Housing finance in developing countries : a transaction cost approach

In most developing countries, relatively little mortgage credit is supplied voluntarily, mainly because of the high transaction costs associated with enforcing contracts. In most countries, the supply of mortgage credit is restrained more by the cost of post-contract governance than by the cost of producing contracts. This distinction is important because before-contract costs are dictated by technological conditions - that is, the nature of the production function - so little can be done to change them. The costs of governance, on the other hand, are more amenable to change. If there are significant gains from reducing these costs, institutional reforms may help realize them. In the lowest-income countries, the before-contract transaction costs of providing housing finance are probably high enough per loan dollar that low levels of demand explain the relative smallness of the housing sector. In most other developing countries, housing finance systems could grow more spontaneously and rapidly if there were more effective post-contract enforcement procedures. This growth would improve the efficiency of financial systems and reduce distortions in the economy - so the economic benefits of reducing housing transaction costs are likely to be significant.