The Unassuming Economist

From Global Housing Watch Newsletter: November 2016

The Housing Challenge in Emerging Asia: Options and Solutions is an excellent new book that has just been published by the Asian Development Bank Institute (ADBI). In this issue of the Global Housing Watch Newsletter, Jera Beah H. Lego interviews Matthias Helble, one of the editors of this timely new book. Lego is a Research Associate, and Helble is a Research Economist. Both are at the ADBI.

Jera Beah H. Lego: The urbanization rate in Asia is nearly 50 percent, with more than 2 billion urban dwellers. About 127,000 people flood into cities every day and the number is rising. What are the challenges for policy makers?

Matthias Helble: These numbers mean that the housing stock in urban areas needs to be continuously expanded, and this has huge implications beyond housing. For example, every household needs to have access to clean water, sanitation, and electricity. New dwellings need to be connected to roads and, if possible, public transportation. New neighborhoods should provide access to health care, education, and jobs. Urban safety and crime prevention need to be ensured. Climate change adaptation and mitigation measures also have to be integrated into the planning process.

Jera Beah H. Lego: How have advanced economies confronted the challenge of housing an increasing urban population?

Matthias Helble: They have experimented with policies targeting both the supply and demand side of rental housing and homeownership. On the demand side, they have eased access to homeownership of low-income groups, typically through direct cash transfers or indirect subsidies such as mortgage guarantees. Success, however, has been mixed, as supply often proved to be inelastic. On the supply side, governments have controlled rents. However, rent controls often reduce the supply of rental housing as it becomes a less attractive investment. Consequently, the rental market becomes tighter, with landowners preferring high-income tenants. So even advanced economies struggle to achieve change.

Figure 1

Jera Beah H. Lego: Many parts of the world have housing shortages. Which countries have successfully dealt with them?

Matthias Helble: The public sector has had a major role in providing affordable and adequate housing in many countries. For example, postwar Japan used a three-pillar approach. One, it established the government Housing Loan Corporation to expedite housing construction. Two, it built rental houses for low-income groups. And three, it provided large-scale supply of residential land. Housing stock was restored by the 1960s.

South Korea followed a similar strategy in the 1970s by expanding land supply and providing more housing loans. But government interventions couldn’t meet increased demand and prices went up sharply in the late 1980s. In response, the South Korean government expanded its housing programs with the Two Million Housing Drive and eventually curbed the property prices. Since then, South Korea has been relatively successful in containing price surges and avoiding real estate bubbles.

These policies are based on the idea that the public sector must supply land, the market should be allowed to solve housing problems, and government regulations must ensure that low-income groups can access adequate housing either through rent subsidies or housing finance.

Figure 2

Jera Beah H. Lego: You point out that from the 1950s to the 1970s, supply-side policies were common. Why did many countries switch to demand-side policies in the 1990s?

Matthias Helble: One reason was the belief that the supply side is elastic and will respond to increased demand. However, this did not often occur because the housing market depends crucially on the government to remove supply constraints such as unclear land titles or a shortage of land. Another reason was that demand-side policies are easier to implement. It is often much easier to stimulate demand using various types of subsidies rather than removing supply constraints, which can be administratively and politically costly.

Jera Beah H. Lego: The book points out that there is not enough housing finance available in Asia. Other studies have also pointed out that the mortgage market is small in developing and emerging countries. Why does housing finance remain elusive?

Matthias Helble: Large parts of the population still have limited or no access to financial services. Households that do have access to banking services often don’t know how to use them. Financial inclusion and education are essential. Many commercial banks see housing finance as a risk because they often find it difficult to establish creditworthiness and to foreclose property. Governments have to both ease people’s access to finance and provide an environment that will make commercial banks eager to loan to would-be homeowners.  

Jera Beah H. Lego: To stimulate housing demand, the US uses mortgage interest deduction while the UK uses the Help-to-Buy scheme. Is it correct to say that very little is done to stimulate the rental housing market? Why?

Matthias Helble: I would not say that very little is done, just relatively little. In both countries, the mantra of homeownership persists, which has advantages such as encouraging accumulation of a physical asset. However, homeownership is expensive, lowers labor mobility, and comes with risks like over-borrowing. Governments should therefore encourage tenure choices such as co-housing and community land trust.

Jera Beah H. Lego: In the book’s case studies, what is the most common policy for promoting homeownership and the rental market?

Matthias Helble: Many countries have experimented with easing mortgage financing, using either direct cash transfers or indirect subsidies like mortgage interest rate reduction. However, mortgage interest reduction in the US shows that a policy aimed at low-income groups can benefit high-income earners instead. In Japan and the UK, the rental market was stimulated by providing public rental housing. Another policy is providing subsidies to suppliers of new housing, as in the case in India.

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Figure 3b

Our global house price index is almost back to its level before the global financial crisis. Is it time to worry again? Find out my answer in my talk and presentation today at the European Commission.

A new paper “assess the spillovers from the oil sector to the housing market cycle using quarterly data for 20 net oil-exporting and -importing industrial countries, and employing continuous- and discrete-time duration models. [The paper does] not uncover a statistically significant difference in the average duration of booms and normal times in the housing markets of those net oil-importers and net oil-exporters. Similarly, the degree of exposure to commodity price fluctuations does not seem to significantly affect the housing market cycle. However, [the authors] find that housing booms are shorter when oil prices increase than housing busts when oil prices decrease. We also show that the net oil-importers are more vulnerable to protracted housing slump episodes than the net-oil exporters.”

Also see another related work on housing and oil prices.

The 2016 International Housing Association (IHA) Interim Meeting took place on November 1-4, in Durban, South Africa. The meeting brought together housing market experts from different countries to discuss and share information about their respective housing markets. The countries represented at the meeting were: Australia, Canada, Japan, Namibia, Nigeria, Norway, Peru, South Africa, Tanzania, The Gambia, Uganda, United States, Zambia, and Zimbabwe. The presentations focused on country specific situations, and special topics.

Country Specific Presentations

How access to housing finance varied across countries was one of the highlight of the country specific presentations. Several papers and the 2014 IIMB-IMF housing conference have pointed out that access to housing finance is a bit easier in the developed countries compared to developing countries. This finding is consistent with what is reported on the ground. The presentations from developed countries showed single digit mortgage rates (Australia: 4.5%, Canada: 2.5-2.9%, Japan: 0.625-0.750%, Norway: 2.2-3.4%, United States: 3.6%). In contrast the presentations from emerging and developing countries showed double digit mortgage rates except for Peru (Namibia: 11.75%, Peru: 8.7%, South Africa: 10.5%, Tanzania: 19%, The Gambia: 20-23%, Uganda: 22%, Zambia: 22.5%, and Zimbabwe: 12-18%).

A growing housing deficit in emerging and developing countries was also highlighted at the meeting. Most of the representatives from emerging and developing countries reported a housing backlog that is growing. For example, Namibia has a backlog of 110,000 housing units that is growing at annual rate of 3,700 units. Other countries also reported housing deficits: Peru: 1.9 million units, The Gambia: 50,000 units, Uganda: 1.6 million units, Zambia: 1.5 million units, Zimbabwe: 1 million units. In Tanzania, demand for housing is projected at about 200,000 units annually.

Special Topics:

Human settlements, affordable housing, green building, IHA Africa, and a dataset on cross-country housing supply were some of the special topics that were presented. First, there was a presentation that described the fundamental elements of human settlements policy and legislation in South Africa. Second, there was a very fascinating presentation and site visit to the Cornubia Project. This affordable housing project aims at being a multi-billion Rand mixed use, mixed income development incorporating industrial, commercial, residential, and open space use. The overall project area is approximately 1,200ha in extent comprising of mainly agricultural land. Third, Green Building Council of South Africa made a presentation on green building. Green building has started to gain traction and emerging as an important topic.

Fourth, there was a presentation that calls for creating an International Housing Association for Africa or developing countries. One of the ideas is to bring more members from the Africa and developing countries and shed more light on the housing market in this part of the world. Five, there was a presentation on a dataset on housing supply. The presentation focused on showing the trends and patterns in housing construction since the Great Recession across 42 countries.     

An IMF paper notes: “Since at least 2001, Mexico’s federal government has hedged the near-term fiscal impact of declines in oil prices through put options. Using a structural model calibrated to the Mexican economy, we quantify the overall benefits of this long-standing policy. Compared to a self-insurance alternative, we find welfare gains from hedging through put options equivalent to a permanent increase in consumption of 0.4 percent. These gains arise mostly from a reduction in sovereign spreads and to a lesser extent from smoothing income volatility. In terms of design, expanding the program to cover domestic fuel sales could yield further gains once gasoline and diesel markets are liberalized. Relying more on liquid instruments—such as options on the Brent—is an avenue worth exploring to ensure the program remains cost effective.”. Read the paper.