The commonly suggested policies on affordable housing have broadly revolved around vertical development, reducing the cost of construction, lowering taxes and fees, easing the process of clearances and permissions, and mandates on affordable housing (minimum shares for affordable housing). Then there is the idea of supporting on rental housing, with the likes of vouchers. All the reports and recommendations by various organisations are confined to these.
While these are all useful and should be implemented, I am not sure they can make much dent on the problem of affordability for the vast majority of population in the foreseeable future, even if implemented well. I feel that these measures will, at best, make housing affordable for the top 20%, instead of the current 10%! Its impact down the ladder will, if at all, be minimal.
The Economist has an article on the challenge of affordability of housing in Seoul. Property prices have risen sharply in recent years, provoking government intervention.
While these are all useful and should be implemented, I am not sure they can make much dent on the problem of affordability for the vast majority of population in the foreseeable future, even if implemented well. I feel that these measures will, at best, make housing affordable for the top 20%, instead of the current 10%! Its impact down the ladder will, if at all, be minimal.
The Economist has an article on the challenge of affordability of housing in Seoul. Property prices have risen sharply in recent years, provoking government intervention.
The government, spying a speculative bubble, has introduced around two dozen measures to cool the market over the past three years. In December it banned mortgages on properties worth more than 1.5bn won (around $1.3m), roughly the price of a mid-size flat in Gangnam. It has also lowered the maximum loan-to-value ratio for flats worth more than 900m won from 40% to 20%. Last month it announced plans to increase property taxes for expensive homes and owners of multiple properties, as well as capital-gains levies on short-term sales. The overall effect, though, has been muddled and counterproductive... In part the problem is that the government’s efforts to cool the market have been offset by monetary easing by the central bank. In order to cushion the economic fallout from covid-19, the Bank of Korea has cut interest rates, encouraging some South Koreans to pile into property. Meanwhile, the tax proposals have angered existing investors, and are likely to restrict supply. Parallel efforts to alleviate the shortage of high-quality housing by building more of it have been slow to get off the ground. Prices, therefore, have continued to rise.
The article's conclusion on dealing with the issue is important,
Increasing supply is likely to be a much more promising way of bringing house prices down than intricate policy interventions, says Hahm Joon-ho, a former member of the Bank of Korea’s monetary-policy board now at Yonsei University in Seoul... “More and more people want to live in high-quality apartments. Seoul does not have enough of those—and so we need to build more.”
I agree with the point on supply. It is perhaps the only way to sustainably keep prices affordable, an essential requirement for any effort in that direction.
Property prices in many cities across the world, including in India, are so prohibitive that they are completely out of reach of all but the upper middle class rich. When property prices have become so high, policies that seek to lower the cost of building or owning houses, while doubtless required, may have limited impact on the problem of affordability. The decline required to make housing affordable would be more than any cost reductions. Even the increase in supply will have to be significant to make a dent on affordability.
In the absence of meaningful efforts at increasing supply, policies to lower costs will still leave the market well away from becoming affordable for the middle class. In fact, perversely, it could even have the effect of encouraging the rich to pile even more into property (which has now become more affordable for them), thereby possibly driving the prices up further.
The only meaningful response to affordability in most cities is to considerably increase supply. This can be done by directly increasing supply, or creating the conditions for increased supply (primarily land, by making more available or by allowing much higher vertical development). The rest all are tinkering with marginal impacts.
On increasing supply, leaving it to the market forces too may not work. Take the example of vertical development. For sure, much higher FAR will lead to an increase in supply. But, given the pent-up and fast growing demand, and the inherently slow-acting nature of market response, this is likely to be a case of too little and too delayed (given the scale of the problem).
Similarly measures to reduce cost is unlikely to have much impact for at least two reasons. One, housing prices, especially in bigger cities, are less about cost. The price-cost wedge has widened sharply as cities have grown. Two, the prices are so high that cost reductions will only have limited impact.
There are perhaps only two responses which are likely to have significant impact, even if confined to those who are directly benefiting from it. One, large volumes of public housing, constructed by government agencies (Housing Boards) and sold on cost-plus basis. The Singapore model or some such type is the only approach to make a large dent on the issue of affordability for the vast majority. But there are limits to how much can be done on this, given the prohibitive fiscal costs, weak state capacity, and political economy problems.
Two, regulatory restrictions on price. This will have to be largely on the rental side. It's been a feature of recent times that major global cities have gone back to adopting rent control regulations. They are doing it because there is no choice available to make housing even remotely affordable. Instead of mocking them, as ivory tower academics and well-heeled opinion makers do, it may be appropriate to at least empathise, even if not agree with them.
Stepping further back, even these measures are mere palliatives. The only sustainable solution is to have more cities which are engines of growth. Too many developing countries (and Indian states) are chronically dependent on a handful of cities as primary engines of growth. Most aspirational Indians will want to be in perhaps no more than 20-25 cities. That's too small for a country of 1.3 billion. Without more cities emerging with opportunities, housing affordability will remain a problem.
On increasing supply, leaving it to the market forces too may not work. Take the example of vertical development. For sure, much higher FAR will lead to an increase in supply. But, given the pent-up and fast growing demand, and the inherently slow-acting nature of market response, this is likely to be a case of too little and too delayed (given the scale of the problem).
Similarly measures to reduce cost is unlikely to have much impact for at least two reasons. One, housing prices, especially in bigger cities, are less about cost. The price-cost wedge has widened sharply as cities have grown. Two, the prices are so high that cost reductions will only have limited impact.
There are perhaps only two responses which are likely to have significant impact, even if confined to those who are directly benefiting from it. One, large volumes of public housing, constructed by government agencies (Housing Boards) and sold on cost-plus basis. The Singapore model or some such type is the only approach to make a large dent on the issue of affordability for the vast majority. But there are limits to how much can be done on this, given the prohibitive fiscal costs, weak state capacity, and political economy problems.
Two, regulatory restrictions on price. This will have to be largely on the rental side. It's been a feature of recent times that major global cities have gone back to adopting rent control regulations. They are doing it because there is no choice available to make housing even remotely affordable. Instead of mocking them, as ivory tower academics and well-heeled opinion makers do, it may be appropriate to at least empathise, even if not agree with them.
Stepping further back, even these measures are mere palliatives. The only sustainable solution is to have more cities which are engines of growth. Too many developing countries (and Indian states) are chronically dependent on a handful of cities as primary engines of growth. Most aspirational Indians will want to be in perhaps no more than 20-25 cities. That's too small for a country of 1.3 billion. Without more cities emerging with opportunities, housing affordability will remain a problem.
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