Housing the Poor in the Developing World: Methods of Analysis, Case Studies, and Policy

By A. Graham Tipple; Kenneth G. Willis | Go to book overview
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12

Discounted cash flow analysis

Present value models of housing programmes and policies

Stephen Malpezzi


INTRODUCTION

Housing investment is the largest single form of fixed capital investment in most economies, developing or developed. In developing countries, the shelter sector usually ranges from 10 to 30 per cent of household expenditure, or 6 to 20 per cent of GNP. Housing investment typically comprises from 10 to 50 per cent of gross fixed capital formation. Further, housing investment’s share of GDP rises as economies develop. 1

It is important to be able to analyse housing market and policy issues in terms of a rigorous analytical framework, and, in particular, to compare the efficacy of alternative government interventions in the housing market according to a common and comprehensive set of criteria. This chapter presents such a framework, and illustrates its use with some examples from Malaysia and Ghana. More details on the applications can be found in Malpezzi (1989) and Malpezzi, Tipple and Willis (1990).

Present value analysis can be used to study both owner-occupied and rental housing, public or private. This kind of analysis can compare the costs and benefits of different housing programmes, and, within programmes, facilitates comparisons of programme components. Present value analysis can yield insights on the efficiency of investments, as well as some useful information on equity.

Conventionally, housing is more often regarded as a social service or basic need than as a productive investment. But shelter and infrastructure investments are directly productive: they are investment in an asset which yields a flow of services over time. Efficient investments are those which yield the most services for the resources society puts into them, discounted for when they are available. As is well known, the present value investment rule yields the most efficient set of

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