Effects of Land and Housing Policies on Market Performance

Growing recognition of the economic and social importance of land, housing and real property markets is focusing attention on the need for good policies and good data to monitor the performance of these markets and their effects on the international economy.

Much of the impetus for addressing these issues came with the United Nations General Assembly's unanimous endorsement in 1988 of the document Global Strategy for Shelter to the Year 2000. This report described the social and economic role of housing and called on governments to undertake enabling policies to create well-functioning land and housing markets.

Within a few years, the World Bank published its own housing policy paper, Housing: Enabling Markets to Work, which set out a stylized set of "do's and don'ts" for housing policymakers to use in making choices about policies, regulations and institutions that influence the performance of the housing sector. Each of these documents makes it clear that the stakes of getting housing policies right are considerable, especially those policies having to do with urban land.

The Importance of the Housing Sector

Housing, together with the land under it, is the single most important asset of households in most of the world's cities. Housing investment and the flow of housing services account for a total contribution to GNP of between 7 and 18 percent in most countries. However, these figures fail to convey fully how the performance of the housing sector is intertwined with that of the broader economy through real, financial and fiscal circuits.

Since housing comprises 15 to 35 percent of consumer spending in most countries, inflation in housing prices is a significant element of overall consumer price inflation. Housing loans comprise some 15 to 20 percent of the consolidated assets of the banking systems of the most industrialized countries, making the integrity of these loans crucial to the overall soundness of the financial sector.

Housing subsidies, particularly in formerly planned economies, have contributed to budgetary deficits which have aggravated inflationary pressures, and poorly planned housing policies have often led to limited residential and labor mobility. Even in the United Kingdom, research indicates that inappropriate housing policies have increased structural unemployment rates, increased consumer prices and interest rates, adversely affected the balance of payments, and led to a significant decline in rates of household savings. Real estate booms and busts have also become a prominent feature of urban and national economies, notably in the United States and Japan.

Given the importance of the housing sector and the high cost of policy failures, it is surprising that many countries underestimate the objectives and instruments of housing policy. As a result, housing problems are often aggravated by ill-conceived or poorly executed public policies, and the performance of the sector falls beneath its potential.

Policies Affecting Housing

The provision of infrastructure, the regulation of land and housing development, the organization of the construction and materials industry, and the involvement of the public sector in housing production all have direct bearing on the production of housing and its responsiveness to shifts in demand. But other policies are also important—for example, those that relate to the physical and legal security of renters and owners, and the ability to use housing as collateral for long-term financing.

These policies influence the desirability of, and demand for, real estate and housing as an asset and, therefore, the amount of housing that investors want to build. In turn, these policies affect the quantity and affordability of housing available to meet the needs of final consumers of housing services. Investment decisions also influence the cost, availability, quality and production of informal housing, which accommodates much of the urban population in many developing countries.

Recent data on 53 countries collected by the Housing Indicators Program, a joint program of the United Nations' Centre for Human Settlements and the World Bank, supports the importance of policy differences in shaping housing sector outcomes. Two key types of indicators are physical measures, such as crowding or structural durability, and measures related to price, such as house values, rents and the ratio of house value to income (also called the house-price-to-income ratio), which often reflects the relative efficiency of housing markets.

Comparisons of such indicators suggest, for example, that in Thailand, where land and housing regulation is simple and efficient, housing supply is more than 30 times as responsive to shifts in demand than in either Korea or Malaysia, where regulation is complicated and cumbersome. This is reflected in striking differences in housing prices, quality and affordability among the three countries.

Enabling and Non-enabling Policies

"Enabling" countries are considered more market friendly because their housing policies support housing demand through appropriate housing finance, property rights and subsidies. Such countries facilitate housing supply by providing infrastructure, pertinent regulation and a competitive housing development industry. Figure 1 shows how a number of important housing outcomes vary with both the level of economic development (as measured by per capita income) and the policy environment for four groups of countries.

Housing prices at lower income levels among non-enablers are often the equivalent of two annual incomes higher than they are among enablers. Home ownership rates among enablers are generally 15 to 25 percentage points higher. Crowding, as measured by floor area per person, is significantly less among enablers. Residential mobility (percentage of population moving annually) is higher among enablers—a factor that facilitates upgrading housing conditions and enhancing job mobility.

A comparison of U.S. cities shows that house prices in non-enabling cities with stricter regulatory policies have risen in relative terms some 30 to 60 percent over a 15-year period (see Figure 2). This trend suggests important consequences for quality of life and competitiveness among cities with different degrees of market flexibility. Relative shifts in housing costs are in some cases equivalent to doubling potential residents' combined federal and state income tax, creating powerful disincentives for moving and for the functioning of labor markets.

These and similar findings suggest that systematic policy mistakes have been made, that their costs have been high, and that it is time for a general change in thinking about the aims and instruments of land and housing policy.

Stephen K. Mayo, a visiting fellow of the Lincoln Institute, is developing research and education programs on land prices, land markets and the broader economy. On November 7-8, 1997, the first in a series of conferences on this topic will be held at the Institute to examine land prices and land information systems.

FYI

References

Angel, Shlomo, Stephen K. Mayo, and William Stephens. "The Housing Indicators Program: A Report on Progress and Plans for the Future," Netherlands Journal of Housing and the Built Environment, 1993.

Malpezzi, Stephen, "House Prices, Externalities, and Regulation in U.S. Metropolitan Areas," Journal of Housing Research 7,2, 1996.

United Nations Centre for Human Settlements. Global Strategy for Shelter to the Year 2000. United Nations, New York, 1988.

World Bank. Housing: Enabling Markets to Work. World Bank Housing Policy Paper. Washington, DC, 1993.

Figure 1 Housing Outcomes for Four Groups of Countries

Source: Based on data from 53 countries collected by the joint World Bank/UN Centre for Human Settlements Housing Indicators Program (HIP). The Enabling Index was developed using HIP data on policies, regulations and institutional arrangements.

Figure 2 Average Housing Price Changes for U.S. Cities

Source: Based on hedonic price indices for rental and owner-occupied housing (weighted by the proportion of renters and owners in each market) for U.S. Standard Metropolitan Areas. The classification of U.S. cities as enablers or non-enablers is based on an index of regulatory stringency originally developed and applied by Stephen Malpezzi.