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World faces $650 billion housing problem

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A staggering 330 million urban households around the world live in substandard housing or are so financially stretched by housing costs they forgo other basic needs like food and health care, according to McKinsey.

Urban dwellers globally fork out $650 billion more per year on housing than they can afford, or around 1 percent of world gross domestic product (GDP), McKinsey estimated in a new report, highlighting the enormity of the affordability gap.

More than two-thirds of the gap is concentrated in 100 large cities. In several low-income cities such as Lagos and Mumbai, the affordable housing gap can amount to as much as 10 percent of area GDP.

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McKinsey's study looked at the cost of housing as a portion of household income in cities around the world to determine where urban residents were most under financial pressure.

For this study, it defined affordability as housing costs that consume no more than 30 percent of household income.

It's going to get worse

Based on current trends in urban migration and income growth, the affordable housing gap would grow to 440 million, or 1.6 billion people, within a decade.

This trend will exact an enormous toll on society, the report warned.

"For families lacking decent affordable housing, health outcomes are poorer, children do less well in school and tend to drop out earlier, unemployment and under-employment rates are higher, and financial inclusion is lower," it said.

Addressing the affordability gap

McKinsey estimates that an investment of $9-$11 trillion would be required to replace today's substandard housing and build additional units needed by 2025. Including land, the total cost could be $16 trillion.

The belief that major cities no longer have land for affordable housing is a myth, it added. Even in cities such as New York there are many parcels of under-utilized or idle land—including government-owned land—that could support successful housing development, the report said.

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The refurbishment of underutilized or old buildings is an important part of the process, alongside the construction of new units.

"Affordable housing is an overlooked opportunity for developers, investors, and financial institutions," it said. "Well-located, properly maintained, affordable housing can be quite profitable."

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There's also an economic case for it, McKinsey points out, noting that affordable housing in the right locations boosts the city's productivity by integrating lower-income populations into the economy.

"It enables labor mobility, opening a path to rising incomes, giving households more to spend on goods and services in their neighborhoods and, over time, enabling them to move up the income pyramid and help drive city GDP growth," it added.