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By Luiz de Mello – Director for Policy, OECD Economics Department

 

Housing is one of the most complex policy challenges facing societies nowadays. More than a home or a shelter, housing is also an item in balance sheets and a physical asset with an imprint on the environment. Rising house prices and rents in many parts of the world are placing an increasingly heavy burden on household budgets, especially among the less affluent social groups (Figure 1).

Part of the challenge is that the supply of dwellings, including social housing, has not kept pace with strong demand, notably in the most sought-after cities and metropolitan areas, and this mismatch is reflected in high prices.

At the same time, housing also has a heavy environmental footprint, making the sector an integral part of solutions to decarbonise our economy as a means of achieving agreed climate change targets. This is due in part to the energy performance of buildings, which varies a great deal depending on the age and quality of construction. Well-functioning housing markets, where supply responds to evolving demand, finance is adequate and investment is carried out in line with high standards of environmental protection, are essential for tackling these interconnected challenges.

The OECD will launch in June a Housing Policy Toolkit to help analysts and policymakers make better housing policies. The Toolkit contains a report entitled Brick by Brick: Building Better Housing Policies that summarises the main findings of two years of analysis and evidence on several aspects of housing, including the design of a range of housing-relevant policies. The Toolkit also features a Dashboard of indicators covering outcomes and policy settings, and it is accompanied by Snapshots of the housing sector in different countries. The Toolkit is the outcome of the joint work and collective experience of several policy communities represented in the OECD Secretariat and committees.

The Toolkit emphasises three key aspects of housing policies: inclusiveness, efficiency and sustainability.

Inclusiveness is motivated by the affordability challenge. Housing costs, including the price of homes and rents, have been rising faster than other important items in household budgets, such as health care and education, and now account for close to a third of spending of the middle class in OECD countries (Figure 2).

Lower-income households spend even more on housing in relation to their income, and they face the added predicament of often living in overcrowded spaces and far from their workplace. They also often live in lower-quality buildings where insulation is poor, making heating and cooling more expensive and environmentally harmful. As a result, they end up spending relatively more out of their income on energy than their more affluent counterparts and face high rates of energy poverty as well. Homelessness is another challenge in many OECD countries. Well-designed social housing programmes can go a long way to make housing more accessible and inclusive.

 

Efficiency is related to how housing markets respond to demand signals. Prices rise to a large extent because investment in new developments and in the existing housing stock is insufficient to meet a growing demand for homes, especially where people want to live and jobs are available. This may be due to a lack of finance, for both developers and potential homeowners, but also outright restrictions related to regulations on zoning and the use of land, for example. Finance is also important for renovations and needed improvements in the energy efficiency of buildings, with potential benefits in terms of inclusiveness and sustainability. Indeed, development of new funding options, such as energy efficient mortgages that combine housing loans with incentives for homeowners to improve the energy efficiency of their dwelling or for buyers to acquire energy efficient properties, are a case in point. The EMF-ECBC’s Energy Efficient Mortgages Initiative (EEMI) is a good example of efforts in this area. Moreover, efficiency is about understanding better the linkages that exist between the housing sector and the business cycle and the related policies that can contribute to financial stability and macroeconomic resilience.

Sustainability has a strong environmental aspect to it. Reducing the environmental impact of housing requires steadfast action, because the residential sector accounts for almost a fifth of emissions of greenhouse gases and over a third of emissions of fine particulates worldwide. Part of the solution is to improve construction technology, but there is also much room to invest in energy efficiency, as mentioned above. This is all the more important because buildings have a long lifespan, and today’s choices will shape to a large extent environmental impacts for quite some time. Sustainability is also related to the interface between housing and transport, since both sectors are closely related, and transport has a considerable environmental footprint. Investment, but also appropriate standards and regulations, are important policy tools to make housing more environmentally sustainable.

On top of all these challenges are the effects of the Covid-19 pandemic. The widespread recourse to teleworking, at least in those sectors and activities that do not require regular person-to-person contact, is reshaping the demand for housing in most of our cities, along with office space and commercial property. To the extent that these changes in habits and behaviour are here to stay, they will require a rethink of urban development programmes, mass urban transport systems, the provision of services and amenities within metropolitan areas, and many other dimensions of housing policies that are at the interface of finance, urban planning, transport and social policies. This adds complexity to pre-pandemic challenges, but also opportunities for change through well thought-out initiatives. In particular, these likely changes to where people want to live and work make it all the more important to remove obstacles to residential mobility, for example by lowering the costs of buying and selling real estate.

If these challenges are complex and multi-faceted, so are the possible policy choices to address them. This is because there may be trade-offs to deal with, but also complementarities to exploit, when selecting a given policy instrument.

The OECD Housing Toolkit recognises upfront these possible complementarities and trade-offs. For example, investment in social and affordable housing has the dual benefit of protecting low-income or vulnerable households, while at the same time expanding the housing supply, which can help to contain the increase in house prices and rents. Whats’s more, if investment is carried out according to high energy efficiency standards, an added benefit is related to the environmental sustainability.

As for trade-offs, an example is the case when regulations on landlord-tenant relations, such as rent control, are made more flexible. This can encourage investment, which helps to reduce supply-demand mismatches and lower barriers to residential mobility, but these reforms could penalise vulnerable incumbent tenants in the short term. Tailoring social housing programmes to address this adverse effect illustrates how comprehensive policy packages can go a long way to deliver quality affordable housing while mitigating possible unintended consequences.

All in all, the OECD Housing Toolkit is a blueprint for policy assessment and design that is available to all stakeholders, in different policy communities and parts of the world. But the journey does not stop here. We will continue to work to address these and other emerging challenges. The role of housing in the economic recovery from the pandemic, the changing landscape of finance with the entry of new participants and financial institutions in housing markets, and the effects of digitalisation on construction, working habits and on-line rental platforms are just a few policy-relevant areas that will continue to require sound evidence and innovative solutions.