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date: 23 April 2024

Housing Policy and Affordable Housinglocked

Housing Policy and Affordable Housinglocked

  • Christian A.L. HilberChristian A.L. HilberDepartment of Geography and Environment, London School of Economics; Centre for Economic Performance
  •  and Olivier SchöniOlivier SchöniDepartment of Finance, Insurance and Real Estate, Université Laval; London School of Economics

Summary

Lack of affordable housing is a growing and often primary policy concern in cities throughout the world. The main underlying cause for the “affordability crisis,” which has been mounting for decades, is a combination of strong and growing demand for housing in desirable areas in conjunction with tight long-term supply constraints—both physical and man-made regulatory ones. The affordability crisis tends to predominately affect low- and moderate-income households. Increasingly, however, middle-income households—which do not usually qualify for government support—are similarly affected. Policies that aim to tackle the housing affordability issue are numerous and differ enormously across countries. Key policies include mortgage subsidies, government equity loans, rent control, social or public housing, housing vouchers, low-income tax credits, and inclusionary zoning, among others. The overarching aim of these policies is to (a) reduce the periodic housing costs of or (b) improve access to a certain tenure mode for qualifying households. Existing evidence reveals that the effectiveness and the distributional and social welfare effects of housing policies depend not only on policy design but also on local market conditions, institutional settings, indirect (dis)incentives, and general equilibrium adjustments. Although many mainstream housing policies are ineffective, cost-inefficient, and/or have undesirable distributional effects from an equity standpoint, they tend to be politically popular. This is partly because targeted households poorly understand adverse indirect effects, which is exploited by vote-seeking politicians. Partly, it is because often the true beneficiaries of the policies are the politically powerful existing property owners (homeowners and landlords), who are not targeted but nevertheless benefit from positive policy-induced house price and rent capitalization effects. The facts that existing homeowners often have a voter majority and landlords additionally may be able to influence the political process via lobbying lead to the conundrum of ineffective yet politically popular housing policies. In addition to targeted policies for individuals most in need (e.g., via housing vouchers or by providing subsidized housing), the most effective policies to improve housing affordability in superstar cities for all income groups might be those that focus on the root causes of the problem. These are (a) the strongly and unequally growing demand for housing in desirable markets and (b) tight land use restrictions imposed by a majority of existing property owners that limit total supply of housing in these markets. Designing policies that tackle the root causes of the affordability crisis and help those in need, yet are palatable to a voter majority, is a major challenge for benevolent policymakers.

Subjects

  • Financial Economics
  • Public Economics and Policy
  • Urban, Rural, and Regional Economics

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