Richard Green, Director of the USC Lusk Center for Real Estate, is the latest contributor to the Marron Institute’s working paper series. His essay, Towards an Urban Housing Strategy, addresses key questions about housing with an eye toward policy options that produce more affordable housing for low and moderate income households. Below, I’ve included a few of the takeaways from each of the six questions that Green raises in his essay.
WHAT DO WE KNOW ABOUT LAND UNDERNEATH HOUSING?
"Land is the key to low cost housing: land values have lots of variation across space, whereas construction costs have far less."
Holding everything else constant, land with a privileged location (either at the center or near good transportation and/or services) will be more valuable. Land prices also vary due to distortions arising from regulations, corruption or insufficient infrastructure. Especially problematic are regulations that limit density, ownership, and price.
Takeaways for policymakers: use proceeds from land sales to finance infrastructure. Liberalize land use where it’s heavily regulated and pair it with infrastructure improvements. Dig deep into regulations to find the core constraints. Allow large floor-area-ratios, high-rise development can actually relieve congestion. Examine household’s access to jobs, schools, transportation and other amenities. Housing may be better managed locally than nationally. Finally, transparency and lack of corruption are essential.
WHAT DO WE KNOW ABOUT CONSTRUCTION OF HOUSING?
"Housing construction cost is a function of four things: imported materials prices, local materials prices, labor productivity, and wages."
Lower income countries suffer relatively high construction costs because of taxes on imported goods and lower labor productivity. Because of this, up to 70% of households in developing cities build their own housing incrementally. This self-built housing tends to accurately satisfy the needs of households in terms of price, size, location, and flexibility but the system is not necessarily the most efficient from an aggregate point of view.
Governments should not engage in building housing, they are inefficient at locating it and don’t have an incentive to minimize cost. The distortions they create have had profound impacts including, in some cases, the prices of publicly built housing plummeting to less than construction cost.
Takeaways for policymakers: Reduce material prices as much as possible, eliminate or reduce taxes on imported materials. Encourage standardization to reduce costs. Encourage modern subdivision techniques. Stay out of the way of progressive, informal housing. Develop indicators of settlement patterns and construction costs. Subsidies to individuals go further than subsidies to building.
WHAT DO WE KNOW ABOUT OWNING HOUSING? WHAT ABOUT PROPERTY RIGHTS?
Some argue that property rights play a defining role in economic progress. Though they are not a panacea, making property rights practical and credible is important for both housing and economic development. Investors avoid credit risk (repayment), market risk, legal risk (accountability on property rights) and political risk.
Takeaways for policymakers: tenure formalization is likely to be successful if there is political will, formalization strategies that have more than the legal dimension, robust land administration, efficient land allocation policies for the poor and an independent, responsive judiciary.
DO WE PLACE ENOUGH EMPHASIS ON RENTAL HOUSING?
"Lots of literature suggests that owner-occupied housing is a good thing."
Children’s schooling outcomes, teenage pregnancy, civic engagement are all tied to home-ownership. However they also seem less content than renters. What’s more, US federal policy has incentivized homeownership with catastrophic results.
Renting is an important part of the puzzle, it is more affordable in cash flow terms, it can allow savings, it provides signals about property prices and settlement patterns, and it may ease labor mobility.
Takeaways for policymakers: recognize that rental markets are important, be neutral with respect to tenure, remove impediments to small landowners to own or develop rentals, include tenants and landlords in subsidy programs or upgrading projects. Additionally, allow for longer leases, avoid rent control and consider a variety of tenure types.
WHAT DO WE KNOW ABOUT HOUSING FINANCE IN EMERGING COUNTRIES?
"Mortgages don’t have the best of reputations at the moment. Yet they remain indispensable."
Mortgages make housing affordable and affect settlement patterns. Lack of finance produces informal settlements. Lending is a risky business. Construction loans are riskier than mortgage loans because the collateral might never get built; risks inherent in construction, long time periods to build projects, etc.
Takeaways for policymakers: to lower risks and interest rates, countries must have good macroeconomic policy, effective bankruptcy law, efficient foreclosure, reliable property valuation, and proper mortgage loan underwriting.
IN SEQUENCING ECONOMIC DEVELOPMENT, WHAT ROLE DOES HOUSING PLAY?
There are contradicting cases where economic development was followed by housing improvements, places where both were improving in tandem or even places where significant increases in housing improvement did not lead to economic growth. There appears to be no clear answer on the question of which stage in the economic development process to emphasize housing.
Green’s final plea is for housing data that can better inform policy decisions. Informal settlement data, for example, is typically woefully inadequate given the large numbers of people who reside in informal housing.