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Article

Global House Prices: Trends and Cycles  

Hites Ahir and Prakash Loungani

On average across countries, house prices have been on an upward trend over the past 50 years, following a 100-year period over which there was no long-term increase. The rising trend in prices reflects a demand boost due to greater availability of housing finance running up against supply constraints, as land has increasingly become a fixed factor for many reasons. The entire 150-year period has been marked by boom and bust cycles around the trend. These also reflect episodes of demand momentum—due to cheap finance or reasonable or unreasonable expectations of higher incomes—meeting a sluggish supply response. Policy options to manage boom–bust cycles, given the significant costs to the economy from house price busts, are discussed.

Article

Housing Policy and Affordable Housing  

Christian A.L. Hilber and Olivier Schöni

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.

Article

Urbanization and Emerging Cities: Infrastructure and Housing  

Gilles Duranton and Anthony J. Venables

Urbanization is a central challenge of our times. At its core, it is an urban development challenge that requires addressing transportation and housing in cities. Transport improvements can reduce travel times and improve the spatial reach of urban dwellers. But these improvements may be crowded out by latent demand for travel and may lead to worse congestion, pollution, and other negative externalities associated with urban traffic. To evaluate the effects of transport improvements, direct travel effects must be measured. Then, an improvement in traffic conditions somewhere may spill over to other areas. Firms and residents may also relocate, so economic growth close to a transport improvement may just result from a displacement of economic activity from other areas. Conversely, better accessibility is expected to foster agglomeration effects and increase productivity. Valuing these changes is difficult, as it requires being able to quantify many externalities such as congestion delays, scheduling gains, and greater job accessibility. Housing policies present different challenges. More fundamental policies seek to enable housing construction by offering more secure property rights, up-to-date land registries, and competent land-use planning—all complex endeavors and all necessary. Other housing policies rely on heavy government interventions to provide housing directly to large segments of the urban population. These policies often flop because governments fail to link housing provision with job accessibility and appropriate land-use planning. Housing is also an expensive asset that requires significant initial funding, while credit constraints abound in the urbanizing world. Policymakers also need to choose between small improvements to extremely low-quality informal housing, retrofitting modern housing in already-built urban areas, or urban expansion. All these options involve sharp trade-offs, subtle induced effects, and complex interactions with transport. All these effects are difficult to measure and challenging to value.

Article

Housing and the Labor Market  

Robert R. Reed III

Since the experiences of the housing boom and bust in the first decade of the 21st century, there has been growing interest in studying the connections between housing markets and labor market activity. Notably, a number of theoretical works have attempted to understand how housing tenure affects labor market outcomes. Interestingly, despite the inherent appeal of the logic that homeownership reduces worker mobility, much of this research does not predict that homeownership is associated with inferior outcomes when compared to renting. Thus, it is important to also examine the implications of homeownership empirically. Although initially focused on macroeconomic studies looking at owner-occupation rates and unemployment across countries, the empirical literature expanded by introducing microeconometric research that examines an individual’s tenure status and labor market results. To begin, it appears that unemployed homeowners may not necessarily suffer from longer unemployment durations than other workers. Further, they may also be less likely to become unemployed; however, homeownership might be associated with lower wages because homeowners are limited in their job searches. In particular, homeowners suffering from negative equity seem to approach search efforts and job acceptance rates differently from other workers. Yet, such individuals are unlikely to default on their mortgages unless they experience adverse labor market shocks.

Article

The Hong Kong Housing Market  

Lok Sang Ho and Yonglin Wang

The Hong Kong Special Administrative Region (SAR) government made a tremendous effort to raise the homeownership rate, starting with Mr. Tung Chee-hwa, the first Chief Executive, who, in his Policy Address in 1997, vowed to raise the homeownership rate from below 50% to 70% in 10 years. The figures showed, however, that while the total homeownership rate had gone up by 18 percentage points in 15 years prior to 1997, from 1997 to Q3 2022, in the space of 25 years, the total homeownership rose from 46.7% to 52.6%, or a mere 5.9 percentage points in 25 years. The nonsubsidized private homeownership rate rose from 30% in 1985 to 36.2% in 1997 (6.2 percentage points in 12 years), yet it rose only from 36.2% in 1997 to 37.2% in 2022Q3, amounting to only 1 percentage point in 25 years. The puzzle may lie in the SAR government’s mistaken strategy of providing increasing opportunities for public housing tenants and subsidized flat owners to profit from the housing benefits. These benefits turn out to be at the expense of the middle-class people who provide much impetus to economic growth and who bear the brunt of the tax burden. The various transaction taxes meant to curb speculation turn out to impede the trading-up process. By significantly reducing the supply of existing homes, and especially that of starter homes, an unintended consequence is much sharper price increases for starter homes than for larger homes. This leads to the proliferation of so-called nanoflats that are tiny yet very expensive.

Article

Macroeconomic Aspects of Housing  

Charles Ka Yui Leung and Cho Yiu Joe Ng

This article summarizes research on the macroeconomic aspects of the housing market. In terms of the macroeconomic stylized facts, this article demonstrates that with respect to business cycle frequency, there was a general decrease in the association between macroeconomic variables (MV), such as the real GDP and inflation rate, and housing market variables (HMV), such as the housing price and the vacancy rate, following the global financial crisis (GFC). However, there are macro-finance variables, such as different interest rate spreads, that exhibited a strong association with the HMV following the GFC. For the medium-term business cycle frequency, some but not all patterns prevail. These “new stylized facts” suggest that a reconsideration and refinement of existing “macro-housing” theories would be appropriate. This article also provides a review of the corresponding academic literature, which may enhance our understanding of the evolving macro-housing–finance linkage.

Article

Economic Penalties Based on Neighborhood, and Wealth Building  

Rowena Gray and Raymond Kim

Building wealth over lifetimes became possible for a broader span of the population in developed countries over the 20th century compared to any time in history. This was driven by more people having the capacity to save because of the expansion of middle-class jobs and education, access to highly developed financial markets, and government support for real estate investment. Housing wealth remains the dominant wealth-building vehicle for those outside the top decile of the income distribution. This, coupled with the high and growing level of residential segregation and local allocation of public goods in countries such as the United States, drives the unequal ability of individuals to build wealth depending on neighborhood of origin and residence. Segregated neighborhoods are drawn along racial and class lines, and while much progress has been made, historical and structural factors such as the legacy of slavery have contributed to the difficulty of fully closing the Black–White wealth gap. More generally, children who grow up in lower-status areas are significantly less likely to rise up the wealth and status ladder, and this is driven by a variety of disadvantages in those neighborhoods. These include higher levels of pollution; worse public services, especially education; and fewer prospects for jobs and training. Some of these can be changed by moving individuals and families to better neighborhoods, while the effects of a polluted environment on the development of 0- to 5-year-olds have long-lasting and often irreversible consequences. These factors have kept the “American Dream” of equality of opportunity and the ability to save and build wealth as individuals and households out of reach for significant portions of society. There is renewed interest in infrastructure investments and place-based policies to address this opportunity gap, which, due to its scale, is beginning to be recognized as having negative implications for the aggregate economy. Economists should maintain their focus on these important questions and continue to improve data sets as the range of assets in which people can build and store wealth grows.

Article

Crises in the Housing Market: Causes, Consequences, and Policy Lessons  

Carlos Garriga and Aaron Hedlund

The global financial crisis of 2007–2009 helped usher in a stronger consensus about the central role that housing plays in shaping economic activity, particularly during large boom and bust episodes. The latest research regards the causes, consequences, and policy implications of housing crises with a broad focus that includes empirical and structural analysis, insights from the 2000s experience in the United States, and perspectives from around the globe. Even with the significant degree of heterogeneity in legal environments, institutions, and economic fundamentals over time and across countries, several common themes emerge. Research indicates that fundamentals such as productivity, income, and demographics play an important role in generating sustained movements in house prices. While these forces can also contribute to boom-bust episodes, periods of large house price swings often reflect an evolving housing premium caused by financial innovation and shifts in expectations, which are in turn amplified by changes to the liquidity of homes. Regarding credit, the latest evidence indicates that expansions in lending to marginal borrowers via the subprime market may not be entirely to blame for the run-up in mortgage debt and prices that preceded the 2007–2009 financial crisis. Instead, the expansion in credit manifested by lower mortgage rates was broad-based and caused borrowers across a wide range of incomes and credit scores to dramatically increase their mortgage debt. To whatever extent changing beliefs about future housing appreciation may have contributed to higher realized house price growth in the 2000s, it appears that neither borrowers nor lenders anticipated the subsequent collapse in house prices. However, expectations about future credit conditions—including the prospect of rising interest rates—may have contributed to the downturn. For macroeconomists and those otherwise interested in the broader economic implications of the housing market, a growing body of evidence combining micro data and structural modeling finds that large swings in house prices can produce large disruptions to consumption, the labor market, and output. Central to this transmission is the composition of household balance sheets—not just the amount of net worth, but also how that net worth is allocated between short term liquid assets, illiquid housing wealth, and long-term defaultable mortgage debt. By shaping the incentive to default, foreclosure laws have a profound ex-ante effect on the supply of credit as well as on the ex-post economic response to large shocks that affect households’ degree of financial distress. On the policy front, research finds mixed results for some of the crisis-related interventions implemented in the U.S. while providing guidance for future measures should another housing bust of similar or greater magnitude reoccur. Lessons are also provided for the development of macroprudential policy aimed at preventing such a future crisis without unduly constraining economic performance in good times.