Global Comparison Of Housing Subsidies
Introduction:
Housing is important for the well being of households worldwide. Housing demand and investment in housing play significant economic roles. As a result, the housing market is subjected to more policy initiatives than any other consumer good. Government intervention is commonly justified to:
(i) address market failure to meet the needs of lower and middle income households, especially in times of housing shortages.
(ii) ensure minimum housing standards.
(iii) stimulate economic activity and job creation.
(iv) achieve positive externalities for society and local communities.
Accordingly, the objectives and strategic approach to housing policy globally are diverse and reflect significant differences in the importance of housing in the social-political context of each country.
Diverse global approaches to housing policy:
In 1919, Britain was the first country in Western Europe to embark on a subsidized public sector housing program. Countries with social housing policies where the government plays an important role in aiding selected groups in the population who cannot secure housing for themselves include Belgium, India, Ireland, Japan, Switzerland, United Kingdom (UK), and the United States of America (USA). Some countries have moved towards a comprehensive commitment, where governments play a major role in shaping and controlling the housing market to ensure housing affordability and welfare. These countries include Denmark, France, Germany, Hong Kong, People’s Republic of China (PRC), Korea, the Netherlands, Norway, Singapore, and Sweden.
Housing policies to promote homeownership:
Homeownership rates vary widely across countries, as well as regionally, within a country. Canada, the UK, and the US have homeownership rates between 65% to 70%, while Germany and Switzerland have rates below 45%. Greece, Hungary, Italy, and Spain have rates of 80% or higher, as do India, Mexico, and Singapore. In PRC, UK, and Eastern Europe, privatization of the housing sector has achieved significant increases in homeownership rates over relatively short periods of time.
Direct interest subsidies:
Under a direct interest subsidy scheme, the government intervenes to reduce the interest paid to private lenders. The government may do this by paying the lender a fixed amount or some proportion of the interest due based on a specific rate less than the market rate. For mortgage interest rate subsidies, the reduction in rate can be for a specified period or for the life of the loan, and it may be phased out over time or phased out as the income level of the borrower increases.
Contractual Savings for Housing (CSH):
Under the CSH, potential borrowers accumulate savings over a number of years to build up equity, while demonstrating their capacity and reliability for repaying debt. Following the saving period, a loan is advanced that is typically equal or some low multiple of the amount already saved. The equity accumulated is disbursed jointly with the loan. Interest rates for savings are fixed below the market rate, and the incentive to follow through the scheme is the promise of a similarly below market, fixed rate loan.
Housing Provident Funds (HPF):
HPFs accrue mandatory savings from either public or private sector employees, typically as a percentage of salary. Employers may also be required to make proportional contributions. Accrued long-term savings are often remunerated at below market yield. Contributing members to the HPF may then withdraw the savings as a down payment for a housing investment, and receive a long-term housing mortgage loan usually at a preferential rate.
Conclusion:
The choice of housing subsidy policy is highly dependent on policy goals, the country’s stage of development, and specific market conditions. Supply-side policies play an important role particularly in markets with serious housing shortages or a relatively inelastic supply of housing. Demand-side subsidies are more suited to markets with an elastic supply of housing and need to be carefully crafted to avoid escalation of house prices.
Also Read: Housing Supply, House Prices, and Monetary Policy