"Housing affordability is a key determinant of individual well-being and overall economic growth"

In the second part of our series, Gabriela Inchauste* talks about Living and Leaving: Housing, Mobility and Welfare in the European Union—the latest report from the World Bank.

• Why would you say it’s important to look into housing affordability?

Housing affordability plays an important role in the growing divides in the European Union, which is experiencing widening productivity gaps and growing inequality in labor incomes. The divide often plays out across regions within countries, as high-productivity jobs are concentrated in metropolitan areas. To the extent that households in the European Union hold most of their wealth in the form of illiquid and immovable assets such as land and housing, they can be an important source of wealth inequality and can also determine intergenerational mobility if homeowners are anchored to the localities where they live, independently of how prosperous or dynamic those locations are.

This is problematic from a growth perspective because it implies that the labor force is not moving to where it can be most productive. For young people and for newcomers, housing affordability can be a real barrier to accessing good jobs, and therefore a key determinant of individual well-being and overall economic growth. Our main goal was to unravel the combined impacts of housing policies and regulations on household welfare.

• If you have to choose one element as major cause of lack of affordable housing, which one would it be?

The main determinant of housing affordability is the regulatory and institutional environment which determines the responsiveness of housing supply to increases in prices. If higher housing prices today don’t lead to more housing built in the future, then housing affordability problems are more prevalent. Stricter regulatory environments and weak institutions are associated with low responsiveness of housing supply to increases in housing prices, as housing developers are less willing to invest in housing. Unfortunately, the most productive metropolitan areas are often the places with the strictest regulatory restrictions and where lack of affordable housing is most acute. Affordable housing policies across the European Union have often focused on tax and spending policies that subsidize homeownership, with scarce attention and resources devoted to easing the barriers and market restrictions that could improve the regulatory and institutional environment that would allow for market prices to come down.

• Can you name one phenomenon/issue which shows a problem with housing affordability? How does this manifest in data/trends that can be monitored?

Low housing affordability restricts the ability of workers to move to locations where there are better job opportunities, not only constraining their own welfare, but also reducing the productivity of the overall economy. Residential mobility is low in the European Union overall compared with Canada and the United States, particularly in Central and Eastern European countries. Higher mobility is associated with a lower degree of rent controls, tenant protections, and transaction costs. It is also associated with higher access to housing finance, better property rights protection, and better quality of land administration. Weak institutions (weak protection of property rights and low quality of land administration) negatively affect mobility because they influence the broader functioning of the market and disproportionately affect the mobility of younger people relative to older people.

Residential mobility rates, defined as a change in dwellings in the last five years, are available from EU-SILC data, but do not include mobility outside their country of origin. Data on five-year residential mobility range from 1.8 percent in Romania to 45.1 percent in Sweden. The residential mobility of younger people is comparable to or even lower than the mobility of older people in most European Union member countries, though with the caveat that external migration is not captured in the data.

• Can you name one or more solutions which could help tackling this?

Our report highlights three areas for attention.

First, create enabling conditions to allow the housing supply to expand. Overly restrictive land use and development regulations constrain housing growth and drive up prices. Cities could encourage new construction or the redevelopment of existing structures by permitting appropriate floor-space ratios, building heights, and density in specific target zones. Cities can also streamline their processes to speed up land-use approval and permitting, creating a more predictable and less burdensome process. In some member states, improving property rights and the land administration system is a priority. Finally, developing governance structures that ensure efficient coordination mechanisms across financing, urban planning, infrastructure development, land-use regulation, building codes, delivery and contracting approaches is critical.

Second, use public finance more strategically. Governments should emphasize strategic investment projects in greenfield housing as a central part of their investment strategies, together with transportation to facilitate commuting to the centers of economic activity. Moreover, a shift in government spending away from tax and benefit incentives that favor homeownership in favor of tenure-neutral, portable and progressive housing allowances would improve redistribution and efficiency. Similarly, instead of incentives aimed at homeownership for the young, governments could consider providing housing allowances for targeted groups, such as the youth, potentially making benefits conditional on job search responsibilities.

Third, improve monitoring and dissemination of housing data and local-level information. Better monitoring and dissemination of information at the metropolitan level on housing prices, employment, wages, housing policies and regulations, and other indicators would help to inform policy makers. Ideally, local, regional, and national governments should create a publicly available house price registry with information on addresses, sales prices, and quality of housing (energy rating, square meters, and so on), with information as close to real time as possible, in line with other high-income countries. House purchase cost indicators could also be published to benchmark the transaction costs in place at the local, regional, and national levels. This level of transparency could lead to greater competition across jurisdictions and contribute to more efficient, and equitable housing markets.

---

* Gabriela Inchauste is a Lead Economist in the Poverty and Equity Global Practice of the World Bank.

Leave comments