Advisory Center for Affordable Settlements & Housing

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Document Type General
Publish Date 12/05/2022
Author Christian A.L. Hilber and Olivier Schöni
Published By Centre for Economic Performance
Edited By Aisha Aftab
Uncategorized

Housing Policy and Affordable Housing

Housing Policy and Affordable Housing:

Lack of affordable housing is a growing and often primary policy concern in cities around 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-run supply constraints, both physical and man-made regulatory ones. Key policies to tackle affordability issues include rent control, social or public housing, housing vouchers, low-income tax credits, inclusionary zoning, mortgage subsidies, or government equity loans. Existing evidence reveals that the effectiveness and the social welfare and distributional effects of these policies depend not only on policy design, but also on local market conditions, and general equilibrium adjustments.

While many housing policies are ineffective, cost-inefficient, or have undesirable distributional effects, they tend to be politically popular. This is partly because targeted households poorly understand adverse indirect effects. Partly, it is because the true beneficiaries are often politically powerful existing property owners, who are not targeted but nevertheless benefit via house price and rent capitalization effects. 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.

Lack of Affordable Housing

Lack of ‘affordable housing’ is a growing policy concern around the world, particularly in so-called superstar cities (such as London, Hong Kong, or San Francisco) and desirable tourist areas. It has fueled social unrest in various cities and has triggered a flurry of policies aimed at addressing the ‘crisis of affordability’.

The term ‘affordable housing’ is defined here as housing that has periodic costs (rental costs or user costs for owner-occupiers) deemed ‘affordable’ relative to household income. In some countries like the UK, ‘affordable housing’ has a different meaning, referring specifically to subsidized housing provided to eligible households whose needs are not met by the market.

Most common way to measure Affordable Housing

The most common, if imperfect, way to measure ‘affordability’ is by comparing house prices or rents to household incomes. One rough rule of thumb states that housing is generally deemed affordable when the price-to-annual gross household income ratio is below 3. Another rule of thumb suggests that rental costs (or housing expenditures for owner-occupiers) should not exceed 30% of gross household incomes.

Using the basic price-to-income measure to proxy for ‘housing affordability’, statistics from numerous countries suggest a trend towards less and less affordable housing, in some cases over a period of several decades. This is especially true for superstar cities where housing has become ‘seriously’ unaffordable for a growing fraction of the population. It similarly applies to desirable tourist areas, where native residents are increasingly out-priced by second-home buyers or out-rented by temporary holidaymakers who use rental-sharing platforms.

Figure 1 shows median price-to-median income multiples for six supply-constrained and thriving ‘superstar cities’ (Panel A) and six cities that are either declining or have lax land use restrictions (Panel B) from 2010 to 2020. All superstar cities are well above the rule of thumb threshold for ‘affordable’ housing, with Hong Kong clearly standing out, and all have experienced a significant decline in affordability.

Threshold of Affordable Housing

In contrast, price-to-income ratios in cities with few supply constraints have remained stable around the affordability threshold. This is true for both declining cities, such as Detroit, and for moderately growing ones such as Quebec. A comparison of Panels A and B also reveals that there can be enormous variation in affordability across space, even within the same country.

One limitation is that it is confined to only eleven years of data, covering less than a full real estate cycle. Panel A overcomes this limitation by focusing on English regions and data from 1983 to 2021, illustrating strong cyclicality in housing affordability, especially in the extremely supply-constrained Greater London region.

Also read: https://www.acash.org.pk/topics/provision-of-affordable-housing-policies/Affordable housing

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