OECD Recommendations on Better Housing Policies
According to OECD, high demand and fewer offers and investments in housing construction are the main reasons for price increase.
Building Better Housing Policies
This OECD study documents trends in growth of cost and affordability, international experience and recommendations necessary for housing policy development. Special attention is paid to three broad aspects: inclusiveness, efficiency and sustainability.
Housing is becoming a more pressing economic, social and environmental problem in the OECD countries. Rising housing prices and rents have undermined affordability and led to social exclusion. The COVID-19 crisis, which has led to significant job and income losses concentrated on the most vulnerable groups, exacerbates the difficulties in ensuring access to high-quality and affordable housing.
Reasons for the increase in housing costs
The supply does not keep up with the demand. Housing costs have increased for a variety of reasons over the past two decades. Key indicators of the housing market, such as housing prices and construction, are the result of supply-demand interaction.
Governments are investing less in housing construction. Another factor contributing to the supply shortage is a reduction of public investment in housing construction, as well as a decrease in relative size of social housing stock in most OECD countries. Over the past two decades, public investment in housing construction has fallen by more than half on average in OECD countries.
Housing affects economic performance in many ways
Housing markets play a primary role in the economy
A significant share of production is housing construction. Construction accounts for about 6% of GDP on average in OECD countries. Housing investment alone accounts for about 20% of the gross fixed capital formation. As a result, fluctuations in housing construction activity and housing prices have a strong impact on the business cycle.
Housing and business cycles are indeed interrelated: countries that experienced larger adjustments in real house prices during the global financial crisis also faced a stronger decline in economic activity. The developing COVID-19 crisis has had a serious impact on construction and other housing activities.
Housing has serious environmental consequences
Housing accounts for a significant share of global CO2 (carbon dioxide) emissions. The housing sector (buildings and construction) accounts for 28% of the world's final energy consumption and 17% of total CO2 emissions.
Use of environmentally friendly materials and improvement of insulation and heating systems have great potential to improve the housing energy efficiency and contribute to achievement of agreed emission targets.
Some environment-related policies may reduce housing affordability in the near future.
Improving housing affordability
Housing is, on average, the largest household expenditure in OECD, and these expenditures increase over time. One of the factors behind increase in household expenditure is an increase in housing costs over the past two decades, especially for tenants.
On average, between 2005 and 2019, real house prices increased in 31 OECD states, and the largest growth (more than 80%) was recorded in Colombia, Canada and Israel. High and rising rents make it difficult for tenants to save up a down payment for home purchases and make them more vulnerable to economic shocks, such as those caused by the COVID-19 pandemic.
Removing obstacles to affordable housing
Demand for affordable housing in many cases does not meet the supply, which is a consequence of a number of factors that may differ from country to country.
There are a number of reasons for the lack of affordable housing:
- Governments are investing less in housing construction;
- Construction of houses is becoming more and more expensive;
- Demand for affordable housing is growing and changing.
Recommendations on making housing more affordable:
- Increase investment in affordable and social housing (this could reverse the steady decline of public investment in housing construction in OECD since 2001);
- Reduce administrative barriers to affordable housing construction (may contribute to an increase in supply). According to OECD, land-use reforms can contribute to the recovery of housing construction after COVID, as well as better align housing supply with changing demand and make housing markets more affordable and efficient (Cournède, De Pace and Ziemann, 2020);
- Improve the provision of government support to low-income households, paying attention to potential trade-offs (for example, phasing out tax incentives that promote home ownership and benefit higher-income households)
- Make the private rental market more accessible by promoting tax neutrality between rent and ownership, ensuring a better balance between lessor and lessee relationship, and using flexible rent stabilization measures if necessary.
Improving housing market efficiency
Economy's capacity to align housing supply with demand is crucial to limit excessive price and rent increases, promote macroeconomic stability, and facilitate housing mobility.
Opportunities for housing policy reform to make housing markets more efficient:
- Abolition of mortgage interest rate benefits will make home ownership less desirable compared to other options for owning real estate and, consequently, will ease price pressure: a gradual reduction of this tax advantage could reduce average real house prices by more than two years compared to the average household disposable income in several countries.
- Making land use decisions at more decentralized levels of government and avoiding overlapping responsibilities can make housing supply more sensitive to demand and reduce average housing prices by more than half a year from the average household disposable income in some countries.
- Simplifying regulation of the rental market in places where land use regulation is flexible, encourages investment in housing construction, increases supply and helps to restrain housing prices relative to income.
For reference: Examples of successful housing policy reforms:
Deregulation of rental markets (Finland): Finland began deregulating rents in the early 1990s. Deregulation was the result of a severe economic crisis in the early 1990s.
As part of its political response to the crisis, the Government abolished rent controls in 1991. This led to market liberalization without restrictions on initial rent or subsequent revision of the rent. In the case of long-term lease agreements, the rent is usually reviewed annually. Amount of the rent increase shall be specified in lease agreement, and in most cases, rent increase is based on the cost of living index.
The motivation was to bring more rental apartments to market in response to the economic crisis and crisis in housing market. This loosening of rental market regulation occurred in the context of very strong housing support for vulnerable households, since Finland ranks second in terms of housing benefit spending in OECD, and the social housing fund accounts for 10% of all housing (Source: De Boer and Bitetti (2014).
Optimization of land use policy management (Israel): Overhaul of land use regulation in Israel is a prime example of increase in the housing supply after the weakening of land use regulation. In the light of deep housing crisis, marked by a rapid increase in housing prices combined with a sharp population growth and insufficient housing supply, the Government has implemented a series of reforms to increase housing supply by simplifying land use procedures and removing obstacles. Creation of the General Housing Construction Directorate, a committee that oversees all relevant housing authorities and unites them in its activities, has allowed for cooperation and coordination between governmen.organizations. This has significantly helped to reduce the average time required for planning and construction (Source: OECD (2017); OECD (2018).
Termination of mortgage interest benefits (Netherlands): In 2010, household debt reached a record high of 128.5% of GDP, mainly due to the rapid growth of mortgage debt. In 2013, some structural reforms were carried out aimed at “reducing the debts associated with private housing market, both from a micro and macro point of view, while strengthening confidence in the housing market” (the Netherlands Stability Programme - April 2012). For example, the mortgage interest rate benefit was limited to mortgages with fully repayable loans over a 30-year period. In 2014, the Government has decided to gradually reduce maximum mortgage tax benefit rate, which at that time was 52%, by 0.5 percentage points per year up to 2040 to “reduce private debt and allow the housing market to function more effectively” (the Netherlands Stability Programme - April 2013). In 2017, a new coalition has decided to accelerate reduction by 3 percentage points per year, ranging from 49% in 2020 and 37% in 2023 (Source: OECD (2018); OECD (2019); Confidence in the Future (Coalition Agreement 2017-2021).
Role of housing in wealth distribution
Housing is the largest asset in household portfolio. Consequently, it is a fundamental factor in accumulation and distribution of assets and net wealth throughout the life cycle and between generations, which contributes to inequality in well-being.
Contribution of housing to wealth inequality varies significantly from country to country, but the available data reveals the following facts:
- Wealth inequality is much higher than income inequality, partly reflecting life cycle effects as wealth accumulates over time.
- There is a strong negative cross-country relationship between home ownership and wealth inequality. Countries with low levels of home ownership show high wealth inequality, even when income inequality is low.
- Access to mortgage markets gives households with limited credit opportunities a better chance of owning their own house, but this entails the following risks:
- Housing debt is the most important liability in household portfolio, especially for young homeowners and for low-income people. OECD countries show sharp differences in degree of mortgage debt retention by households.
- Mortgage debt is both an opportunity and a risk. This debt allows households, especially those with small initial assets, to accumulate wealth, but it can also expose households to economic and social vulnerability.
Removing barriers to mobility in housing sector
Housing mobility matters. Low level of housing mobility can be an obstacle to labor force adaptation, making labor markets less efficient, which negatively affects the overall economic indicators.
The OECD countries show significant differences in population mobility, which is relatively high in Australia, the USA and the Nordic countries, while it is much lower in countries of Eastern and Southern Europe. In all countries, homeowners are much less mobile than tenants.
Housing conditions and policies affect people's decisions and opportunities to move
Housing mobility is higher where the housing supply is more sensitive to changes in demand. Reforming poorly set-up land use and planning policies can facilitate mobility by reducing differences in housing prices across locations.
Stricter rules of the rental market, both rent control and higher security of tenure, are associated with less mobility of housing, especially for tenants, low-income families. Rental rules should ensure a balance between the interests of lessor and lessee, provide security of ownership and encourage supply of affordable rental housing.
Higher transaction costs when buying and selling a house, in particular from transaction taxes such as notary fees, are associated with lower mobility, especially among younger households who are more likely to become first-time buyers.
Relationship between housing sector and environment
Housing structure generates various financial and negative external effects throughout the entire life cycle. Housing sector has a significant impact on the environment. It directly affects environment through the use of materials during construction and demolition.
Environmental policy in housing sector is aimed at eliminating these external effects by better matching private and social housing costs. The net environmental impact of a general land use policy depends on how this policy takes into account the external costs associated with land use, energy consumption and materials in real estate prices and rents.
Policies aimed at improving housing conditions and better coordination of housing policies at different levels and sectors of public administration require:
Ensuring flexibility of land use rules to meet local housing needs at the level of urban agglomerations, while encouraging the efficient use of land and creating an attractive built-up environment;
Giving appropriate powers to local authorities to make decisions, especially with regard to spending and investment in social housing;
Introduction and reform of taxes on real estate.
Expanding the evidence base
In housing construction, where policy reform is evidence-based, a number of indicators are required, both by results and by tools.
Data gaps are particularly relevant in three areas: housing prices, vulnerability in terms of access to housing, and local land use regulations. Filling in these data gaps will be of great benefit, as it will help to better inform housing policy choices.
All OECD countries publish internationally comparable statistics to track the dynamics of housing prices at the national level.
Strict, internationally comparable housing price levels are much less developed. Recommendations for progress:
Compilation of housing price indices at the subnational level in accordance with international statistical standards.
Extending the coverage of housing price indices to cover all types of housing and all purchases.
To compile statistics on housing prices in urban areas, use the concept of functional urban area.
Start developing statistics on housing price levels at both national and subnational levels.
Monitoring the housing conditions of vulnerable households is important, especially given the increased economic vulnerability caused by the COVID-19 pandemic. Recommendations for progress:
Improve the monitoring of evictions.
Inclusion of issues related to evictions in regular national and international housing surveys.
Regular collection of data on homeless, expanding the geographical coverage.
Integration of various data sources on homelessness (for example, administrative data; data on health and homelessness).
Land-use planning is important for creating sustainable and productive cities. According to the data, there is a little systematic data on land use regulations, partly due to their complexity, as well as due to the fact that they are mainly the responsibility of local authorities. OECD aims to develop internationally comparable land use management measures by collecting data from local authorities on:
Regulation on the land use type.
Building density norm.
Information on the licensing process.
For reference: A measurement program to improve the evidence base on eviction and homelessness.
Improve the monitoring of evictions;
Expand the set of methodological tools in order to integrate various data sources (for example, administrative data or research data; data on health and homelessness), for a better understanding of needs and problems of the homeless population.
Conclusion:
Inefficiency in housing markets can have adverse consequences for the economy as a whole, including macroeconomic instability and limited labor mobility. Price pressure also exacerbates the problem of upgrading housing stock in accordance with environmental goals.
The report sets out evidence-based options for concerted policy action to address these challenges, while recognizing the complementarities and trade-offs between different housing policy objectives.
