The Unassuming Economist

From a new paper co-authored with  Remi Jedwab, and Anthony Yezer:

“It is obvious that holding city population constant, differences in cities across the world are enormous. Urban giants in poor countries are not large using measures such as land area, interior space or value of output. These differences are easily reconciled mathematically as population is the product of land area, structure space per unit land (i.e., heights), and population per unit interior space (i.e., crowding). The first two are far larger in the cities of developed countries while the latter is larger for the cities of developing countries. In order to study sources of diversity among cities with similar population, we construct a version of the standard urban model (SUM) that yields the prediction that the elasticity of city size with respect to income could be similar within both developing countries and developed countries. However, differences in income and urban technology can explain the physical differences between the cities of developed countries and developing countries. Second, using a variety of newly merged data sets, the predictions of the SUM for similarities and differences of cities in developed and developing countries are tested. The findings suggest that population is a sufficient statistic to characterize city differences among cities within the same country, not across countries.”

From the IMF’s latest report on New Zealand:

“The government is refocusing elements of its multi-pronged approach to improve housing affordability.

• On the demand side, the policy measures so far have included an increase in the accommodation supplement—a cash subsidy linked to low-income recipients’ actual rents or home ownership costs; the extension from two to five years of the period during which capital gains on residential investment property are taxed (“bright line test”); a change in the tax treatment of residential rental losses, which can only be deducted from future taxable income from rental properties rather than taxable income in general; and a ban on the purchase of residential property by nonresidents under the Overseas Investment Amendment Act.

• On the supply side, the implementation of the KiwiBuild program—where the government plans to build 100,000 affordable homes for first-time home buyers over ten years from 2018—is lagging. The government is currently considering a reset of the program, which is likely to be smaller in scale and more regional needs-based, while at the same time prioritizing social housing, and rent support for low-income households. The Urban Growth Agenda is the umbrella for other measures on the supply side, including related to planning, zoning, and the provision of housing-related infrastructure.

• On the institutional side, the government established the Ministry of Housing and Urban Development, consolidating responsibilities for the housing agenda. The government agency Kāinga Ora―Homes and Communities was established as the lead developer for affordable homes and social housing.

Staff’s Views

• Improving housing affordability would lower macrofinancial risks and contribute to more sustainable growth. Housing affordability has barely improved, notwithstanding the housing market cooling. House prices are expected to continue rising under the baseline economic outlook. Demand for housing is likely to remain strong, given population growth and low interest rates, while the supply response is constrained by land use and other restrictions. Construction costs are high. Improving housing affordability would reduce inequality and contribute to lower macrofinancial risks, and, in the longer term, make growth more sustainable, including by supporting productivity through agglomeration externalities. Supply-side reforms are central for broad improvements in affordability, although additional direct support might be required for some lower-income households.

• The government’s continued focus on advancing its comprehensive housing policy agenda is welcome. The consolidation for housing-related policies in one Ministry should help in policy implementation. Steps taken to support local governments’ infrastructure funding and financing to facilitate timely infrastructure provision are welcome developments.

• Nonetheless, the housing policy agenda could benefit from some further measures. The objectives of the KiwiBuild program could, at lower risk to the budget, be achieved through other means, including, for example, temporary tax credits for the construction sector to adopt new technology, rather than the government taking on the role of a developer. Staff welcomes the government’s intention to consider adding elements of tax reform, such as a tax on all vacant land, to the agenda. A broad land tax, for example, would support more efficient land use. Since the comprehensive agenda should foster housing affordability on a non-discriminatory basis, the ban on purchases of residential property by nonresidents should be removed, given its use is not in line with the IMF’s Institutional View (IV) on capital flows. At the local level, there should be reforms to simplify and standardize zoning and permit local councils to actively plan for and enable housing supply growth and planning reforms.

Authorities’ Views

• The implementation of the government’s multi-pronged approach to improve housing affordability is advancing. A more comprehensive housing policy agenda is taking shape, including increased focus on making housing for lower income households more affordable through a better accommodation supplement. The authorities highlighted that, in addition to the housing related measures already put in place, the new Ministry of Housing and Urban Development has reinforced institutional capacity to deliver the full breadth of the housing plan, including on the legislative changes needed to ensure more affordable houses and the related infrastructure development. The ministry will be supported by a new government entity for affordable housing development, Kāinga Ora―Homes and Communities, to strengthen delivery.

• The authorities do not consider the restrictions on purchases of residential property by nonresidents to be a CFM measure. The restrictions do not aim to affect capital flows or resolve a balance of payments issue. They are a demand-side measure to ban overseas speculators against the backdrop of the government’s comprehensive housing agenda. The goal is to create a housing market with prices shaped by New Zealanders, and to make homes more affordable. They also pointed out that the Phase I review of the Overseas Investment Act (OIA) not only brought residential land into the category of sensitive land but also simplified the rules for investment in forestry by overseas persons.”

On cross-country:

• Q2 2019: house price slowdown in Asia-Pacific, North America, and some parts of the Middle East, though Europe’s boom continues. – Global Property Guide

On the US:

• Why Are American Homes So Big? – The Atlantic
• How We Know California’s New Rent Control Law Will Make Its Housing Shortage Worse – Foundation for Economic Education
• Why Can’t California Solve Its Housing Crisis? – Rolling Stone
• Statewide California Rent Control: Shooting The Price Messenger – Cato
• California Zoning: Housing Construction and a New Ranking of Local Land Use Regulation – George Mason University
• Airbnb pledges $25 million to support affordable housing and small business – Los Angeles Times
• A Golden State Mayor Takes On the Nimbys – Wall Street Journal
• One in Four of New York’s New Luxury Apartments Is Unsold – New York Times
• New Paper Details the Dramatic Decline of Low-Cost Rentals – Harvard Joint Center for Housing Studies
• How Deep Is the GSE ‘Economic Moat’? – Harvard Joint Center for Housing Studies
• How Once-Doomed Mortgage Giants Gained New Lease on Life – Wall Street Journal
• Comment Letter to the Consumer Financial Protection Bureau on the Qualified Mortgage Rule – Urban Institute
• How Debt Burden Affects FHA Mortgage Repayment, in Six Charts – Urban Institute
• HUD’s Proposal to Revise the Disparate Impact Standard Will Impede Efforts to Close the Homeownership Gap – Urban Institute
• Three Ways Fintech Is Changing Homebuying—And Three Important Questions – Urban Institute
• Housing Finance At A Glance: A Monthly Chartbook, August 2019 – Urban Institute

On other countries:

• [Australia] Australia’s house prices are now in free fall – Global Property Guide
• [Barbados] Barbados’ two-tiered housing market – Global Property Guide
• [Chile] Chile’s house prices are rising strongly – Global Property Guide
• [China] China’s house price boom over in the 1st tier cities – Global Property Guide
• [Costa Rica] Costa Rica’s thriving housing market – Global Property Guide
• [Egypt] Egypt’s house prices falling sharply – Global Property Guide
• [India] India’s property market remains weak, amidst a slowing economy – Global Property Guide
• [Indonesia] Indonesia’s housing market rarely makes big moves – Global Property Guide
• [Ireland] Ireland’s housing market is slowing rapidly – Global Property Guide
• [Mexico] Mexico’s housing market is strengthening – Global Property Guide
• [Saudi Arabia] Is Saudi Arabia’s house price decline about to end? – Global Property Guide
• [South Africa] South Africa’s house price appreciation remains below inflation – Global Property Guide
• [Spain] Spain’s housing market remains healthy – Global Property Guide
• [St. Lucia] Saint Lucia is still a buyer’s market, despite its beauty and increasing buzz – Global Property Guide
• [Taiwan] Taiwan’s housing market improving – Global Property Guide
• [United Kingdom] Has St Ives’ second home ban backfired? – Financial Times
• [United Kingdom] The UK’s housing market is slowing sharply – Global Property Guide
• [United Arab Emirates] UAE’s property prices fall further – Global Property Guide

From the IMF’s latest report on Mongolia:

Global Housing Watch Newsletter: September 2019

In this interview, Stijn Van Nieuwerburgh talks about his new paper on “Affordable Housing and City Welfare”. Stijn Van Nieuwerburgh is the Earle W. Kazis and Benjamin Schore Professor of Real Estate and Professor of Finance at Columbia University’s Graduate School of Business. The paper is co-authored with Jack Y Favilukis (University of British Columbia) and Pierre Mabille (New York University).

Hites Ahir: The “housing affordability crisis” has been in the headlines in many parts of the world. How serious is this crisis?

Stijn Van Nieuwerburgh: One commonly agreed upon metric to quantify the lack of affordability is the fraction of renters that spend more than 30 percent of their income on rent. Among the 50 largest metropolitan areas in the United States, half of all renter households are rent burdened. Another popular metric is house price to average income ratio. The price-to-income ratios have been going up in every major city in the world. In my view, this is the leading challenge for local policy makers.

Hites Ahir: Your new paper builds a framework to evaluate four housing policy tools—zoning changes, rent control, housing vouchers, and tax credits—that policymakers employ to tackle housing affordability issues. In layman’s terms, could you describe the framework?

Stijn Van Nieuwerburgh: The framework is adapted from modern macro-economics and finance: a large group of households that differ in age and labor 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 bond or in rental housing. We introduce a spatial dimension in this macro model: the city has a center where people work, but only some live there. The rest commutes from the suburbs and outer boroughs of the city to the center. Commuting has a time cost and a financial cost. Households can choose their location in each period. Developers decide how much housing to build in each location but are subject to zoning rules, which are particularly strict in the center. This makes housing supply much less elastic in the center.

Developers are subject to an affordable housing mandate capturing the realities of mandatory inclusionary housing: when they build rental housing, developers must set aside a percent of the total square feet for housing that rents at below-market rates. These affordable housing units are allocated by lottery, but subject to an income qualification requirement. Once a household gains access to an affordable housing unit, it is allowed to stay there without having to satisfy the income requirement.

The model captures three main costs of affordable housing. First, supply reductions because developers face lower prices and rents. Second, misallocation of housing across the income and wealth distribution both because some underserving households gain access to affordable units despite having fairly high income or wealth and because they do not move out once their income rises. Misallocation also takes the form of distortions in the size of the housing unit chosen with some consuming more housing and others less than they would in the free market, and spatial misallocations. Third, a reduction in labor supply.

The model also captures a key benefit of affordable housing units: it acts as insurance device in the presence of income risk. When households fall on hard times, these affordable housing units provide shelter at low rents which improves housing stability. Because most models that deal with affordable housing do not model households’ income risk, households’ risk aversion, and market incompleteness, they miss this insurance benefit.

In sum, affordable housing policies have costs and benefits. Dialing the knobs of these policies up or down shifts the economy along the efficiency-equality tradeoff curve. Since a policy usually benefits some households at the expense of others, we need to take a stance on how to aggregate individual households’ welfare. We choose a utilitarian social welfare criterion which weighs every household equally. But because poor households have higher marginal utility, there is more social benefit to helping them. How much more depends on the curvature of the utility function and how much residual risk they face given the social insurance programs already in place.

Hites Ahir: What are the main findings?

Stijn Van Nieuwerburgh: We calibrate the model to the New York metropolitan area, and show that the model does a good job matching the observed income, housing, and financial wealth inequality, house price and rent levels, and home ownership rates. The model also captures current zoning policy and the share of affordable housing units currently in place. With this “status quo” as our baseline, we explore various policy changes.

The first main result is that reducing the misallocation of affordable housing units can lead to large welfare gains, about 3.6 percent of lifetime wealth. Specifically, we lower the income qualification threshold for affordable housing unit lottery winners, and force existing tenants to requalify every 4 years. By rotating out higher-income tenants and bringing in low-income tenants, we improve access to the insurance provided by affordable housing units. We can do so without dramatically reducing housing stability. Of all policies we analyze, reducing the misallocation of affordable housing units creates the largest welfare gains for society. This policy does not expand the number of affordable housing units.

The second main policy experiment studies an expansion of the affordable housing mandate. Developers now must set aside a larger percentage of square feet of affordable rental units of the total square feet of market rentals they build. This policy is akin to an expansion of rent control–as recently transpired in New York State and Oregon–since a larger fraction of rental units will be affordable. We contemplate a fifty percent expansion, which results in 30 percent rather than 20 percent of the rental stock being rented at a 50 percent discount to the market rent This policy creates modest welfare gains of 0.66% of permanent consumption. This gain is only about 1/6^th as large as reducing the misallocation in the existing affordable housing stock but comes at great expense to the developers in the form of billions of dollars in lost rents. The reason for the modest gain is that while the policy helps more needy households, it also creates more housing and labor supply distortions, and more housing misallocation.

The third main experiment studies an upzoning policy, which increases the amount of residential housing that can be built in the city center by 10%. This policy has the intended effect of lowering rents and house prices by increasing housing supply. It also saves on commuting costs since more households can now live in the city center. But the welfare gain it creates is modest: 0.37%, or about half of the gain from the expansion of rent control.  In contrast to the previous policies, zoning is much less redistributive in nature. It benefits all ages, income groups, and wealth groups, even most existing homeowners (who do suffer house price declines). By the same token, it fails to generate large welfare gains for the poor, which is where most of the bang for the buck lies in terms of welfare gains.

The fourth experiment expands housing vouchers, such as Section 8 vouchers. These are cash transfers earmarked for housing. In the model, the additional vouchers must be paid for with additional taxes. Since the tax system is progressive, the rich see their taxes rise. Because labor income taxation is distortionary, this results in a non-trivial reduction in labor supply. The city’s economic output falls as a result. Nevertheless, the voucher expansion is well targeted on the poor and creates a sizeable welfare gain of 1.0 percent.

Figure 1 shows the welfare gains of the policies for households of different productivity levels. It clearly shows the redistributive nature of the policies that make affordable housing more efficient, that expand rent control, and that increase vouchers. The upzoning policy creates smaller, but more uniformly distributed benefits.

In the paper we also consider low-income housing tax credits, which we find to be fairly ineffective since they create modest rent reductions but are financed with distortionary taxation.

One final experiment worth mentioning is that moving all affordable housing units from the city center to the rest of the MSA leads to a welfare gain, but only if it is accompanied by subsidies for transportation. The financial cost of commuting is an important factor for low-income households.

Figure 1.

Hites Ahir: In the paper, you point out that standard affordability metrics do not capture the improved availability of affordable housing. Why?

Stijn Van Nieuwerburgh: In a spatial equilibrium model, households may respond to policy changes by moving. This changes the average income of a neighborhood. While rents may be falling in response to a policy change, average rent-to-income ratios may be rising if the policy attracts lower income households to the neighborhood. The policy experiment that creates more affordable housing units, for example, results in a rise in the average rent-to-income ratio in both zones. A policy maker defining housing affordability by the average rent-to-income ratio would erroneously conclude affordability had gone down.

Hites Ahir: What are the policy implications of your findings?

Stijn Van Nieuwerburgh: They follow directly from the welfare gain calculations. We need more efficiency in the affordable housing system with a renewed focus on helping the neediest. Allowing people who make more than $200,000 stay in their affordable housing unit, like in the new New York rent control law, is the wrong reform. We do not require a massive expansion in the scope of the affordable housing stock, but modest expansions can help in combination with reductions in misallocation. We also need to expand supply, but cannot expect miracles from that approach alone.

Hites Ahir: What kind of questions you would like future research on housing affordability to address?

Stijn Van Nieuwerburgh: We hope the framework is useful as a jumping-off board for others to model more place-based policies, such as investments in transportation infrastructure.