How Colombia Reaps the Benefits of Affordable Housing

By Jonathan Malagón and Olivia Nielsen

The global economy is in a state of disorder, the adverse effects of climate change have become palpable, and the COVID-19 pandemic has revealed a clear linkage between poor housing quality and public health. In short, as governments try to tackle this multidimensional threat there is no better time than now to invest in housing.

Housing investments can reap large benefits and with over 1.6 billion people lacking access to adequate housing the choice seems obvious. Multiple crises can be tackled simultaneously through well-structured, well-adapted, and strategic public spending on housing. However, not every housing investment is created equal, and in some cases, public investments in housing can have negative effects. The case of Colombia is an excellent example that shows how to do it well.

In 2015, the Government of Colombia announced plans to provide incentives for the construction of social housing within a program named “Mi Casa Ya” (MCY). During the initial stages of the program’s operation, developers had found limited demand among low-income households simply because these households did not qualify for the long-term financing necessary. To address this, MCY was revised to become a demand-driven program that expands subsidies available to households and supports consumer choice to buy homes that suit them instead of building low-income housing in remote and often undesirable neighborhoods. MCY leverages the resources of the country’s strong private sector to provide carefully calculated mortgage subsidies that increase the affordability of medium and low-income households.

MCY is simple and transparent, designed to ensure that low-income households pay less for a mortgage than what they previously paid in rent for a similar unit. A down payment is provided partially or totally by the government depending on the level of household income: the lower the income, the higher the subsidy. Plus, MCY beneficiaries receive a 4 percent discount to the interest rate. The value and effectiveness of this program is best illustrated by the repayment behavior of the beneficiaries: non-performing loans are some of the lowest of Colombia’s banking sector. So households are choosing to pay back these housing loans more than other types of loans.

In only a few years, MCY has exceeded its targets and positively impacted the following sectors:

Housing: Colombia increased the number of new houses sold annually from 150,000 in 2015 to 250,000 in 2021, becoming one of the countries in the world with the highest level of new houses per million inhabitants.  In 2020, Colombia was the recipient of the “Scroll of Honour,” from UN Habitat, one of the most prestigious human settlement and housing policy design awards globally. In 2021, Colombia was recognized by the United Nations as the “World Champion of Social and Affordable Housing.”

Economic: The housing sector has reached one of the highest backward linkages in the history of the Colombian economy, with one dollar in housing creating 2.2 dollars of value in other sectors of the economy. One of five jobs created in the country is related to housing construction and development. The real GDP of housing activities (excluding offices) increased 11.6 percent year over year in 2021. The boost in the housing sector has been a fundamental piece in the countercyclical economic policy post COVID. It has generated jobs, wealth, and tax collection, while simultaneously fulfilling social policy goals.

MCY is not the only affordable housing programme in Colombia. Supply-driven programs remain in place, focused on relocations due to disasters, or victims of violence. Other programs reduce the qualitative housing deficit by upgrading homes and neighborhood infrastructure.

MCY has accomplished a lot in only a few years. It has doubled housing production, while producing great economic benefits. Now, Colombia will need to ensure that green and climate mitigation measures are also introduced in the program to ensure its sustainable impact. As other countries seek to address their compound threats, the case of Colombia provides a best practice for many to follow. Countries with a strong private sector but limited housing affordability can carefully design mortgage incentives that enable households to choose their own home, while delivering great benefits to the economy.