Thoughts on affordable housing - II

I have blogged several times about the challenge of ensuring housing affordability. The last one was here. It's one of the most intractable public policy challenges. There are no now and immediate solutions of any kind, and the conventional market-based approaches to addressing the problem are either too limited or too long-winding to make any meaningful dent in the problem.  

Unlike other markets, housing suffers from two problems. On the supply side, the stock of land available to build houses is fixed and limited. This naturally acts as a dampener on the supply of housing. On the demand side, housing is increasingly being used purely for investment and not for living and as an investment. 

The combination of these two creates several distortions in the market and weakens the working of the market-based mechanism. 

For this reason, the only meaningful solution in the medium-term to the affordable housing crisis may need direct intervention by the government by increasing the supply of public housing. Measures like rent control are palliatives, which while ensuring affordability do little to address the problem of supply (and may even worsen it). 

The market orthodoxy on affordable housing is to ease zoning restrictions and the market will respond by increasing supply to clear the demand. This is the classic Austrian school approach.

There is another Austrian school approach to addressing housing affordability. Francesca Mari has an excellent article in the Times that points to Vienna's social housing model of Gemeindebauten, where the government builds the housing units and allots them at very affordable rents, enough to just cover the operation and maintenance costs. The vast majority of Viennese are eligible, and its scale is very large. 

It has its origins in the aftermath of World War I, and the scale was massive even then.  

In 1919... Vienna began planning its world-famous municipal housing, known as the Gemeindebauten. Before World War I, Vienna had some of the worst housing conditions in Europe, Eve Blau notes in her book, “The Architecture of Red Vienna.” Many working-class families had to take on subtenants or bed tenants (day and night workers who slept in the same bed at different times) in order to pay their rent. But from 1923 to 1934, in a period known as Red Vienna, the ruling Social Democratic Party built 64,000 new units in 400 housing blocks, increasing the city’s housing supply by about 10 percent. Some 200,000 people, one-tenth of the population, were rehoused in these buildings, with rents set at 3.5 percent of the average semiskilled worker’s income, enough to cover the cost of maintenance and operation.

This is a good description,

Experts refer to Vienna’s Gemeindebauten as “social housing,” a phrase that captures how the city’s public housing and other limited-profit housing are a widely shared social benefit: The Gemeindebauten welcome the middle class, not just the poor... Perhaps no other developed city has done more to protect residents from the commodification of housing. In Vienna, 43 percent of all housing is insulated from the market, meaning the rental prices reflect costs or rates set by law — not “what the market will bear” or what a person with no other options will pay. The government subsidizes affordable units for a wide range of incomes. The mean gross household income in Vienna is 57,700 euros a year, but any person who makes under 70,000 euros qualifies for a Gemeindebau unit. Once in, you never have to leave. It doesn’t matter if you start earning more. The government never checks your salary again. Two-thirds of the city’s rental housing is covered by rent control, and all tenants have just-cause eviction protections. Such regulations, when coupled with adequate supply, give renters a level of stability comparable to American owners with fixed mortgages. As a result, 80 percent of all households in Vienna choose to rent... the average waiting time to get a Gemeindebau is about two years (at any given moment there are 12,000 or so people on the waiting list, and each year about 10,000 or more people are housed). Vienna residents — anyone who has had a fixed address for two years, whether they are a citizen or not — may apply, and applications are evaluated based on need.

 Its benefits appear evident,

Housing experts believe that this approach leads to greater economic diversity within public housing — and better outcomes for the people living in it... City housing officials point out that having wealthier tenants in the Gemeindebauten helps thwart the problems that accompany concentrated poverty, creating a more stable, healthier environment for everyone. Unlike in the United States, where public housing is only for the poorest — the average resident’s annual household income was $15,219 in 2019, well below the federal poverty line of $16,910 for a family of two — the relative integration of the Gemeindebauten means that they are not stigmatized...

Vienna’s generous supply of social housing helps keep costs down for everyone: In 2021, Viennese living in private housing spent 26 percent of their post-tax income on rent and energy costs, on average, which is only slightly more than the figure for social-housing residents overall (22 percent). Meanwhile, 49 percent of American renters — 21.6 million people — are cost-burdened, paying landlords more than 30 percent of their pretaxincome, and the percentage can be even higher in expensive cities. In New York City, the median renter household spends a staggering 36 percent of its pretax income on rent.

Mari points to possible solutions to the problem of affordable housing - rent control (as in Berlin), looser zoning regulations (as in Tokyo). She also points to the example of Auckland which did upzoning on a big scale.

In 2016, the city, which has one of the most expensive housing markets in the world, “upzoned” 75 percent of its residential land, increasing its legal capacity for housing by about 300 percent in an effort to encourage multifamily-housing construction and tamp down prices. In areas that were upzoned, the total number of building permits granted (a way of estimating new construction) more than quadrupled from 2016 to 2021. As intended, the relative value of underdeveloped land increased, because it could suddenly host more housing, and the relative value of units in densely developed areas decreased, tempering sky-high prices. 

But there are clear limits to market-based experiments with housing

The key difference is that Vienna prioritizes subsidizing construction, while the United States prioritizes subsidizing people, with things like housing vouchers. One model focuses on supply, the other on demand. Vienna’s choice illustrates a fundamental economic reality, which is that a large-enough supply of social housing offers a market alternative that improves housing for all... there are limits to what upzoning can do. Often the benefits of allowing greater density are captured by developers, who price the new units far above cost. It doesn’t offer renters security or directly create the type of housing most needed: affordable housing.

The US, like in health insurance and a lot else, has a combination of market-driven policies that has its origins in the free-market ideology. These policies end up not only not achieving the objective, but also favour the well-off. 

The United States government intervenes heavily in the housing market. It’s just a two-tiered system, as Gail Radford, the historian, argues. There’s generous support for affluent homeowners and deliberately insufficient support for the lowest-income households. In 2017, the United States spent $155 billion on tax breaks to homeowners and investors in rental housing and mortgage-revenue bonds, more than three times the $50 billion spent on affordable housing...

That $50 billion isn’t nothing. In fact, in many U.S. cities, public spending per capita on housing and community-development subsidies is higher than in Vienna. But it seems clear that much of this money is misspent, whether through inefficient private-public partnerships like the low-income-housing tax credit; or through distortionary vouchers; or, most dubiously of all, through subsidizing homeowners, the people who need it least. “If you give everyone demand-side subsidies, like vouchers, and there’s a supply shortage, it’s going to drive up prices,” Chris Herbert, the managing director of Harvard’s Joint Center for Housing Studies, told me...

The fixed-rate, 30-year mortgage is a particularly American invention, possible only because the federal government insures the debt — if a borrower defaults, the government is on the hook. Then there’s our tax code, which allows those affluent enough to buy homes and itemize their deductions to write off the interest they pay on their mortgages: the bigger the mortgage, the bigger the deduction. Homeowners can deduct up to $10,000 of their property taxes from their federal taxes too, and if they sell their primary residence, they may be able to avoid paying capital gains on profits of up to $250,000 per person ($500,000 for couples). As housing activists like to point out, everyone who has a mortgage is living in subsidized housing...

The U.S. government prioritized support for banking rather than construction. The 30-year mortgage was a huge economic boon for the millions of Americans who took one out, benefiting from the federal subsidies and the nation’s long upward trajectory in home prices; the instrument leveraged many a renter and public-housing resident into homeownership and “turned many a former dependent of the public sector into a small-time fiscal conservative,” as Adkins, Cooper and Konings write in “The Asset Economy.”

This constituency of middle-class homeowners is what the Dartmouth emeritus economist William A. Fischel calls “homevoters”: a coalition of Americans who — consciously or not — vote to protect the value of their property. They tend to oppose local development and favor exclusionary zoning — which ensures maximum appreciation and prevents their tax dollars from extending to poorer neighborhoods. This tendency, alongside stagnant wages, has transformed the nation’s housing stock into an ever-scarcer and ever-more-expensive class of speculative asset. It’s almost impossible to “cater to the expectations of an existing constituency of middle-class homeowners without raising the barriers of entry for the rest of society,” Adkins and her colleagues write. “A middle-class politics of asset democratization has ended up undermining the conditions of its own viability.”

The contrast with Vienna's choice is stark, 

Vienna has succeeded in curbing the craving to own. It has done it by driving down the price of land through rezoning and rent control. In general, the beneficiaries of these land-use policies are less the Gemeindebauten (they stopped building from 2004 to 2015 and now only produce some 500 units a year) and more the limited-profit housing associations, the origins of which preceded Red Vienna and have built 3,000 to 5,000 units a year for the last four decades. Today limited-profit housing accounts for half the city’s social housing. Limited-profit housing associations are restricted to charging rents that reflect costs. Investors — banks, insurance funds — may buy shares of the limited-profit housing associations, generally to help fund initial construction. They are paid a low rate of annual interest on their shares. Any profits beyond that must be reinvested in the construction of new social housing...

Though the Gemeindebauten represented a large initial government outlay, Vienna’s social housing is now self-sustaining. Guess how much of the residents’ salary goes toward the program. One percent. Social housing drives down rents in the private market by as much as 5 percent. Vouchers may appear cheaper in the short term, but directly financing well-regulated public and limited-profit construction is the only way to mitigate speculation and hedge against ever-increasing housing costs. In 2020, New York and California spent $377 and $248 per capita, respectively, in housing development, while Vienna spent just $124 — and approximately half of Vienna’s spending is on low-interest financing that will be repaid and then re-lent.

Direct intervention by the government to increase supply through public housing is especially important in countries like India where nearly 80% of the demand is for units below Rs 10 lakh, a market that neither private builders nor mortgage providers will feel is commercially viable enough to service. In any case, the land values in major cities are too high to be able to support affordable housing of any reasonable value (say, Rs 20-50 lakh). The problem though is with the fiscal cost.