Badly-designed housing policies played an important role in triggering the recent economic and financial crisis. This chapter investigates how housing policies should be designed to ensure adequate housing for citizens, support growth in long-term living standards and strengthen macroeconomic stability. Governments intervene in housing markets to enhance people’s housing opportunities and to ensure equitable access to housing. These interventions include fiscal measures, such as taxes and subsidies; the direct provision of social housing or rent allowances; and various regulations influencing the quantity, quality and price of housing. Housing policies also have a bearing on overall economic performance and living standards, in that they can influence how households use their savings as well as residential and labor mobility, which is crucial for reallocating workers to new jobs and geographical areas. Indeed, as a recent OECD analysis shows, effectively supervised financial and mortgage market development combined with policies that enhance housing supply flexibility are key to macroeconomic stability.

Innovations in mortgage markets should be coupled with appropriate regulatory oversight and prudent banking regulations. Financial liberalization and mortgage innovations have increased access to credit and lowered the cost of housing finance. This has had positive implications for previously credit-constrained households, allowing them a better chance of owning their own home. But regulatory reforms in mortgage markets may also be behind a noticeable increase in house prices –by an average of 30% in OECD countries – and in house price volatility. Moreover, deregulation can pose risks to macroeconomic stability if it triggers a significant relaxation in lending standards and a subsequent increase in non-performing loans. This is why there is a need for regulatory oversight and prudent banking regulations. Housing supply responsiveness to demand can be improved in many OECD countries, but care is needed to avoid volatility in residential housing investment. The supply of new housing that is responsive to prices helps to avoid excessive volatility in house prices, but greater responsiveness can also translate into more volatile residential investment. Responsiveness can be increased by streamlining cumbersome construction licensing procedures, and –in countries with a shortage of land for residential construction – by encouraging the use of land through better linking the assessment of property value for tax purposes to the market value.