and corruption was (and still is) persistent inflating project construction costs
  • Building and planning designs were often based on European models which were not suitable for the region which did not accommodate traditional Asian ways of living
  • Income levels were simply too low for residents to buy or even maintain their housing

What projects were constructed became inhabit- ed by middle- and upper-income groups while informal housing expanded. Few countries (e.g. Malaysia) remained committed to high-density subsidized housing.

In the late 1960s, in response to the widespread failure of public housing initiatives, a “self-help” housing paradigm emerged where slum dwellers were envisioned to build their own housing with supportive government policies. But these programs were doomed to fail where land was privately-owned and slum dwellers could be evicted at any time. The rapid increase in land values only increased this risk and “self-help” programs were ultimately swallowed up by the wider economic paradigm, except in countries such as Japan with both expanding economies and better functioning markets.

By the 1980s, governments shifted even further away from public housing in favor of being an “enabler” for the market to work through housing sector reforms that encouraged private housing investment. Because government involvement was seen as a failure, the government focus shifted to addressing market failures through various policy instruments to help the private sector address the problem.

Around this time (late 1980s), China was in a full-scale shift from a highly centralized- to market-based housing sector. By 2002, 80% of public housing in China had been sold to occupiers supported by government-led finance schemes.

In other countries, where the limitations and challenges of self-help housing schemes were well-recognized, slum upgrading became a prevailing practice. Notable initiatives include the Kampung Improvement Program in Jakarta which benefited over 70% of the slum population at a cost of just $118 per capita, and Bangkok’s Baan Mankong program (“secure housing” in Thai) which facilitates a process that is entirely community driven. This program supports networks of poor communities to survey and map all the poor and informal settlements across the city and develop plans for comprehensively upgrading them. Residents partner or consult with experts from local governments, NGOs and academia, but it is the members of individual settlements that take the lead in surveying and mapping the community, developing plans and budgets for upgrading housing and infrastructure and negotiating secure land tenure to eliminate the risk of eviction. Once the communities reach an agreement on land tenure and complete their upgrading plans and budgets, the implementing agency, Community Organizations Development Institute (CODI), issues infrastructure subsidies and/or subsidized loans directly to the community. This empowers the poor to determine where and how they want to improve their community. By any measure, this program was a huge success. Between 2003 and 2011, more than 60% of the households involved were able to negotiate land deals that allowed them to remain in place and more than 78% were either able to negotiate a long-term lease or cooperative land ownership with title.

Structural socio-economic changes in Asian cities from the 1990s onwards resulted in the continued exclusion of lower-income groups from housing markets. The private sector has not been sufficiently stimulated to produce low-income housing because housing that is affordable to lower-income sectors has not been profitable and therefore attractive for private sector housing developers. Consequently, with a lack of government policies and programs, informal housing approaches continued to be employed even though they became increasingly constrained by lack of available land. While self-built housing in slums and informal settlements has traditionally been seen to be a temporary phenomenon, Asian cities demonstrate that economic growth alone does not guarantee that those living in slums can or will move to better housing.

Private housing supply caters mostly to upper income households where it is profitable for private developers to produce housing, which often results in a detrimental mismatch of supply and demand. For example, in Bangladesh there is actually a considerable surplus of housing at the upper-income level, yet an acute shortage of affordable housing for the great majority of middle- and lower-income groups.

While the enabling approach underpins much Asian housing policy, access to affordable urban land for housing development remains a continual problem in Asian cities. Some cities, e.g. Bangkok and Manila, have little influence or control over land development as such cites have high rates of private land ownership.

In Asian countries that have relatively strong economies and well-functioning housing markets (e.g. India), the issue is not the cost of housing, but the lack of housing finance. Many households are able to service a mortgage, but they cannot get finance, often due to high down payment requirements.

One notable exception to the housing finance paradigm is the Government Housing Bank of Thailand (GHB), a government-owned bank, which is the leading housing finance lender in the country, including the low-income demographic. It achieved this position by mobilizing domestic savings and stimulating greater private sector participation in housing finance. The combination of increased supply of competitive housing loans and a responsive housing supply system have made housing more easily affordable to 70 – 80% of the Thai population.

4.2 Affordability

Median house prices in developed countries can often be 2.5 to 6 times the average median annual salary. In Asia, house-price-to-income ratios are higher in many countries, as shown in Figure 9.

As is evident, rent-to-income ratios vary significantly from one country to another. They are lowest in countries where public housing is still dominant and highest in countries with high demand pressure, owing to insufficient supply of rental accommodation and high new household formation rates. In general, however, rent-to-income ratios in Asian cities are almost twice as high as in cities in developed countries.

Poorer urban households simply cannot afford to spend such proportions of their income on housing, and thus have no other option than to rent rooms in housing built by the informal sector, often in slums and informal settlements.

Figure 9. House Price/Rent-to-Income Ratios for Selected Asian Capital Cities

Source: UN-HABITAT, 2003

Affordability in Asia is exacerbated by several factors:

  • The majority of housing finance schemes have high interest rates and are inflexible
  • The price of urban land is very high as is the cost of building materials
  • Few low-technology housing construction methods are available or used
  • Compliance costs and regulations for formal housing are expensive and time consuming
  • The income disparity is so huge that low income households are simply unable to afford market-based housing in the formal sector

4.3 China’s National Housing Programs

The Chinese government recognizes the importance of adequate and affordable housing for its citizens to maintain peace and stability. Government housing policy is administered via three main programs:

The Economic and Comfortable Housing Program (ECH) was launched in 1995 and aims to help lower- and middle-income households secure housing when they cannot afford private housing. Housing is mostly built by private developers for profit and sold through market transactions.

All units are developed for sale, not rent. House prices are lower because local governments provide land for free or at low cost and reduce or waive development fees. Furthermore, the government regulates the sale price to keep profits at 3%. House prices are 50 – 60% of market prices (per square meter).

A large proportion of the population is eligible. Since 1998, ECH housing has been positioned to be accessible to 70 – 80% of the urban population. This broad eligibility reflects a goal of the ECH to stimulate the economy, especially after the Asian Financial Crisis of the late-1990s. Providing housing to most of the population was one way to achieve this. But in practice, ECH housing has become dominated by higher income households, forcing out lower income households due to rising ECH housing prices. The government is instituting reforms to try and rectify this issue.

The Housing Provident Fund (HPF) was established in 1994 as a housing savings scheme to promote home ownership. Employers and employees contribute a certain percentage of their income to a HPF account held by the China Central Bank. Employees can get their funds for home purchase, improvement or home construction at below-market rates. In this way, workers generate savings they can use to buy a home on the open market.

Because contributions under HPF are based on income, there are affordability and accessibility issues because workers who earn more get larger employer contributions. Only 25% of workers enrolled have taken loans. This low rate is because of the strict loan terms, the challenge of processing the loan, and strict approval criteria (credit checks and income sources and levels). Those with lower incomes cannot get a large loan and, due to consistent increases in house prices, home ownership gets further out of reach of the lower-income bracket. Finally, HPF loans are typically around half of the value of the property, so purchasers still must fund nearly half the purchase themselves, which is a challenge for many households.

The Cheap Rental Housing (CRH) program is a government-subsidized rental housing program for those with disabilities, low-income, disadvantaged groups, and seniors. The program was initially proposed as supporting both new-build rental housing and rent subsidies of existing rental properties, although new-build has come to dominate. Funding comes from local governments through several mechanisms such as capital gains from the HPF, annual budgetary allocations, and other local housing funds. The CRH has grown slowly due to the reluctance of local governments to implement their own program at a municipal level. In 2006, a new law specified that local governments must spend 5% of the net gain from land conveyance fees on CRH, although this had limited practical success due to lack of enforcement. Between 1998 and 2006, the program has only contributed 1% of total housing production during this period. Nevertheless, this still represents a considerable size: to date 550,000 low income households have benefited from CRH.

Recognizing the challenges of the CRH program and the need to scale up, the Chinese government launched an ambitious plan – the Cheap Rental Housing Guarantee Plan in 2009. The plan aimed to provide 7.5 million homes for low-income households. Three-quarters will be in new build and one quarter in existing housing through rental subsidies. Plans are made for each year with targets for house construction and beneficiaries, which are in turn aggregated for each province. The central government has increased its funding for the plan to subsidize CRH construction stipulating that 10% of conveyance fees and all capital gains in HPF investments should be allocated to CRH.

5. Using Tokenization to Create A New Solution Pathway

The affordable housing sector is laden with analyses and papers highlighting approaches and case studies in various countries relating to the affordable housing challenge. In general, these solutions tend to fall into one of three categories:

  • Government-owned or public housing with subsidized rent
  • Government subsidies for privately-owned housing, which can come in many forms, including:
    • Cash subsidies (e.g., for rent)
    • Tax subsidies (e.g. tax credits)
    • Interest rate subsidies
  • Government mandates or set asides for privately-owned housing, including:
    • Absolute caps on rents and/or rent increases
    • Mandatory low-income set asides for new residential developments
    • Specific low-income set asides for site redevelopment initiatives, e.g. brownfields, industrial re-zoning, etc.

Clearly there is no one-size-fits-all solution to the affordable housing challenge and, in practice, a combination of approaches is appropriate to suit the unique needs and objectives of each region and locality. However, a common element in each of the above scenarios is that a government body enables or directly creates the solution; the absence of private sector-led innovation is striking.

We suggest an alternative approach that involves the use of a token economy to create new private-sector led incentives to affordable housing. There are at least two ways a token economy might be used:

  • To get more private capital to flow into affordable housing; and
  • To incentivize tenant behavior in a way that helps create value for private owners of such property.

We explore each of these concepts separately below.

5.1 Tokenization as an Alternative Financing Mechanism

Income producing property is generally financed under some combination of mortgage finance plus equity contributed by investors via an investment vehicle that pools capital and provides investors with rights to cash flow and appreciation. One of the most common such vehicles in the US is a Real Estate Investment Trust (REIT) where investors buy “shares” in a portfolio of assets overseen by a professional portfolio manager. Modeled after mutual funds, REITs are typically designed to provide investors with regular income, asset diversification and long-term capital appreciation.

Equity REITs own or manage income producing properties – such as office buildings, shopping centers and apartment buildings – and lease the space to tenants. After paying operating expenses, equity REITs distribute the bulk of their income to their shareholders as dividends. Equity REITs also generate income for their shareholders from the sale of properties.

There are several different types of REITS, but equity REITs constitute the majority of today’s REIT market, comprising more than $2 trillion of real estate assets and more than 200,000 properties across the US. The shares of equity REITs may be listed on stock exchanges or they may be privately held.

In most European countries, REITs are still a relatively new concept. More commonly utilized across Europe are open- or closed-end investment funds, partnerships and limited liability companies, which can also feature in the US. While these structures vary from country to country, the concept is similar to that of a REIT.

An emerging approach to financing real estate involves dividing individual properties or portfolios into ownership interests represented by “tokens” rather than shares. The purported advantages of a token approach to financing real estate are many, and include:

  • Increased liquidity – trading tokens can be accomplished on a peer-to-peer (P2P) basis where tokens are simply transferred from one electronic wallet to another, a faster way to trade than incumbent structures;
  • Increased transparency – because token trading is enabled with blockchain, an immutable record of all trades is maintained and accessible;
  • Increased flexibility – token exchanges can offer investors the potential to design their exposure to individual properties, rather than investing in a pre-determined portfolio managed by a third-party portfolio manager;
  • Higher valuations – because token exchanges can be designed with no minimum investment requirement, they hold the potential to allow retail investors to participate in an asset class previously accessible only to institutions or other larger ticket investors; and
  • Reduced costs – P2P trading holds the potential to lower costs associated with intermediary fees and avoidance of transfer taxes.

Real estate token projects tend to fall into two categories:

Bespoke property tokenization – This involves tokenizing an individual property or project. There are scores of such projects around the world and, while relatively easy to accomplish from a technical perspective, the main disadvantage is the lack of a marketplace where conventional real estate investors are comfortable to participate, much less allowed in the case of institutional investors, to buy tokens. This is because even the more well- known token exchanges (e.g. Binance, Bittrex, etc.) do not operate under the jurisdiction of a securities regulator.

Portfolio tokenization – Here, a portfolio of professionally managed real estate assets is tokenized in a manner like that of a REIT or other pooled investment vehicle. But again, the lack of a token exchange approved by securities regulators is an impediment to participation by institutional investors.

Hence, the more sophisticated projects emerging are those that seek to create regulated “security token” exchanges where retail and institutional investors can trade tokens representing undivided interests in individual properties, projects or portfolios just like any other regulated security. These exchanges would be established in full compliance with securities regulations in the jurisdictions in which they plan to operate and, but for the token, would resemble any other regulated securities exchange.

While no securities authority in any OECD country has yet formerly approved the operation of such an exchange, industry experts agree this is only a matter of time as multiple projects are in various stages of approval in the US, Europe and Asia. Large asset managers are keenly interested in the sector as the security token represents an entirely new asset class with broad market appeal, especially to retail investors whose options for investing in income-producing property are somewhat limited.

Exchange considerations aside, the most potential benefit from real estate tokenization to investors and project sponsors alike is created when individual properties (or projects are tokenized, i.e. each property has its own unique token. This structure provides investors with the ability to sculpt their exposure to individual properties thus maximizing flexibility.

An illustration of how this can function is provided in Figure 10. In this example, a Special Purpose Vehicle (SPV) would hold legal title to all the properties whose tokens trade on the exchange so that it remains government-facing, i.e., when tokens trade, there is no need to re-register title with the government property registry. This is an important feature for maximizing trading efficiency and avoiding transfer taxes and other transaction expenses.

Figure 10. Example Structure of Real Estate-Backed Security Token Exchange

To summarize, tokenizing affordable housing could be a highly attractive financing alternative for numerous reasons, including:

  • More efficient inclusion of retail investors in this asset class with consequent increase in capital supply and, perhaps, valuation;
  • Ability to create tokens with a social purpose specifically targeted to institutional Socially Responsible Investment (SRI) funds; and
  • Potential to create multiple tokens for individual properties, for example, to bifurcate the cash and tax attributes for different investor target markets as is presently done in the US where the Low-Income Housing Tax Credit is sold as a distinct commodity to tax-motivated investors.

5.2 Leveraging a Token Economy to Incentivize Tenant Behavior

Tokenizing affordable housing holds the promise of incentivizing tenant behavior in a way that benefits property owners and investors as well as the tenants themselves. For example, once a property is tokenized, the tokens can be distributed to tenants to reward them for desired behaviors, including:

  • Paying rent on a timely basis;
  • Paying utilities on a timely basis (i.e. in sub-metered properties and where utility arrears negatively impacts property value);
  • Consuming lower quantities of utilities (i.e. where individual units are not sub-metered or where utilities are otherwise included in the rent, and where installation of inexpensive IoT devices is feasible);
  • Maintaining dwelling units so changeover costs are minimized (e.g. to repair damage) when a unit is vacated – tokens could make the security deposit process more efficient and transparent; and
  • Contributing to common charges or otherwise participating in activities that maintain and/or improve public areas and grounds.

In addition, tokens can be used to allow tenants to purchase ownership in the property over time, perhaps as part of their monthly rent payment. This concept is similar to the rent-to-own strategy that has been popular in the US for several decades. Unscrupulous landlords can scam low-income tenants with a rent-to-own program because they can hold on to the money paid toward ownership and then never provide a way for tenants to receive a return. Tokenization, on the other hand, would make the accounting of a rent-to-own program 100% transparent and mitigate the risk that a landlord or project sponsor might fail to comply with their contractual commitment to the tenant.

If the property manager (or a trustee) held such earned tokens in an electronic wallet for the benefit of tenants (i.e., tenants could not immediately liquidate their earned tokens), tenants could benefit by:

  • Creating a mechanism to satisfy offset obligations, for example for rent or utility bill arrears and/or to offset the cost to repair damages or pay transition costs otherwise funded by the security deposit;
  • Have a mechanism of “forced” savings that can be used to pay rent if a tenant’s income falters;
  • Have a mechanism to participate in the cash flow of a property so tenants feel more a sense of responsibility to common areas and grounds; and
  • Have a way to acquire property ownership over time.

These are potentially powerful benefits that accrue to both tenants and property owners, aligning their interests in a unique way. In regions where renters lack motivation to contribute to the maintenance of their building (e.g. Eastern Europe), incentive tokens may be deployed to help tenants feel more of a sense of responsibility to the overall condition and appearance of the property, including common areas and grounds.

As a final concept, tokens “banked” as described above can help facilitate the transition (or retention) of a family who wants to move due to change in the size of their household within a particular property, development or project to the extent that the both dwellings operate under the same token. In this way, “credits” earned toward the purchase of one dwelling can be used with no loss of value in the purchase or use with another dwelling operating under the same token.

5.3 Summary

Tokenization of affordable or social housing may be a highly interesting private sector-led complement to the existing fabric of government-led incentive programs available around the world. For the reasons stated above, token schemes can be designed with unique attributes to mine value not accessible with conventional incentive schemes. The emergence of the security token and its acceptance by securities regulators as a unique asset class deserving of regulation to enable specialized real estate-backed token exchanges makes the concept both timely and appropriate.


The material in this whitepaper draws heavily on the following reports:

Section 2 – The US Perspective

“The State of the Nation’s Housing 2018”, Joint Center for Housing Studies of Harvard University, 2018

“Affordable Land and Housing in Europe and North America”, United Nations Settlements Programme (UN-HABITAT), 2011

Section 3 – The European Perspective

“Affordable Land and Housing in Europe and North America”, United Nations Settlements Programme (UN-HABITAT), 2011

“Affordable Housing in Europe: Innovative Public Policies That Can Effectively Address the Housing Crisis”, Barcelona Centre For International Affairs, September 2017.

Section 4 – The Asian Perspective

“Affordable Land and Housing in Asia”, United Nations Settlements Programme (UN-HABITAT), 2011

“What Can We Learn from Thailand’s Inclusive Approach to Upgrading Informal Settlements?”, The World Resources Institute, May 12, 2016

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