After decades of neglect, the Palestinian housing sector is capturing the attention of professionals as diverse as economists, politicians and human-rights activists. The latter view shelter as a basic human right, fundamental to improving living conditions. Peace activists highlight the intrinsically political nature of housing and land issues and advocate an end to the deleterious Israeli practices of house demolition, land confiscation and expansion of illegal settlements in Palestinian territories.
Economic analysis has generally focused on the housing sector to illustrate the structural distortions characterizing Palestinian investment patterns. For decades, the construction of primarily residential buildings has mobilized the main bulk of personal savings and business investment. Each year, approximately 80 percent of funds are invested in the sector. Economists point out that, rather than being excessive, the level of private investment in property and building is indicative of the low level of investment in other sectors. This pattern was established in the early days of occupation with the systematic undermining of the productive capacity of the Palestinian economy. Moreover, unlike the agriculture and manufacturing sectors, for example, construction was perceived as relatively unaffected by fluctuations in the political environment. Up until today - despite marked improvements in the capital and commodity markets - risk-averse investors continue to be attracted by the relative stability of residential property and buildings. The diversion of funds from construction to equity in business - i.e., injecting funds into productive activities - is therefore commonly used to assess the robustness of investment financing in Palestine.
More recently, economists specializing in housing issues have bemoaned the lack of a formal financial system for the housing markets in Palestine, and are quick to conclude that the housing sector is rampant with inefficiencies.

Unanimous Claim

If there is one commonality, one unanimous claim concerning housing issues, it is that rapid and affordable housing provision is a critical challenge facing the Palestinian people. The Minister of Housing estimated in 1995 that at least 250,000 housing units would need to be constructed or renovated in the next ten years to meet the housing needs of the Palestinian people. Exorbitant land prices have contributed to the housing shortages, which in turn have induced high housing density: in Gaza 41.2 percent of houses in refugee camps shelter three or more persons per room. With an annual population growth rate of 3.7 percent, compounded by the return of thousands of Diaspora Palestinians, and an acute land scarcity, the housing shortage is set to escalate, especially in densely populated Gaza.

A Brief Look at Housing Projects

Available information suggests that current funding (private and public investment, as well as donor assistance), although on the rise, is dramatically low relative to housing needs. Ministry of Planning and International Cooperation statistics indicate that, between 1994 and 1998, U.S.$ 89.5 million donor funds were allocated to housing development. This volume of donor funds appears less substantive when compared with the education sector (which received a cumulative disbursement of U.S.$ 297.3 million over the same period), or even the police (which received U.S.$ 93.1 million in four years. Apparently, this figure does not take into consideration the U.S.$ 10 million project, funded by Japan and allocated, amongst other, to the development of housing units for the Palestinian police).
Donor-funded housing projects have taken various forms: construction of new houses, renovation of inadequate or overcrowded houses, upgrading of refugee shelters, technical and administrative support to the Ministry of Housing and the Palestinian Housing Council, loan schemes for home improvement and construction and promotion of joint ventures in the construction industry. The majority of the projects have been "traditional" construction and rehabilitation of residential dwellings, including refugee shelters.
These projects - funded by various sources such as the European Commission, Spanish Cooperation, Japan, USAID and Canada - have injected much-needed capital into the sector and have enabled thousands of Palestinians to have access to adequate housing.
However, a sizable proportion of these projects has been "one-off" projects, with little or no long-term implications for housing development. As it is highly unlikely that donors will eternally pump capital into the Palestinian economy, development efforts are currently focusing on the design of sustainable housing finance mechanisms. Some organizations, such as the American Near East Relief Agency, are planning to experiment with the internationally renowned formula of revolving loan funds for housing purposes which, by definition, has a built-in sustainability component.

Developing an Effective Mortgage Market

The comprehensive - some would say ambitious - housing project currently being implemented by the Ministry of Housing, with the financial and technical support of the World Bank, the International Finance Corporation (IFC) and the Canadian International Development Agency (CIDA) neatly fits this paradigm of "self-sustaining financing system."
The project, which aims to stimulate capital into the production of housing, encompasses the creation of the Palestinian Mortgage and Housing Corporation (PMHC). The PMHC, modeled after the Canadian Mortgage and Housing Corporation, was established to provide technical and financial consultancy to the Palestinian banking sector. CIDA, the principal technical partner, is providing U.S.$ 2.5 million, the World Bank has disbursed a loan of U.S.$ 17 million and on April 22, 1999, IFC signed an agreement to invest a total of U.S.$19 million in equity and loans in the PMHC. The shareholders of the PMHC also reportedly include public sector entities (Ministry of Finance, Ministry of Housing, Palestinian Monetary Authority) and financial institutions (Arab Bank, the Palestine Development and Investment Company [PADICO]).
The idea behind the establishment of the PMHC is straightforward. As Palestine lacks an effective mortgage market - few operating banks in Palestine have lending facilities for the housing sector - there is a crucial need for financial mechanisms to enable the maximum number of Palestinians to have access to housing loans. The IFC points out that the project will also have a positive spillover effect, in that approximately 3,400 jobs will be created annually from increased demand for housing construction.
The functions of the PMHC (according to its Memorandum of Association) are to design mortgage loan insurance products, standardize mortgage-lending guidelines, and develop and improve the financial markets for both the medium and the long term. To alleviate the problem of risk perception and the conservative attitude of the local banking system, which continues to prefer short-term overdraft facilities, two additional components have been designed. The Liquidity Facility will provide long-term funds for lending by banks and other primary market lenders, and the Mortgage Insurance Fund will provide partial risk coverage for primary lenders.
On a smaller scale, initiatives are also being designed by other organizations to accelerate housing finance. The Cooperation for Development, a British NGO, for example, is implementing an indirect lending program (through the provision of a guarantee fund) that aims to increase the participation of local banks in medium-term housing loans. The Ministry of Housing is also involved in discussions with local banks regarding the allocation of an additional U.S.$ 20 million in cash to be used for granting long-term housing loans.

An Exclusionary Market?

The effective development of a mortgage system will no doubt propel, in the long run, the growth of a demand-based housing market enabling middle-income families to access housing. But development practitioners are often quick to question how low-income sectors of the population benefit from such projects. In the World Bank/Ministry of Housing initiative, a specific component has been devised to target the poor - the Palestinian Housing Assistance Fund.
According to the deputy minister of housing, the Fund, which will be administered by the Ministry of Housing, will generate affordable housing for the low- to moderate-income households, through an explicit program of savings, loans and grants. Contrary to standard government subsidy schemes, the Fund intends to tap into the savings of lower-income households. "A program that makes use of existing - but habitually unmobilized - savings of lower-income households and fosters the accumulation of new savings for housing can expand the pool of long-term resources in the economy. If such resources are made accessible to financial institutions, they can support increased mortgage lending and mitigate risks," claims the Ministry of Housing team. In order to qualify for the grant, households will have to accumulate sufficient savings for the necessary down-payment and present a finance and savings plan for the projected investment. The grants, combined with a loan from a financial institution, will enable households to purchase housing in the range of U.S.$ 20,000 to $30,000.
Whether the subsidy scheme will target the poor - much less the poorest of the poor - however, remains to be seen. After all, 38 percent of the Gazan population is estimated at living below the poverty line and, of these, two-thirds live in absolute poverty without being able to meet their basic needs, including shelter (Poverty Report, 1998). The designers and implementers of the Fund should perhaps bear in mind that examples drawn from countries as far-ranging as South Africa and Bangladesh suggest that government subsidy schemes can function more effectively if they work in collaborative partnership with local communities. With minimum support - but with full control over the housing planning and development process - the poor can be prolific producers of shelter.

From Palestine Economic Pulse, Vol. IV No. 2, 1999. Printed by permission.