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The development of the housing sector is widely recognized as an integral part of economic development. In addition to the large share that the housing sector occupies in the economy, its importance also arises from the positive externalities andspill-over effects andits impact on the social andpolitical climate, issues of particular importance in developing countries. In most countries, andincreasingly so in emerging economies, housing represents a large proportion of a household's expenditure and takes up a substantial part of lifetime income. Usually, it is the largest asset ownedby households. The backwardandforwardlinks to landmarkets, durable goods manufacturing and development of labour markets with depth and mobility further underscore the significance of this sector, particularly in the process of economic transition. It is also widely understood that the provision of housing services depends upon a well-functioning housing finance system. Indeed, without a properly functioning housing finance system that operates in an allocationally andoperationally efficient manner, the 'real' housing market wouldbe suboptimal. Moreover, similarly to the housing markets, the housing finance system has beneficial spill-over effects on the entire financial system, with far-reaching consequences for economic development. Increasing emphasis is therefore being placedin developing andtransitioning countries on the reform of real estate finance andmortgage markets. Economists andpolicy makers have isolatedat least five main economic andsocial policy issues that arise from a successful reform effort, andwhich wouldbe of particular significance to developing countries such as Russia, India and China. 1. Social impact. The purportedbenefits of homeownership have been stressedin theoretical andempirical literature. The social value creation by homeownership, such as social stability, functional neighbourhoods, development of civil society, abatement of crime andgeneral enhancement of welfare, are well recognized. This is particularly true of provision of affordable housing for the poor, in addition to the widely acclaimed objectives of equity and social justice. 'Homeowners accumulate wealth as the investment in their homes grows, enjoy better living conditions, are often more involved in their communities, andhave children who tendon average to do better in school and are less likely to become involvedwith crime. Communities benefit from real estate taxes homeowners pay, andfrom stable neighbourhoods homeowners create' (US Department of Housing andUrban Development, 2000). Homeownership creates neighbourhoods with a collective sense of identity through the development of stake-holding that is linked in terms of its value to the dynamics of the neighbourhood at large. The value may be monetary, as well as quality of life issues in the immediate neighbourhood of the primary residence. Some raise the question of whether homeowners make better citizens. Although the ownership rate in many emerging economies is high (Proxenos, 2002; i.e., ownedhomes as a proportion of total dwellings), the quality of a large segment of dwellings leaves much to bedesiredandmany of the externalities of housing are neither creatednor captured. 2. Spill-over, multiplier effect. Direct new expenditures in the construction industry or in other real estate relatedind ustries stimulate the economy andgenerate jobs. Since a substantial portion of generatedincome is ploughedback into the economy, there is an additional multiplier effect. This is true of any industry. However, since the real estate industrial sector cluster is largely a non-tradable industry (i.e., most of the output andinputs associatedwith the industry stay, and are from within the confines of the domestic economy), there is little leakage out of the country. The localizedandd omestic nature of real estate therefore leads to a much larger multiplier effect than wouldbe expectedfor more tradable sectors. While construction, home maintenance andrepairs, power and transport directly affect the economy, the extensive nature of downstream andupstream links of real estate, from the finance sector to the furniture/ consumer goods sector, from infrastructure (roads, bridges, public works) to superstructure (commercial space/retail, industrial, etc.) further impact the national economy. A given amount of expenditure in the real estate industry (vis-à-vis other sectors) tends to support larger numbers of jobs in the economy.
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