The need for affordable housing is ever increasing and demands a solution

Gebiedsontwikkeling.nu
Erasmus School of Economics

During the last few years, one of the most prominent subjects in politics and society is the matter of housing. It is commonly heard that the ‘current generation won’t naturally find housing’ and that this is the consequence of decades of policy decisions. What are the factors contributing to the problem of housing and how can these challenges be resolved? Jeroen van Haaren, senior researcher Urban Economics and Real Estate at Erasmus School of Economics, together with his student Kasimir Hagendoorn, wrote an article on Gebiedsontwikkeling.nu to elaborate on this complex issue.

Outline of the problem

The government implements new laws in hopes of attaining a housing market that provides for those who are in need of affordable housing. However, according to Van Haaren and Hagendoorn, these measures contribute to the problem more often than not. Different tiers of government, such as provincial authorities and the national administration, make legislation to offset the effects of policy measures that have been taken in the past. This makes the incremental system of rules very complex, since many policies are counterproductive, its implications are hard to measure and each policy effects another part of the housing market. Because of these different effects, there are discrepancies between the markets of homes for sale and rental properties. Decision makers aren’t conscious enough of the interrelatedness of these markets and therewith the implications of their policy.

So, what does this actually mean? Driven by all these policies, people looking for a house base their decision to rent or buy on financial factors. Instead, it might be more sensible to keep other preferences in the back of their mind and one’s stage in life. Many starters instantaneously choose to buy, since housing costs of properties for sale are lower than those of rental properties, even more so if mortgage repayments are regarded as a way of accruing wealth. Because there is a considerable shortage of rental properties, rents are high. High rents attract investors, who buy houses at high prices to rent out those properties: this effectively implies competition in the housing market between individuals and investors with deep pockets, driving up prices even more. Politicians attempt to aid starters in their search of housing, but disrupt the markets with ineffective policy. One example of this is the reduction of transfer taxes for starters. However, this reduction ends up in the pockets of house owners, since they possess the real estate and thereby can further increase prices. And the decision of some regional governments to make the acquirers of properties live in these properties themselves reduces the incentive to rent out properties.

The short run

The housing policy should be focused on accommodating the ideal match between costs of living and one’s income. Since the problem is urgent and changing the market takes time, some different implementations have to be made immediately to relieve some stress on the market. By means of a selective and property-neutral allowance, households should be given the option between buying or renting. In this way, other factors such as mobility and flexibility can play a role in this decision. This allowance should decrease as household income increases, in order to prevent a family from getting ‘stuck’ in their current way of living.

Another solution to the housing problem has to do with the rental market. Owing to acute scarcity of rental properties in certain cities, there are possibilities of significant mark-ups for investors. In order to decrease incentives for investors to make use of this opportunity, profits should be reduced by means of taxes. This is a double-edged sword, since these revenues can be utilized to lessen the burden of housing of low-income households. If the government decides to let these taxes move along with market conditions, the excessive burden of this tax can be minimized. In this way, efficient policy contributes to an accessible housing market.

The long run

In the long run, a systematic approach to the housing market is desirable, provided that the national government steps up as the main actor. Of course, the design of the housing market is a political question, but there are some important elements to this design that are to be considered: the system should be approached integrally, so that there are as little discrepancies between the partial markets as possible. Policies have to be property-neutral, meaning that there is no difference in treatment between a property for sale or rent. And, of course, the reach of policy and responsibility has to be distinctly defined.

To resolve the problem in the long term, the gap between demand and supply has to be bridged. To reduce costs, more houses have to be built: in this way, the fierce competition and therewith the virtuous circle of prices can be resolved. To make the development of projects easier, it is important to critically review the requirements. Which ones are really necessary, which ones are mostly just a nuisance? Some examples of requirements that need to be reviewed concern parking norms, sustainability requirements and minimal surface rules. Another way to achieve lower costs, is by stimulating the dialogue between local authorities and property developers. If authorities gain more insight in the critical parts of a case such as discount rates, reaching a middle ground will be more attainable: after all, compromise requires an understanding of the interests of the other party.

Researcher
Jeroen van Haaren, senior researcher Urban Economics and Real Estate
More information

You can read the full article from Gebiedsontwikkeling.nu, 7 January 2020, here.

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