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Choice and Government Intervention in Housing Markets
Choice and Government Intervention in Housing Markets M Cigdem and G Wood, RMIT University, Melbourne, VIC, Australia ª 2012 Elsevier Ltd. All rights reserved.
Glossary Demand-side housing subsidy Government assistance to improve the ability of households to pay for housing or housing of a particular type and quality. Deregulation The removal or relaxation of government controls that stipulate limits and/or requirements that market participants must observe. Externalities Eventuate when the actions of consumers or producers incidentally affect other consumers or producers, but no compensation is paid or received for these incidental side effects. Market failure Inefficient market outcomes that occur due to imperfections that prevent the optimal allocation of resources. Merit goods Goods that are deemed to be intrinsically desirable and should be consumed at or above socially desirable minimum levels.
Introduction From as early as the late nineteenth century, governments have played an instrumental role in the housing sector, particularly in advanced Western countries. While the nat ure and degree of their involvement has varied over time and from country to country, governments of industrialised countries have deployed an array of housing policies in an effort to influence the production, consumption, financing, distribution, and location of dwellings. Policy-makers have experimented with alternative versions of the market–state relationship, some of which have emphasised the role of the free market relative to the state, and others that have enhanced the power of the state. In all of these relationships however, governments have exercised some degree of intervention in the housing sector. There are various justi fications for the pervasiveness of government in housing. One of the more important is acknowledgement that shelter is a basic human need or merit good that is too pivotal for both individual well-being and social stability to be left solely to the free market. Housing is then often regarded as a merit good; if merit goods are under-provided in a market system, there is a case for government intervention (regulation, subsidies, taxation, or direct provision) to sup port their provision.
POLICY (Overview)
Neoliberalism A belief in market mechanisms as the best way of achieving an efficient and equitable allocation of resources. Privatisation The transfer of the central government’s ownership rights in enterprises, land, housing, and so on, to private investors. Public housing Public housing is housing financed, owned, and managed by government agencies. Social housing A form of housing that is supplied by not-for-profit providers, but typically fully or partly financed by government. Supply-side housing subsidy Government assistance aimed at reducing the costs of producing or maintaining housing units.
The concept of housing need has been a critical con sideration for governments. Housing need can be defined as the quantity of housing required to provide accommodation of some minimum standard. Where a country’s housing stock fails to meet all the nation’s housing needs, home lessness, overcrowding, insecurity of tenure, and insanitary conditions can eventuate. Up until the 1970s, housing need and failure of markets to satisfy the housing needs of the poor tended to dominate housing policy debates and was an important influence shaping housing policy. It is only in the latter part of the twentieth century, as governments in industrial countries succeeded in meeting most housing needs, and housing shortages receded, that housing choice has attracted attention in housing policy debates. The arrival of the Thatcher and Reagan governments brought with it the introduction of a neoliberal approach to housing, which holds as its most basic tenet the propo sition that an efficient production and equitable distribution of goods and services is best achieved through the operation of markets. The advent of neoliberalism also witnessed a shift away from policies centred on meet ing needs towards policies concerned chiefly with individual choice and housing affordability. This shift was also encouraged by a belief that direct government provision of housing (public housing) and the use of
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regulatory interventions (e.g., rent controls and security of tenure) stifled choice, and could even worsen housing conditions by deterring private investment in housing. Early examples of choice-based policies include the UK’s ‘Right to Buy’ introduced in the 1980s (see article Privatisation of Social Housing), and the housing voucher programme implemented in the United States (see article Access and Affordability: Housing Vouchers). By 2000, housing choice was a key issue shaping housing policy debates in countries such as the United Kingdom, the Netherlands, the United States, Australia, and New Zealand. These countries were also among the first to promote demand-side subsidies as housing policy instru ments that expand individuals’ housing options (see article Policies to Support Access and Affordability of Housing). The structure of the article is as follows. The first section asks why governments have intervened so perva sively in the housing sector. Next, we describe the various forms that government intervention typically takes. The next section presents a neoliberal critique of the role of governments in the housing sector, and examines the market-oriented policy approach to housing. Finally, we offer some observations on recent housing policy devel opments introduced by social democrat governments.
Housing Needs, Market Failure, and Government Intervention Merit Goods and Housing Needs This policy perspective is based on the belief that when low-income families and persons cannot afford to purchase or rent accommodation sufficient to meet housing need, government must intervene to ensure that housing needs are met. It is feared that if needs are not met, negative externalities such as ill-health, disease, homelessness, and inferior educational outcomes (for the children of those in housing need) will arise. The merit good argument is strengthened if low-income households are poorly informed with respect to the adverse effects of occupying housing at unsatisfactorily low levels. In such circum stances, a free market will underprovide housing. These arguments had a particular resonance in the late nineteenth and early twentieth centuries given the serious problems of poverty at this time. They tended to prompt government intervention on the supply side of the housing market that was more ambitious during eras and in countries with highly unequal distributions of income and wealth. The merit good rationale is commonly linked to issues of equity in housing markets. In the modern era, merit good argu ments remain an important rationale for government intervention during economic recessions. This has been particularly apparent through the recent recession trig gered by the global financial crisis.
Market Failure in Housing Markets Housing has many of the characteristics likely to generate market failure and therefore negatively impact both productive and allocative efficiency. Housing is a durable, complex good that is spatially fixed. Its com plexity and durability mean that problems of imperfect and asymmetric information are prominent features of housing markets. While housing is traded in private markets in much the same way as other durables, it is unusual in being responsible for the generation of important externalities. Externalities are incidental benefits and costs that can be nonexcludable and/or nonrival, for example, noise pollution or communicable diseases whose origin is poor housing conditions. Finally, while monopoly is not commonly associated with housing markets, it can be a source of market failure in rental tenures. Externalities
Externalities are an important source of market failure in housing markets (see article Economics of Housing Externalities). Negative externalities are said to arise when one party’s actions have adverse impacts on another party’s utility or well-being. Because there is no market in the externality, the party adversely affected is not compensated. Externalities are not always negative. For example, gentrification can result in reduced crime, higher employment, better education outcomes, and typically have positive spillover effects on property values in the vicinity of the neighbourhood (see article Gentrification and Neighbourhood Change). But it has been negative externalities that typically prompt housing policy interventions. In a housing con text, externalities emanating from poor housing and overcrowding can impact on the wider neighbourhood, both monetarily and socially (see article Housing and Neighbourhood Quality: Urban Regeneration). Deteriorating housing can cause urban blight and decay that is capitalised into surrounding property values and deters financial institutions from lending to property buyers and investors (see article Policies to Address Redlining). Moreover, poor housing conditions can con tribute to (1) health problems for adults and children (see article Health and Housing), (2) neighbourhood blight, (3) poor education outcomes for children (see article Residential Segregation and Education), and (4) inferior employment prospects for residents (see article Housing and Labour Markets). Imperfect Information
Another problem that prevents markets from working optimally is imperfect information where consumers have inadequate knowledge of housing options, and are
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uncertain about future prices, incomes, and market condi tions. Imperfect information has two characteristics: (1) incomplete information and (2) asymmetric information. Incomplete information occurs when consumers lack information on some aspects of a transaction that may affect their payoffs. Asymmetric information, on the other hand, occurs when one party to a transaction has valuable knowl edge of some aspect of the transaction that is not disclosed to other parties involved in the transaction, and it would be costly for these other parties to verify this knowledge. Imperfect and asymmetric information are often associated with adverse selection and moral hazard market failures that are particularly prominent in mortgage markets and have prompted governments to intervene by regulating financial institutions that originate mortgages (see article Mortgage Markets: Regulation and Intervention).
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Supply-Side Interventions Interventions on the supply side take the form of ‘bricks and-mortar’ subsidies that are granted to financiers, developers, or providers and designed to reduce the costs of housing supply, or government provision. These supply-side subsidies can take two forms, direct and indirect subsidies (see article Policy Instruments that Support Housing Supply: Supply-Side Subsidies). Direct supply-side subsidies involve a cash transfer from govern ment to suppliers which lowers their costs of production. Indirect supply-side subsidies involve no cash transfer but instead use regulation or controls, for example, caps on interest rates that, in effect, lower costs of production. Government provision involves the financing and pro duction of housing services by a state agency, as in public housing, for example.
Monopoly
A monopoly arises when one firm is responsible for all output in an industry and is protected from new competi tion by barriers to entry. Monopoly power prevents markets from operating efficiently because the monopolist can restrict output and thereby raise price to levels that are higher than would prevail if competition in and for the market were possible. This form of market failure is not prominent in the ‘private housing sector’ where there is typically more than one housing supplier, and entry by new firms is possible. But where a developer acquires substantial land banks and government regulations prevent release of more land for residential development in an area, there can be cause for concern. However, even in areas where there is a single developer, the exploitation of monopoly power will be constrained by the presence of developers in neighbouring areas and regions. Private rental housing markets are generally consid ered to be competitive, but since housing is heterogeneous and moving costs are nontrivial, landlords can possess some monopoly power. But once again this power is held in check if there are ample alternative rental housing opportunities in terms of types of housing, in nearby locations and made available by numerous land lords. As long as housing consumers regard other types of housing, communities or neighbourhoods as close substi tutes monopoly power will remain constrained.
Demand-Side Interventions These types of intervention typically offer assistance to households (renters and homeowners) that facilitate affordability of and access to housing of a satisfactory standard (see article Demand Subsidies for Low-Income Households). These interventions aim to either lower the cost of housing, therefore making it more affordable, or lower the height of barriers, for example, discrimination, that impede access to housing opportunities (see article Discrimination in Housing Markets). Subsidies that lower the cost of housing include housing allowances, housing vouchers, rent controls, tax expenditures, and low-inter est mortgages. Measures to improve access include legislation that aims to outlaw ethnic or racial discrimina tion, and regulation of housing standards.
The Neoliberal Critique Since the 1970s, neoliberal ideas have become increas ingly influential in shaping Western governments’ approaches to housing policy. Government interventions in the housing sector have been criticised from a neolib eral perspective because: government presence in housing markets tends to • Aweaken competition and hence stifle innovation and
What Form Does Government Intervention Take? The above motives for government intervention have prompted a wide range of government policy measures in housing markets to promote equity and efficiency outcomes. The main instruments of government policy can be categorised as either demand-side or supply-side interventions. These are discussed in turn below.
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choice. This is perhaps most evident in the large mono lithic public housing estates built by Eastern European government agencies, but also apparent in Western developed countries with substantial public housing sectors The regulation of rents, interest rates, land use, and building standards distorts price signals and results in resource misallocation and the inefficient functioning of markets
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Clients of housing programmes can become welfare• dependent because of blunt incentives to work and save. The critique is based on a philosophy that advocates the rights of the individual and, in particular, their right to exercise choice over what to purchase and consume, including residential location and housing services. Markets are viewed as the best vehicle guaranteeing these rights. In recent decades we have therefore wit nessed a marked shift in housing policy, with a greater emphasis on market-based solutions. This change in approach towards housing policy is important for a number of reasons. First, it seeks to empower households by facilitating the exercise of a greater degree of choice in housing markets. But what is meant by choice? Choice is an ability to exercise autonomy and responsibility in decision-making. Autonomy is the right to choose a preferred combination of consumption goods and services, given prices and incomes; responsibility in decision-making means that individuals are accountable for the consequences of their choices. The consequences of good or bad decisions are then borne by the individual responsible for making the decision. Second, the neoliberal approach uses housing subsidies and other forms of government intervention in the hous ing market to fulfil different functions. Housing policy should facilitate the exercise of choice in housing markets rather than meeting needs that are defined by government. Third, market-based solutions are the favoured approach. Policies should then assist low-income house holds’ capacity to pay for housing, while relying on private markets to respond by supplying housing that meets the preferences of households. This implies that government should avoid intervention on the supply side of the market.
Market-Based or Neoliberal Approach to Housing Policy With a market-based approach, government intervention is considered positive only insofar as it helps the market to operate freely, and assists the poor and disadvantaged who are unable to provide for themselves. There are three key elements to the market-based approach. First, the use of housing vouchers or housing allowance programmes (see article Access and Affordability: Housing Allowances) that assist poor households to move into housing of a satisfactory standard and in suitable locations (see article Mobility Programmes for Disadvantaged Populations: The Moving to Opportunity Programme). Second, there is an emphasis on
privatisation measures that are designed to roll-back state involvement in the ownership and management of housing. Third, deregulation that relaxes or removes controls on housing rents, interest rates, building standards, land use, and any other aspect of housing and land markets. These three approaches are discussed below. Housing Allowances and Housing Vouchers
Housing allowances are income-related subsidies that are designed to provide income support to low-income households and to assist them in obtaining housing accom modation of a quality that is beyond what would otherwise be affordable. They are paid either directly to eligible households or indirectly via landlords or mortgage lenders on the household’s behalf. Eligibility is typically extended to low-income tenants and, less commonly, to low-income owner-occupied households. Because housing allowances improve a household’s purchasing power, they are consid ered a demand-side subsidy. Payment of a housing allowance to eligible households can involve a cash pay ment, but another common method of payment is by housing voucher. A housing voucher takes the form of a promissory note issued by the administering agency to eligible tenants, who then use the voucher in place of cash to meet rent payments. In some developed countries including Australia, Canada, and Ireland, housing allow ance programmes can provide housing assistance implicitly through income-related schemes. Also referred to as ‘rents geared to income’ or ‘differential rent schemes’, this form of housing allowance involves social housing landlords setting rents equal to some predefined percentage of the tenant’s income. While these housing policy programmes were com monly tied to housing of some minimum standard, the quality goal has become less of a concern, and they are increasingly geared to easing housing affordability and facilitating choice, including how much of income to devote to housing. From an income support point of view, policy-makers use housing allowance schemes to provide income assistance to low-income households by ensuring that low-income households do not spend a disproportionate share of their income on housing services. Thus, by reducing the rent-to-income ratio, housing allowances and vouchers allow households to allocate a larger portion of their income on nonhousing related goods. In recent years, the US policy focus has shifted further to a third dimension concerned with promoting greater spatial mobility among housing voucher recipients. Examples of such programmes include the ‘Moving to Opportunity’ programme and the ‘Housing Choice Voucher’ programme. One of the central features of these types of policy instruments is that the housing voucher is attached to the individual not the housing
Choice and Government Intervention in Housing Markets
occupied by eligible tenants. As a result, recipients are not tied to a particular dwelling and can utilise their housing voucher entitlements wherever they go. This feature of the voucher-based programme is a particularly important one from a neoliberal perspective, as it allows households to exercise some choice over where they live, and the type of accommodation they wish to reside in. In a sup ply-side subsidy system, households often relinquish this right to public landlords who instead decide what type of housing the tenant will be offered, and where they will live. Since the recipient exercises choice, demand-side subsidies are regarded as more efficient than supply-side subsidies. Privatisation and Consumer Sovereignty
Privatisation is another key component of the neolib eral approach and has been adopted by a growing number of countries, particularly over the last two decades (see article Privatisation of Housing: Implications for Well-Being). This trend is in stark contrast to the traditional postwar policy orientation based on expansion of the welfare state, planned devel opment, and public-sector-led economic growth. In a broad sense, privatisation occurs when the state transfers ownership or control over previously govern ment-owned and -managed operations to the private sector. It has been extensively experimented with by different levels of government, and can take several forms. In the housing sector, privatisation has been asso ciated with the sale of public and social rented housing and the contracting-out of management functions. This approach to privatisation was a particularly important theme in the UK housing agenda introduced by the Thatcher government elected in 1979. The ‘Right to Buy’ programme introduced a uniform national scheme whereby tenants of local authority housing and select housing associations were granted a ‘right to buy’ the property they occupied at a discounted rate. The size of the discount was positively related to the length of tenancy, and was as much as 70% of the market value in some instances. Applicants were given the right to buy their existing dwelling as well as the right to a 100% mortgage from the local authority at a rate of interest fixed by the Treasury (see article Privatisation of Social Housing). Advocates of the privatisation of public housing main tain that private markets offer housing consumers a wider array of choices. Managers of public housing, on the other hand, are less responsive to consumer preferences. Furthermore, privatisation is believed to enhance consumer well-being through property ownership. Individuals who are owner-occupiers are able to exercise more control over the use of their dwelling, and through investing money in housing maintenance and improvements, they are also better placed to accumulate wealth. Governments
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of all persuasions tend to encourage the accumulation of wealth in housing by extending tax expenditures to owneroccupiers (see article Access and Affordability: Homeowner Taxation). Privatisation programmes were subsequently intro duced by a number of countries including the Netherlands, France, and Australia, among others, in an effort to promote increased homeownership. In the United States, however, privatisation efforts followed a somewhat different trend to that of other Western coun tries. While the Reagan government shared Thatcher’s pro-market views, it sought to increase the role and influence of the market by deregulation and liberalisation rather than the sale of public housing. This reflects the traditionally smaller public housing tenure in the United States. Deregulation
A third component of the neoliberal approach is housing market deregulation, which can be broadly defined as the removal or relaxation of government controls in housing markets with a view to increasing the role and influence of market processes. There are two key areas in the housing sector where deregulation has been prominent: (1) the housing finance sector and (2) rental housing. Housing finance sector
Housing finance deregulation often features the removal of government restrictions on housing finance institu tions’ lending practices, the lifting of interest rate ceilings, and relaxation of reserve requirements. The removal of lending restrictions had important implica tions for banks in particular, allowing them to more vigorously compete with specialists in housing finance markets. Governments have also increasingly allowed the entry of international and nonbank lenders, leading to the opening up of the mortgage market to international competition and greater availability of funds. Deregulation is widely accredited with improving home buyers’ access to credit, particularly low- and middleincome households. But it has also been blamed as a source of inflationary bias in housing markets. Rental housing
Deregulation in rental housing typically features the relaxation or removal of rent controls and security of tenure regulations. Rent controls place caps on rents or rent increases, and are often accompanied by regulation of the terms of tenancies. In the early post-Second World War years, there was a popular measure adopted by governments struggling to meet housing shortages, and needing to curb the rising rents that inevitably accom pany shortages. However, when landlords cannot charge the market rent because of rent controls, returns to invest ments in rental housing are lower than would eventuate
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in a free market. The attractiveness of private rental housing as an investment is further impacted if there are security of tenure provisions that prevent landlords from giving sitting tenants notice to quit during or even at the conclusion of lease contracts. These regulations have been blamed for shortages of good-quality rental housing on the grounds that they deter landlords from investing in new rental housing, and depress maintenance and improvement outlays on the established rental stock. Governments have moved to relax rent controls and security of tenure regulations as these adverse impacts became more apparent, and as the more severe postSecond World War housing shortages eased (see article Access and Affordability: Rent Regulation).
Conclusion Until the early 1970s, governments in the Western world played a central role in the housing sector. That role was justified on two main grounds. First, that housing is a basic human need and therefore one that governments should ensure is sufficiently met for all individuals. The poor are particularly vulnerable so early forms of intervention tended to focus on supply-side interventions to meet the housing needs of the poorest. Second, housing is prone to market failures such as those associated with externalities and imperfect information. These failures have a strong spatial dimension that can be central to neighbourhood decline and the emergence of slum housing. Governments have introduced various subsidy programmes and regu latory controls to correct for these failures. As housing shortages were eliminated and housing needs waned as a policy concern, housing choice began to emerge as an increasingly important influence in hous ing policy debates. This coincided with the growing importance of neoliberal ideas in both social and eco nomic policy. The neoliberal critique posits that government intervention distorts price signals, which leads to resource misallocation, blunt incentives, and wel fare dependency. Neoliberals also criticise government intervention on the grounds that it weakens competition and hence stifles innovation and choice. Their response was to develop policies advancing the rights of individuals to exercise choice in markets, including those such as housing where government involvement had been prominent. According to neoliberals, such outcomes are best achieved by market-based solutions, and in the hous ing sector this meant emphasis on housing allowances/ vouchers, the sale of public housing, and removal or relaxation of regulatory controls such as those on rents and interest rates. In more recent times social democrat governments have reacted by introducing reforms designed to make collective forms of housing provision more responsive to the needs
and aspirations of clients. These developments encompass more decentralised models of public housing provision, the transfer of public housing to not-for-profit social housing providers, and increased tenant participation in the man agement of social housing. In some countries, particularly those in Western Europe, we witnessed a growing emphasis on neighbourhood renewal programmes that integrate housing and other public service programmes (such as employment services) to address urban decay. But even these initiatives have been shaped by neoliberal ideas. Public–private partnerships are a feature of many urban renewal interventions (see article Public-Private Housing Partnerships), while in social housing there is an increasing use of market principles in setting rents and guiding invest ment decisions. The exclusive reliance on large public sector programmes to address housing problems is now only resorted to in extreme conditions, such as the severe recession triggered by the meltdown in US financial mar kets in 2008. See also: Access and Affordability: Homeowner Taxation; Access and Affordability: Housing Allowances; Access and Affordability: Housing Vouchers; Access and Affordability: Rent Regulation; Demand Subsidies for Low-Income Households; Discrimination in Housing Markets; Economics of Housing Externalities; Gentrification and Neighbourhood Change; Health and Housing; Housing and Labour Markets; Housing and Neighbourhood Quality: Urban Regeneration; Mobility Programmes for Disadvantaged Populations: The Moving to Opportunity Programme; Mortgage Markets: Regulation and Intervention; Policies to Address Redlining; Policies to Support Access and Affordability of Housing; Policy Instruments that Support Housing Supply: Supply-Side Subsidies; Privatisation of Housing: Implications for Well-Being; Privatisation of Social Housing; Public-Private Housing Partnerships; Residential Segregation and Education.
Further Reading Aalbers MB (2004) Promoting home ownership in a social-rented city:
Policies, practices and pitfalls. Housing Studies 19(3): 483–495.
Bradbury KL and Downs A (eds.) (1981) Do Housing Allowances Work?
Washington, DC: Brookings Institution. Clark WAV and Dieleman F (1996) Households and Housing: Choices and Outcomes in the Housing Market. New Brunswick, NJ: Rutgers University, Center for Urban and Policy Research. Gibb K (1995) A housing allowance for the UK? Preconditions for an income-related housing subsidy. Housing Studies 10: 517–532. Kemp PA (ed.) (2007a) Housing Allowances in Comparative Perspective, pp. 295. Bristol, UK: The Policy Press. King P (2009) Understanding Housing Finance: Meeting Needs and Making Choices, 2nd edn. London: Routledge. Leece D (2004) The Economics of the Mortgage Market: Perspectives on Household Decision Making. Oxford, UK: Blackwell Publishing. Lindsay R (1970) The economics of interest rate ceilings. Bulletin 68–70.
Choice and Government Intervention in Housing Markets Meijer FM and Visscher HJ (1998) The deregulation of building controls: A comparison of Dutch and other European systems. Environment and Planning B: Planning and Design 25: 617–629. Steele M (1998) Canadian housing allowances inside and outside the welfare system. Canadian Public Policy – Analyse de Politues 24: 209–232. Stephens M (2005) An assessment of the British housing benefit scheme. European Journal of Housing Policy 5: 111–129.
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Turner B, Hedus J, and Tosics I (eds.) (1992) The Reform of Housing in Eastern Europe and the Soviet Union. New York: Routledge. Varady D and Walker CC (2007) Neighborhood Choices. New Brunswick, NJ: Center for Urban Policy Research. Wood G and Bushe-Jones S (1990) Financial deregulation and access to home ownership in Australia. Urban Studies 27(4): 583–590. Yates J (1988) Housing finance and deregulation: Predictions and outcomes. The Australian Economic Review 21(1): 3–15.
Glossary Demand-side housing subsidy Government assistance to improve the ability of households to pay for housing or housing of a particular type and quality. Deregulation The removal or relaxation of government controls that stipulate limits and/or requirements that market participants must observe. Externalities Eventuate when the actions of consumers or producers incidentally affect other consumers or producers, but no compensation is paid or received for these incidental side effects. Market failure Inefficient market outcomes that occur due to imperfections that prevent the optimal allocation of resources. Merit goods Goods that are deemed to be intrinsically desirable and should be consumed at or above socially desirable minimum levels.
Introduction From as early as the late nineteenth century, governments have played an instrumental role in the housing sector, particularly in advanced Western countries. While the nat ure and degree of their involvement has varied over time and from country to country, governments of industrialised countries have deployed an array of housing policies in an effort to influence the production, consumption, financing, distribution, and location of dwellings. Policy-makers have experimented with alternative versions of the market–state relationship, some of which have emphasised the role of the free market relative to the state, and others that have enhanced the power of the state. In all of these relationships however, governments have exercised some degree of intervention in the housing sector. There are various justi fications for the pervasiveness of government in housing. One of the more important is acknowledgement that shelter is a basic human need or merit good that is too pivotal for both individual well-being and social stability to be left solely to the free market. Housing is then often regarded as a merit good; if merit goods are under-provided in a market system, there is a case for government intervention (regulation, subsidies, taxation, or direct provision) to sup port their provision.
POLICY (Overview)
Neoliberalism A belief in market mechanisms as the best way of achieving an efficient and equitable allocation of resources. Privatisation The transfer of the central government’s ownership rights in enterprises, land, housing, and so on, to private investors. Public housing Public housing is housing financed, owned, and managed by government agencies. Social housing A form of housing that is supplied by not-for-profit providers, but typically fully or partly financed by government. Supply-side housing subsidy Government assistance aimed at reducing the costs of producing or maintaining housing units.
The concept of housing need has been a critical con sideration for governments. Housing need can be defined as the quantity of housing required to provide accommodation of some minimum standard. Where a country’s housing stock fails to meet all the nation’s housing needs, home lessness, overcrowding, insecurity of tenure, and insanitary conditions can eventuate. Up until the 1970s, housing need and failure of markets to satisfy the housing needs of the poor tended to dominate housing policy debates and was an important influence shaping housing policy. It is only in the latter part of the twentieth century, as governments in industrial countries succeeded in meeting most housing needs, and housing shortages receded, that housing choice has attracted attention in housing policy debates. The arrival of the Thatcher and Reagan governments brought with it the introduction of a neoliberal approach to housing, which holds as its most basic tenet the propo sition that an efficient production and equitable distribution of goods and services is best achieved through the operation of markets. The advent of neoliberalism also witnessed a shift away from policies centred on meet ing needs towards policies concerned chiefly with individual choice and housing affordability. This shift was also encouraged by a belief that direct government provision of housing (public housing) and the use of
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regulatory interventions (e.g., rent controls and security of tenure) stifled choice, and could even worsen housing conditions by deterring private investment in housing. Early examples of choice-based policies include the UK’s ‘Right to Buy’ introduced in the 1980s (see article Privatisation of Social Housing), and the housing voucher programme implemented in the United States (see article Access and Affordability: Housing Vouchers). By 2000, housing choice was a key issue shaping housing policy debates in countries such as the United Kingdom, the Netherlands, the United States, Australia, and New Zealand. These countries were also among the first to promote demand-side subsidies as housing policy instru ments that expand individuals’ housing options (see article Policies to Support Access and Affordability of Housing). The structure of the article is as follows. The first section asks why governments have intervened so perva sively in the housing sector. Next, we describe the various forms that government intervention typically takes. The next section presents a neoliberal critique of the role of governments in the housing sector, and examines the market-oriented policy approach to housing. Finally, we offer some observations on recent housing policy devel opments introduced by social democrat governments.
Housing Needs, Market Failure, and Government Intervention Merit Goods and Housing Needs This policy perspective is based on the belief that when low-income families and persons cannot afford to purchase or rent accommodation sufficient to meet housing need, government must intervene to ensure that housing needs are met. It is feared that if needs are not met, negative externalities such as ill-health, disease, homelessness, and inferior educational outcomes (for the children of those in housing need) will arise. The merit good argument is strengthened if low-income households are poorly informed with respect to the adverse effects of occupying housing at unsatisfactorily low levels. In such circum stances, a free market will underprovide housing. These arguments had a particular resonance in the late nineteenth and early twentieth centuries given the serious problems of poverty at this time. They tended to prompt government intervention on the supply side of the housing market that was more ambitious during eras and in countries with highly unequal distributions of income and wealth. The merit good rationale is commonly linked to issues of equity in housing markets. In the modern era, merit good argu ments remain an important rationale for government intervention during economic recessions. This has been particularly apparent through the recent recession trig gered by the global financial crisis.
Market Failure in Housing Markets Housing has many of the characteristics likely to generate market failure and therefore negatively impact both productive and allocative efficiency. Housing is a durable, complex good that is spatially fixed. Its com plexity and durability mean that problems of imperfect and asymmetric information are prominent features of housing markets. While housing is traded in private markets in much the same way as other durables, it is unusual in being responsible for the generation of important externalities. Externalities are incidental benefits and costs that can be nonexcludable and/or nonrival, for example, noise pollution or communicable diseases whose origin is poor housing conditions. Finally, while monopoly is not commonly associated with housing markets, it can be a source of market failure in rental tenures. Externalities
Externalities are an important source of market failure in housing markets (see article Economics of Housing Externalities). Negative externalities are said to arise when one party’s actions have adverse impacts on another party’s utility or well-being. Because there is no market in the externality, the party adversely affected is not compensated. Externalities are not always negative. For example, gentrification can result in reduced crime, higher employment, better education outcomes, and typically have positive spillover effects on property values in the vicinity of the neighbourhood (see article Gentrification and Neighbourhood Change). But it has been negative externalities that typically prompt housing policy interventions. In a housing con text, externalities emanating from poor housing and overcrowding can impact on the wider neighbourhood, both monetarily and socially (see article Housing and Neighbourhood Quality: Urban Regeneration). Deteriorating housing can cause urban blight and decay that is capitalised into surrounding property values and deters financial institutions from lending to property buyers and investors (see article Policies to Address Redlining). Moreover, poor housing conditions can con tribute to (1) health problems for adults and children (see article Health and Housing), (2) neighbourhood blight, (3) poor education outcomes for children (see article Residential Segregation and Education), and (4) inferior employment prospects for residents (see article Housing and Labour Markets). Imperfect Information
Another problem that prevents markets from working optimally is imperfect information where consumers have inadequate knowledge of housing options, and are
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uncertain about future prices, incomes, and market condi tions. Imperfect information has two characteristics: (1) incomplete information and (2) asymmetric information. Incomplete information occurs when consumers lack information on some aspects of a transaction that may affect their payoffs. Asymmetric information, on the other hand, occurs when one party to a transaction has valuable knowl edge of some aspect of the transaction that is not disclosed to other parties involved in the transaction, and it would be costly for these other parties to verify this knowledge. Imperfect and asymmetric information are often associated with adverse selection and moral hazard market failures that are particularly prominent in mortgage markets and have prompted governments to intervene by regulating financial institutions that originate mortgages (see article Mortgage Markets: Regulation and Intervention).
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Supply-Side Interventions Interventions on the supply side take the form of ‘bricks and-mortar’ subsidies that are granted to financiers, developers, or providers and designed to reduce the costs of housing supply, or government provision. These supply-side subsidies can take two forms, direct and indirect subsidies (see article Policy Instruments that Support Housing Supply: Supply-Side Subsidies). Direct supply-side subsidies involve a cash transfer from govern ment to suppliers which lowers their costs of production. Indirect supply-side subsidies involve no cash transfer but instead use regulation or controls, for example, caps on interest rates that, in effect, lower costs of production. Government provision involves the financing and pro duction of housing services by a state agency, as in public housing, for example.
Monopoly
A monopoly arises when one firm is responsible for all output in an industry and is protected from new competi tion by barriers to entry. Monopoly power prevents markets from operating efficiently because the monopolist can restrict output and thereby raise price to levels that are higher than would prevail if competition in and for the market were possible. This form of market failure is not prominent in the ‘private housing sector’ where there is typically more than one housing supplier, and entry by new firms is possible. But where a developer acquires substantial land banks and government regulations prevent release of more land for residential development in an area, there can be cause for concern. However, even in areas where there is a single developer, the exploitation of monopoly power will be constrained by the presence of developers in neighbouring areas and regions. Private rental housing markets are generally consid ered to be competitive, but since housing is heterogeneous and moving costs are nontrivial, landlords can possess some monopoly power. But once again this power is held in check if there are ample alternative rental housing opportunities in terms of types of housing, in nearby locations and made available by numerous land lords. As long as housing consumers regard other types of housing, communities or neighbourhoods as close substi tutes monopoly power will remain constrained.
Demand-Side Interventions These types of intervention typically offer assistance to households (renters and homeowners) that facilitate affordability of and access to housing of a satisfactory standard (see article Demand Subsidies for Low-Income Households). These interventions aim to either lower the cost of housing, therefore making it more affordable, or lower the height of barriers, for example, discrimination, that impede access to housing opportunities (see article Discrimination in Housing Markets). Subsidies that lower the cost of housing include housing allowances, housing vouchers, rent controls, tax expenditures, and low-inter est mortgages. Measures to improve access include legislation that aims to outlaw ethnic or racial discrimina tion, and regulation of housing standards.
The Neoliberal Critique Since the 1970s, neoliberal ideas have become increas ingly influential in shaping Western governments’ approaches to housing policy. Government interventions in the housing sector have been criticised from a neolib eral perspective because: government presence in housing markets tends to • Aweaken competition and hence stifle innovation and
What Form Does Government Intervention Take? The above motives for government intervention have prompted a wide range of government policy measures in housing markets to promote equity and efficiency outcomes. The main instruments of government policy can be categorised as either demand-side or supply-side interventions. These are discussed in turn below.
•
choice. This is perhaps most evident in the large mono lithic public housing estates built by Eastern European government agencies, but also apparent in Western developed countries with substantial public housing sectors The regulation of rents, interest rates, land use, and building standards distorts price signals and results in resource misallocation and the inefficient functioning of markets
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Clients of housing programmes can become welfare• dependent because of blunt incentives to work and save. The critique is based on a philosophy that advocates the rights of the individual and, in particular, their right to exercise choice over what to purchase and consume, including residential location and housing services. Markets are viewed as the best vehicle guaranteeing these rights. In recent decades we have therefore wit nessed a marked shift in housing policy, with a greater emphasis on market-based solutions. This change in approach towards housing policy is important for a number of reasons. First, it seeks to empower households by facilitating the exercise of a greater degree of choice in housing markets. But what is meant by choice? Choice is an ability to exercise autonomy and responsibility in decision-making. Autonomy is the right to choose a preferred combination of consumption goods and services, given prices and incomes; responsibility in decision-making means that individuals are accountable for the consequences of their choices. The consequences of good or bad decisions are then borne by the individual responsible for making the decision. Second, the neoliberal approach uses housing subsidies and other forms of government intervention in the hous ing market to fulfil different functions. Housing policy should facilitate the exercise of choice in housing markets rather than meeting needs that are defined by government. Third, market-based solutions are the favoured approach. Policies should then assist low-income house holds’ capacity to pay for housing, while relying on private markets to respond by supplying housing that meets the preferences of households. This implies that government should avoid intervention on the supply side of the market.
Market-Based or Neoliberal Approach to Housing Policy With a market-based approach, government intervention is considered positive only insofar as it helps the market to operate freely, and assists the poor and disadvantaged who are unable to provide for themselves. There are three key elements to the market-based approach. First, the use of housing vouchers or housing allowance programmes (see article Access and Affordability: Housing Allowances) that assist poor households to move into housing of a satisfactory standard and in suitable locations (see article Mobility Programmes for Disadvantaged Populations: The Moving to Opportunity Programme). Second, there is an emphasis on
privatisation measures that are designed to roll-back state involvement in the ownership and management of housing. Third, deregulation that relaxes or removes controls on housing rents, interest rates, building standards, land use, and any other aspect of housing and land markets. These three approaches are discussed below. Housing Allowances and Housing Vouchers
Housing allowances are income-related subsidies that are designed to provide income support to low-income households and to assist them in obtaining housing accom modation of a quality that is beyond what would otherwise be affordable. They are paid either directly to eligible households or indirectly via landlords or mortgage lenders on the household’s behalf. Eligibility is typically extended to low-income tenants and, less commonly, to low-income owner-occupied households. Because housing allowances improve a household’s purchasing power, they are consid ered a demand-side subsidy. Payment of a housing allowance to eligible households can involve a cash pay ment, but another common method of payment is by housing voucher. A housing voucher takes the form of a promissory note issued by the administering agency to eligible tenants, who then use the voucher in place of cash to meet rent payments. In some developed countries including Australia, Canada, and Ireland, housing allow ance programmes can provide housing assistance implicitly through income-related schemes. Also referred to as ‘rents geared to income’ or ‘differential rent schemes’, this form of housing allowance involves social housing landlords setting rents equal to some predefined percentage of the tenant’s income. While these housing policy programmes were com monly tied to housing of some minimum standard, the quality goal has become less of a concern, and they are increasingly geared to easing housing affordability and facilitating choice, including how much of income to devote to housing. From an income support point of view, policy-makers use housing allowance schemes to provide income assistance to low-income households by ensuring that low-income households do not spend a disproportionate share of their income on housing services. Thus, by reducing the rent-to-income ratio, housing allowances and vouchers allow households to allocate a larger portion of their income on nonhousing related goods. In recent years, the US policy focus has shifted further to a third dimension concerned with promoting greater spatial mobility among housing voucher recipients. Examples of such programmes include the ‘Moving to Opportunity’ programme and the ‘Housing Choice Voucher’ programme. One of the central features of these types of policy instruments is that the housing voucher is attached to the individual not the housing
Choice and Government Intervention in Housing Markets
occupied by eligible tenants. As a result, recipients are not tied to a particular dwelling and can utilise their housing voucher entitlements wherever they go. This feature of the voucher-based programme is a particularly important one from a neoliberal perspective, as it allows households to exercise some choice over where they live, and the type of accommodation they wish to reside in. In a sup ply-side subsidy system, households often relinquish this right to public landlords who instead decide what type of housing the tenant will be offered, and where they will live. Since the recipient exercises choice, demand-side subsidies are regarded as more efficient than supply-side subsidies. Privatisation and Consumer Sovereignty
Privatisation is another key component of the neolib eral approach and has been adopted by a growing number of countries, particularly over the last two decades (see article Privatisation of Housing: Implications for Well-Being). This trend is in stark contrast to the traditional postwar policy orientation based on expansion of the welfare state, planned devel opment, and public-sector-led economic growth. In a broad sense, privatisation occurs when the state transfers ownership or control over previously govern ment-owned and -managed operations to the private sector. It has been extensively experimented with by different levels of government, and can take several forms. In the housing sector, privatisation has been asso ciated with the sale of public and social rented housing and the contracting-out of management functions. This approach to privatisation was a particularly important theme in the UK housing agenda introduced by the Thatcher government elected in 1979. The ‘Right to Buy’ programme introduced a uniform national scheme whereby tenants of local authority housing and select housing associations were granted a ‘right to buy’ the property they occupied at a discounted rate. The size of the discount was positively related to the length of tenancy, and was as much as 70% of the market value in some instances. Applicants were given the right to buy their existing dwelling as well as the right to a 100% mortgage from the local authority at a rate of interest fixed by the Treasury (see article Privatisation of Social Housing). Advocates of the privatisation of public housing main tain that private markets offer housing consumers a wider array of choices. Managers of public housing, on the other hand, are less responsive to consumer preferences. Furthermore, privatisation is believed to enhance consumer well-being through property ownership. Individuals who are owner-occupiers are able to exercise more control over the use of their dwelling, and through investing money in housing maintenance and improvements, they are also better placed to accumulate wealth. Governments
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of all persuasions tend to encourage the accumulation of wealth in housing by extending tax expenditures to owneroccupiers (see article Access and Affordability: Homeowner Taxation). Privatisation programmes were subsequently intro duced by a number of countries including the Netherlands, France, and Australia, among others, in an effort to promote increased homeownership. In the United States, however, privatisation efforts followed a somewhat different trend to that of other Western coun tries. While the Reagan government shared Thatcher’s pro-market views, it sought to increase the role and influence of the market by deregulation and liberalisation rather than the sale of public housing. This reflects the traditionally smaller public housing tenure in the United States. Deregulation
A third component of the neoliberal approach is housing market deregulation, which can be broadly defined as the removal or relaxation of government controls in housing markets with a view to increasing the role and influence of market processes. There are two key areas in the housing sector where deregulation has been prominent: (1) the housing finance sector and (2) rental housing. Housing finance sector
Housing finance deregulation often features the removal of government restrictions on housing finance institu tions’ lending practices, the lifting of interest rate ceilings, and relaxation of reserve requirements. The removal of lending restrictions had important implica tions for banks in particular, allowing them to more vigorously compete with specialists in housing finance markets. Governments have also increasingly allowed the entry of international and nonbank lenders, leading to the opening up of the mortgage market to international competition and greater availability of funds. Deregulation is widely accredited with improving home buyers’ access to credit, particularly low- and middleincome households. But it has also been blamed as a source of inflationary bias in housing markets. Rental housing
Deregulation in rental housing typically features the relaxation or removal of rent controls and security of tenure regulations. Rent controls place caps on rents or rent increases, and are often accompanied by regulation of the terms of tenancies. In the early post-Second World War years, there was a popular measure adopted by governments struggling to meet housing shortages, and needing to curb the rising rents that inevitably accom pany shortages. However, when landlords cannot charge the market rent because of rent controls, returns to invest ments in rental housing are lower than would eventuate
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in a free market. The attractiveness of private rental housing as an investment is further impacted if there are security of tenure provisions that prevent landlords from giving sitting tenants notice to quit during or even at the conclusion of lease contracts. These regulations have been blamed for shortages of good-quality rental housing on the grounds that they deter landlords from investing in new rental housing, and depress maintenance and improvement outlays on the established rental stock. Governments have moved to relax rent controls and security of tenure regulations as these adverse impacts became more apparent, and as the more severe postSecond World War housing shortages eased (see article Access and Affordability: Rent Regulation).
Conclusion Until the early 1970s, governments in the Western world played a central role in the housing sector. That role was justified on two main grounds. First, that housing is a basic human need and therefore one that governments should ensure is sufficiently met for all individuals. The poor are particularly vulnerable so early forms of intervention tended to focus on supply-side interventions to meet the housing needs of the poorest. Second, housing is prone to market failures such as those associated with externalities and imperfect information. These failures have a strong spatial dimension that can be central to neighbourhood decline and the emergence of slum housing. Governments have introduced various subsidy programmes and regu latory controls to correct for these failures. As housing shortages were eliminated and housing needs waned as a policy concern, housing choice began to emerge as an increasingly important influence in hous ing policy debates. This coincided with the growing importance of neoliberal ideas in both social and eco nomic policy. The neoliberal critique posits that government intervention distorts price signals, which leads to resource misallocation, blunt incentives, and wel fare dependency. Neoliberals also criticise government intervention on the grounds that it weakens competition and hence stifles innovation and choice. Their response was to develop policies advancing the rights of individuals to exercise choice in markets, including those such as housing where government involvement had been prominent. According to neoliberals, such outcomes are best achieved by market-based solutions, and in the hous ing sector this meant emphasis on housing allowances/ vouchers, the sale of public housing, and removal or relaxation of regulatory controls such as those on rents and interest rates. In more recent times social democrat governments have reacted by introducing reforms designed to make collective forms of housing provision more responsive to the needs
and aspirations of clients. These developments encompass more decentralised models of public housing provision, the transfer of public housing to not-for-profit social housing providers, and increased tenant participation in the man agement of social housing. In some countries, particularly those in Western Europe, we witnessed a growing emphasis on neighbourhood renewal programmes that integrate housing and other public service programmes (such as employment services) to address urban decay. But even these initiatives have been shaped by neoliberal ideas. Public–private partnerships are a feature of many urban renewal interventions (see article Public-Private Housing Partnerships), while in social housing there is an increasing use of market principles in setting rents and guiding invest ment decisions. The exclusive reliance on large public sector programmes to address housing problems is now only resorted to in extreme conditions, such as the severe recession triggered by the meltdown in US financial mar kets in 2008. See also: Access and Affordability: Homeowner Taxation; Access and Affordability: Housing Allowances; Access and Affordability: Housing Vouchers; Access and Affordability: Rent Regulation; Demand Subsidies for Low-Income Households; Discrimination in Housing Markets; Economics of Housing Externalities; Gentrification and Neighbourhood Change; Health and Housing; Housing and Labour Markets; Housing and Neighbourhood Quality: Urban Regeneration; Mobility Programmes for Disadvantaged Populations: The Moving to Opportunity Programme; Mortgage Markets: Regulation and Intervention; Policies to Address Redlining; Policies to Support Access and Affordability of Housing; Policy Instruments that Support Housing Supply: Supply-Side Subsidies; Privatisation of Housing: Implications for Well-Being; Privatisation of Social Housing; Public-Private Housing Partnerships; Residential Segregation and Education.
Further Reading Aalbers MB (2004) Promoting home ownership in a social-rented city:
Policies, practices and pitfalls. Housing Studies 19(3): 483–495.
Bradbury KL and Downs A (eds.) (1981) Do Housing Allowances Work?
Washington, DC: Brookings Institution. Clark WAV and Dieleman F (1996) Households and Housing: Choices and Outcomes in the Housing Market. New Brunswick, NJ: Rutgers University, Center for Urban and Policy Research. Gibb K (1995) A housing allowance for the UK? Preconditions for an income-related housing subsidy. Housing Studies 10: 517–532. Kemp PA (ed.) (2007a) Housing Allowances in Comparative Perspective, pp. 295. Bristol, UK: The Policy Press. King P (2009) Understanding Housing Finance: Meeting Needs and Making Choices, 2nd edn. London: Routledge. Leece D (2004) The Economics of the Mortgage Market: Perspectives on Household Decision Making. Oxford, UK: Blackwell Publishing. Lindsay R (1970) The economics of interest rate ceilings. Bulletin 68–70.
Choice and Government Intervention in Housing Markets Meijer FM and Visscher HJ (1998) The deregulation of building controls: A comparison of Dutch and other European systems. Environment and Planning B: Planning and Design 25: 617–629. Steele M (1998) Canadian housing allowances inside and outside the welfare system. Canadian Public Policy – Analyse de Politues 24: 209–232. Stephens M (2005) An assessment of the British housing benefit scheme. European Journal of Housing Policy 5: 111–129.
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Turner B, Hedus J, and Tosics I (eds.) (1992) The Reform of Housing in Eastern Europe and the Soviet Union. New York: Routledge. Varady D and Walker CC (2007) Neighborhood Choices. New Brunswick, NJ: Center for Urban Policy Research. Wood G and Bushe-Jones S (1990) Financial deregulation and access to home ownership in Australia. Urban Studies 27(4): 583–590. Yates J (1988) Housing finance and deregulation: Predictions and outcomes. The Australian Economic Review 21(1): 3–15.