Boris Johnson has pledged that more people will be helped onto the property ladder and that the supply of housing will be improved. Christian Hilber and Olivier Schöni consider the history of housing policy and the challenges that politicians face in tackling the affordability crisis

Hilber, Christian A. L.

Schöni, Olivier

English

LSE Research Online

Why	is	it	so	difficult	to	tackle	the	lack	of	affordablehousing?Boris	Johnson	has	pledged	that	more	people	will	be	helped	onto	the	propertyladder	and	that	the	supply	of	housing	will	be	improved.	ChristianHilber	and	Olivier	Schöni	consider	the	history	of	housing	policy	and	thechallenges	that	politicians	face	in	tackling	the	affordability	crisis.In	2017,	London	Councils	commissioned	a	poll	of	Londoners	inquiring	aboutthe	most	important	issues	facing	the	city.	Lack	of	affordable	housing	cametop.	30%	of	Londoners	said	it	is	the	most	important	issue,	ahead	of	crime	(14%)	and	transport	(12%).	Only	5%	weremost	concerned	about	Brexit.	Over	half	of	Londoners	(52%)	thought	housing	is	the	most	or	one	of	the	mostimportant	issues	facing	the	capital.	Moreover,	80%	of	the	public	agreed	at	that	time	that	the	UK	has	a	housingcrisis.	Since	the	poll,	housing	affordability	has	further	deteriorated.Measures	of	housing	affordability	confirm	that	these	concerns	are	justified.	The	most	common,	if	imperfect,measure	to	gauge	housing	(un)affordability	is	the	house	price-to-earnings	ratio.	It	increased	from	3.1	in	the	firstquarter	of	1995	to	10.9	in	the	fourth	quarter	of	2021.	That	is,	the	average	full-time	worker	in	London	nowadaysrequires	nearly	11	gross	annual	salaries	to	buy	an	average	housing	unit.	A	multiple	of	three	or	less	is	generallydeemed	to	be	affordable.	While	London	stands	out,	the	price-to-earnings	ratio	similarly	deteriorated	for	the	UK	as	awhole	over	the	same	period,	from	2.9	to	6.7.Looking	at	the	price-to-earnings	ratio	alone	ignores	two	important	facts.	First,	it	ignores	the	cost	of	mortgagefinancing.	Second,	not	everybody	owns,	and	rents	may	have	increased	less	than	house	prices.It	is	true	that	mortgage	interest	rates	have	come	down	a	lot	since	1995,	and	while	they	have	increased	slightly	inrecent	months,	they	are	still	low	by	historic	standards.	But,	even	when	financing	costs	are	fully	considered,	housingaffordability	has	deteriorated	substantially.	A	first-time	buyer’s	mortgage	payment	as	a	percentage	of	take-homepay	in	London	has	increased	from	25%	in	the	first	quarter	of	1997	to	54.9%	in	the	fourth	quarter	of	2021.	In	the	UKthe	equivalent	increase	is	from	17.7%	to	32.3%.It	is	also	true	that	private	and	social	rents	have	increased	much	less	than	house	prices	over	the	last	20	years.	Still,the	average	weekly	social	rent	as	a	percentage	of	the	10th	percentile	weekly	pay	(the	lowest	income	decile)	hasincreased	in	London	from	26.6%	in	1997	to	30%	in	2020.	The	average	weekly	private	rent	as	a	percentage	of	the30th	percentile	weekly	pay	increased	in	London	from	66.4%	in	2005	to	70.6%	in	2020.	While	affordability	for	rentershas	deteriorated	only	slightly	over	the	last	15	years,	the	fact	that	moderate	income	Londoners	would	have	to	spend70.6%	of	their	gross	income	to	afford	an	average	rental	unit	in	the	capital	is	just	staggering.The	above	stats	for	London	illustrate	the	increasingly	dire	nature	of	the	housing	affordability	crisis.	Yet,	London	isnot	alone.	Housing	affordability	crises	are	a	global	phenomenon,	especially	in	so	called	‘superstar	cities’;	cities	suchas	Hong	Kong	(perhaps	the	worst	affected	city	in	the	world),	New	York	City,	San	Francisco,	Vancouver,	Paris	orSydney.But	what	is	causing	these	housing	affordability	crises?	What	policies	are	implemented	around	the	world	to	tacklethese	crises?	How	effective	are	these	policies	in	attaining	their	stated	goals?	Are	they	worth	their	cost?	And	whoare	the	main	beneficiaries	of	these	policies?	These	are	some	important	questions	that	economists	have	beeninvestigating	for	decades.We	have	recently	written	about	this	research	for	the	Oxford	Research	Encyclopedia	of	Economics	and	Finance.The	entry	is	still	undergoing	the	final	stages	of	the	peer-review	process;	however,	the	close-to-final	draft	is	availableas	a	CEP	occasional	paper.	The	main	insights	of	our	literature	review	can	be	summarised	in	three	points:1.	 The	main	underlying	cause	for	the	‘affordability	crisis’,	which	has	been	mounting	for	decades,	is	a	combinationof	strong	and	growing	demand	for	housing	in	desirable	areas	in	conjunction	with	tight	long-run	supplyconstraints	–	both	physical	and	man-made	regulatory	ones.	The	affordability	crisis	tends	to	predominatelyBritish Politics and Policy at LSE: Why is it so difficult to tackle the lack of affordable housing? Page 1 of 2		Date originally posted: 2022-06-09Permalink: https://blogs.lse.ac.uk/politicsandpolicy/why-is-it-so-difficult-to-tackle-the-lack-of-affordable-housing/Blog homepage: https://blogs.lse.ac.uk/politicsandpolicy/affect	low-	and	moderate-income	households.	Increasingly,	however,	middle-income	households	–	who	do	notusually	qualify	for	government	support	–	are	similarly	affected.2.	 Policies	that	aim	to	tackle	the	housing	affordability	issue	are	numerous	and	differ	enormously	acrosscountries.	Key	policies	include	mortgage	subsidies,	government	equity	loans,	rent	control,	social	or	publichousing,	housing	vouchers,	low-income	tax	credits,	and	inclusionary	zoning,	amongst	others.	The	overarchingaim	of	these	policies	is	to	(i)	reduce	the	periodic	housing	costs	of	or	(ii)	improve	access	to	a	certain	tenuremode	for	qualifying	households.3.	 Many	mainstream	housing	policies	are	ineffective,	cost-inefficient,	and/or	have	undesirable	distributionaleffects	from	an	equity	point	of	view.	The	ineffectiveness	and	undesirable	distributional	effects	in	supplyconstrained	cities	such	as	London	arise	from	the	fact	that	policies	–	such	as	Help	to	Buy	–	that	stimulatehousing	demand	get	‘capitalised’	into	higher	house	prices	and	rents	(an	indirect	market-adjustment	effect).This	capitalisation	effect	offsets	the	policy-induced	incentives	(typically	in	the	form	of	subsidies	or	taxdeductions)	and	mainly	benefits	existing	better-off	homeowners	and	landlords.The	reader	might	now	wonder:	why	do	voters	continue	to	support	housing	policies	that	are	ineffective	and/orinefficient?	Indeed,	some	of	the	most	ineffective	policies	–	such	as	the	Mortgage	Interest	Deduction	or	Help	to	Buy–	are	politically	amongst	the	most	popular	ones.	This	is	partly	because	targeted	households	poorly	understandadverse	indirect	effects,	which	is	exploited	by	vote-seeking	politicians.	Partly,	it	is	because	often	the	truebeneficiaries	of	the	policies	are	the	politically	powerful	existing	property	owners	(homeowners	and	landlords),	whoare	not	targeted	but	nevertheless	benefit	from	positive	policy-induced	house	price	and	rent	capitalisation	effects.The	facts	that	(i)	existing	homeowners	often	have	a	voter-majority	and	(ii)	landlords	additionally	may	be	able	toinfluence	the	political	process	via	lobbying,	lead	to	a	conundrum:	housing	policies	may	be	politically	popular	yetineffective	and,	in	some	instances,	even	counterproductive	from	an	affordability	point	of	view.	That	is,	policies	mayexacerbate	affordability	crises	and	worsen	inequality.So,	what	should	benevolent	policymakers	do,	in	light	of	what	we	learnt	from	our	review?	In	addition	to	implementingtargeted	policies	for	individuals	most	in	need	(e.g.,	via	housing	vouchers	or	by	providing	subsidised	housing),	theyshould	promote	those	policies	that	improve	housing	affordability	for	all	income	groups	by	focusing	on	the	rootcauses	of	the	problem.	These	root	causes	are	(i)	the	strongly	and	unequally	growing	demand	for	housing	indesirable	markets	and	(ii)	tight	land	use	restrictions	supported	by	a	majority	of	existing	property	owners	that	limittotal	supply	of	housing	in	these	markets.	To	design	democratic	policy	reforms	along	those	lines	that	are	palatable	toa	voter-majority	is	perhaps	the	biggest	challenge	that	needs	to	be	overcome	in	order	to	cure	the	rising	affordabilitycrises	in	superstar	cities	around	the	world.	It	won’t	be	an	easy	task,	but	as	one	of	LSE’s	REF	2021	Impact	CaseStudies	shows,	research-induced	change	may	be	slow,	but	it	is	possible.______________________Note:	the	above	draws	on	the	CEP	occasional	paper	Housing	policy	and	affordable	housing.About	the	AuthorsChristian	Hilber	is	Professor	of	Economic	Geography	at	the	London	School	of	Economics	andan	affiliate	at	the	Centre	for	Economic	Performance.		Olivier	Schöni	is	Assistant	Professor	at	the	department	of	finance,insurance,	and	real	estate	of	the	Laval	University	in	Quebec,	Canada,	andan	associate	of	CEP’s	urban	and	community	wellbeing	programmes.		Photo	by	MOHD	AZRIN	on	Unsplash.British Politics and Policy at LSE: Why is it so difficult to tackle the lack of affordable housing? Page 2 of 2		Date originally posted: 2022-06-09Permalink: https://blogs.lse.ac.uk/politicsandpolicy/why-is-it-so-difficult-to-tackle-the-lack-of-affordable-housing/Blog homepage: https://blogs.lse.ac.uk/politicsandpolicy/

Why is it so difficult to tackle the lack of affordable housing?

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Why is it so difficult to tackle the lack of affordable housing?

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