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Housing Policy

Area: Policy and financing

Housing policies are usually understood in a narrow manner as social policies targeting housing prices through housing allowances, tax deduction or social housing allocation. This definition takes a different approach and draws from a larger body of economic literature to identify the wider array of policies that impact housing markets.

Broadly speaking, housing markets are influenced through fiscal, macroeconomic, prudential and structural policies (Hilbers et al., 2008). This wide range of public policies have clear impacts on housing demand and supply and also usually create synergies between each other.

Fiscal policies have a stronger impact on income and costs through taxation and subsidies. One of the main fiscal policies with regard to housing is the mortgage interest deduction which reduces user costs and can produce increases in property prices (Poterba, 1984).

Macroeconomic policy regulates the money supply through interest rates. Housing has usually been perceived as a conveyor belt for macroeconomic policy as the expansion of the money supply through low interest rates or quantitative easing has the potential to increase demand during recessions counteracting the procyclical behaviour of financial markets (Muellbauer, 1992).

Prudential policies determine the level of risk associated with lending through Loan-to-Value (LTV) and Debt-to-Income (DTI) ratios. The Great Financial Crisis is usually seen as the failure of prudential policy that resulted in the tightening of loans  (Whitehead & Williams, 2017) and  drew renewed attention to housing policy from central banks, policymakers, and economists (Piazzesi et al., 2016).

Structural policies regulate housing supply, this includes planning regulations and environmental standards. For example, research from the US has shown that zoning laws can have a relevant impact on housing affordability by constraining supply (Glaeser & Gyourko, 2002).

While most research is conducted selectively on each of these policy interventions, there are relevant synergies between policy domains that can be identified. These policies usually work in conjunction with each other: lax prudential policies and favourable home ownership taxation together with low interest rates and tight planning controls can lead to higher property prices. Conversely, constrained lending, brick-and-mortar subsidies and higher interests rates are known to mitigate rising house prices.

References

Glaeser, E. L., & Gyourko, J. (2002). The Impact of Zoning on Housing Affordability. NBER Working Paper 8835 http://www.nber.org/papers/w8835

Hilbers, P., Hoffmaister, A. W., Banerji, A., & Shi, H. (2008). IMF Working Paper. House Price Developments in Europe: A Comparison. WP/08/211. IMF Working Paper European Department. https://www.imf.org/external/pubs/ft/wp/2008/wp08211.pdf

Muellbauer, J. (1992). Anglo-German differences in housing market dynamics: The role of institutions and macro economic policyEuropean economic review36(2-3), 539-548.

Piazzesi, M., S. &, Schneider, M., Arefeva, A., Hoffmann, E., Kermani, A., Lenel, M., Myers, S., Peter, A., Taylor, J., & Uhlig, H. (2016). Housing and Macroeconomics. NBER Working Paper 22354. https://www.nber.org/papers/w22354

Poterba, J. M. (1984). Tax Subsidies to Owner-Occupied Housing: An Asset-Market Approach. Source: The Quarterly Journal of Economics, 99(4), 729–752. https://about.jstor.org/terms

Whitehead, C., & Williams, P. (2017). Changes in the regulation and control of mortgage markets and access to owner-occupation among younger households. https://doi.org/10.1787/e16ab00e-en

Created on 01-07-2022 | Update on 09-08-2022

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