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Bhutan Urban Policy Notes: Affordable Housing Policy Summary

Core Content

This document outlines the challenges and opportunities in Bhutan's affordable housing sector as part of a broader urban policy review. It highlights the growing urbanization and associated demographic shifts, emphasizing the need for targeted policies to ensure equitable and sustainable housing provision. The focus is on both supply and demand-side constraints and proposes reforms to address these challenges in alignment with the 12th Five-Year Plan and Vision 2020.

Main Trends and Key Findings

• Rapid Urbanization: Bhutan has experienced the fastest rural-urban migration in South Asia (5% annual growth rate from 2000–2010). Thimphu, the capital, now houses about 15% of the total population, with 37.9% of the population living in urban areas as of 2017.
• Population Growth and Housing Demand: The population of Thimphu Dzonkhag increased by 40% between 2012 and 2017, significantly increasing the demand for affordable housing.
• Demographic Shifts: Urban households are smaller, younger, and have a lower dependency ratio compared to rural ones. The elderly population is expected to quadruple by 2040, increasing the diversity of housing needs.
• Housing Stock and Quality: While quantitative housing deficits are low, housing quality is a major concern, especially in rural areas. Urban areas have higher access to basic infrastructure and formal housing, but still face affordability challenges.

Key Challenges

Supply Side Constraints

• Land Administration and Planning: Limited land value capture instruments such as property taxation or betterment fees hinder municipal control over urban expansion. Land pooling is a successful model but not widely implemented.
• Construction Capacity: The construction industry lacks the capacity to deliver consistent quality standards due to high material import costs, lack of skilled labor, and uneven application of building codes and standards.
• Infrastructure Provision: Urban areas need more infrastructure investment to support growing populations and improve housing quality.

Demand Side Constraints

• Limited Access to Finance: Formal participation in financial institutions is low (34% of the population has a bank account), limiting access to mortgages and affordable loans. Microfinance and housing-specific financial instruments are underdeveloped.
• Subsidy System: Housing subsidies are not well-targeted and may crowd out private sector development. Current subsidies benefit certain groups, such as public sector workers, but do not effectively reach the most vulnerable.
• Affordability: Housing costs in urban areas are unaffordable for the median income household, with housing expenditures likely exceeding 30% of income. This is higher than the global standard of 25–30%.

Policy Recommendations

Clarifying Government Role

• National and Local Governments: Both levels need to play a role in enabling housing markets and ensuring equitable provision. National-level policies should focus on financial instruments and data systems, while local governments should manage land use and infrastructure.
• Land Assembly Mechanisms: Strengthening land pooling and other land value capture instruments can increase housing supply and improve infrastructure access.

Enhancing Housing Finance Options

• Mortgage and Microfinance Products: Developing mortgage and microfinance products tailored to middle and lower-income groups can increase access to credit. Housing microfinance loans, similar to those in Afghanistan, could serve as a viable alternative.
• Collateralization Reforms: Assessing the viability of land collateralization could enable developers to access construction finance more easily.

Strengthening Subsidy Systems

• Targeted Subsidies: A comprehensive review of housing subsidies is needed to ensure they are effectively targeted to low-income and vulnerable groups.
• Public Housing Provision: The National Housing and Development Corporation (NHDCL) and National Provident and Pension Fund (NPPF) should focus on expanding affordable housing options and improving subsidy efficiency.

Improving Building Standards and Codes

• Material and Technique Standards: A review of building codes and materials is necessary to allow for more affordable and resilient construction options.
• Training and Certification: Programs for builders and workers can improve quality and safety standards in the construction industry.

Establishing Data Systems

• Housing Market Observatories: Publicly available data systems are essential for tracking housing markets, property trends, and creditworthiness. These systems can support better policy-making and market transparency.

Conclusion

Despite a relatively low quantitative housing deficit, Bhutan faces significant challenges in ensuring affordable and quality housing for all. The government needs to strengthen its policy framework, enhance financial instruments, improve land management, and invest in data systems to better support housing markets and meet the needs of diverse income groups. The successful land pooling model in Thimphu demonstrates the potential for innovative land management strategies to improve housing supply and urban resilience.