The Unassuming Economist

From VOX post by Jack Favilukis, Pierre Mabille, Stijn Van Nieuwerburgh:

“Housing affordability is a leading challenge for local policymakers around the world, yet a coherent framework for analysing the various policy options is lacking. This column builds such a framework and uses it to show that policies that make affordable housing more efficient, that expand rent control, and that increase vouchers have a redistributive effect. Upzoning policies creates smaller, but more uniformly distributed benefits.

The ‘housing affordability crisis’ has been in the headlines in many parts of the world, and for a good reason. Among the 50 largest metropolitan statistical areas (MSAs) in the US, half of all renter households spend more than 30% of their income on rent (Joint Center for Housing Studies of Harvard University 2018). They are rent burdened. Other common metrics to quantify the lack of affordability are average rent-to-income and house price-to-income ratios. All of these metrics have been rising in most major cities in the world. Housing affordability has been the leading challenge for local policymakers. Yet a coherent framework for analysing the various policy options is lacking.

A new framework

In a recent paper (Favilukis et al. 2019), we build a framework to evaluate four major housing policy tools – zoning changes, rent control, housing vouchers, and tax credits – that policymakers employ to tackle housing affordability issues. The framework is adapted from modern macroeconomics and finance. Each period, households that differ in age and labour productivity make choices about how much to consume, save, and work; whether to own or rent a house; the size of the house; and how large a mortgage to get if they own. Savings are invested in a government bond or in rental housing.

We introduce a spatial dimension in this macro model. The metropolitan area has two locations: the city centre where people work but only some households live (zone 1), and the suburbs/outer boroughs of the MSA (zone 2) from which households commute to work. Commuting has a time cost and a financial cost. Households can choose their location in each period. Households are risk averse and face labour income and mortality risk, which they cannot perfectly insure against. This market incompleteness is the key friction in the model. The government provides some insurance through the tax code, including for example unemployment insurance. However, local policymakers can affect the provision of social insurance by using affordable housing policies.”

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