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Reconciling housing and the environment: is it possible, and how?

By Grace Alexander, Ioannis Tikoudis, Katherine Farrow and Walid Oueslati, OECD Environment Directorate

Ensuring widespread access to affordable housing constitutes a significant policy challenge in many countries. Increasing housing costs in urban areas push many to live in less accessible locations and to lower their living standards. This can reduce wellbeing, undermine social cohesion and eventually jeopardize political stability. At the same time, another policy challenge, equally urgent and multifaceted, emerges from climate change and environmental degradation in urban areas. The cost that climate change, air pollution and biodiversity loss impose on modern societies is significant: health, food systems and infrastructure are all affected, and the consequences will only grow if these issues are left unaddressed. Are the housing and environmental crises somehow interrelated? Do governments have the relevant tools to pursue affordability and environmental sustainability at the same time?

How we build our urban areas affects housing markets and comes with certain environmental costs. The residential sector accounts for a large share of fine particulate matter (Figure 1), an air pollutant associated with severe health impacts, with the sector responsible for 37% of the emissions of fine particulate matter globally. Limits on building height and density, applied widely around the world, reduce housing supply and contribute to observed house price surges. Similar regulations cause cities to spread outwards, causing irreversible changes on the natural areas surrounding cities and generating more greenhouse gas emissions per capita. The phenomenon of rapid suburban expansion, which has come to be known as urban sprawl, possessed tremendous momentum for decades and continues to be a focal issue in urban development today. Sprawled cities imply greater travel distances, make residents more dependent on their cars and tend to increase the cost of providing public transport services (OECD 2018).

Figure 1. Housing accounts for a large share of fine particulate matter

Source: Air emission accounts, OECD Environment Database

Reconciling housing and the environment, published in the OECD report “Brick by Brick, provides an anatomy of such practices, and their long run social cost. The chapter explores ways to build our urban areas by balancing housing affordability and environmental quality. It is not only that housing policies affect the environment, the chapter reports, but also that urban environmental policies can have a significant impact on our house values. Reducing pollution and increasing green spaces increase the value of nearby housing stock. Although energy efficiency regulations may increase construction costs, they also add value to homes that are subject to such regulations. Importantly, the value that environmental regulations can add to the existing housing stock should not be confused with the rise in house prices caused by mechanisms causing artificial scarcity, such as regulatory constraints on housing supply.

Ultimately, the homes that we live in and the environment around us are crucial to our health and wellbeing. By considering the effect of the residential sector on the environment, and vice versa, the chapter outlines how we may be able to strike a sustainable balance between the two.

Further Reading:

OECD (2021), Brick by Brick: Building Better Housing Policies, OECD Publishing, Paris, https://doi.org/10.1787/b453b043-en.

OECD (2021), Reconciling Housing and the Environment., Brick by Brick: Building Better Housing Policies, OECD Publishing, Paris, https://doi.org/10.1787/96aaa66a-en

OECD (2018), Rethinking Urban Sprawl: Moving Towards Sustainable Cities, OECD Publishing, Paris, https://doi.org/10.1787/9789264189881-en.




A recipe for lower house prices

By Volker Ziemann, OECD Economics Department

Does housing need to become always more and more expensive relative to other services, eating an ever-higher share of income? This situation puts a strain on household finances, making it complicated for people to move close to jobs and often generating macro-economic or financial risks. The economy’s capacity to meet the demand for housing and supply dwellings where they are demanded is crucial to avoid these excessive price and rent increases, contribute to macroeconomic stability and facilitate residential mobility. The OECD has recently launched a report entitled “Brick by Brick: Building Better Housing Policies” to help analysts and policymakers make better housing policies. At its core, one of its chapters focuses on the fundamental drivers of housing supply and demand and the relevance of housing policies to ensure affordable and quality housing for all.

The empirical framework underlying the analysis builds on the famous stock-flow model for housing in which i) a positive (negative) shock to housing demand increases (decreases) house prices, ii) higher (lower) house prices boost (reduce) housing investment, and iii) higher (lower) supply of housing feeds back into house prices and partly offsets the initial demand shock. In this framework, demand and supply elasticities jointly determine how much of a change in demand feeds into prices and how much into construction.

Figure 1. Stock-flow model of housing

These elasticities depend to a great extent on housing-related policies.

  • Eliminating mortgage interest deduction, for instance, mitigates house prices increases amid demand pressures (lower demand elasticity).
  • A high degree of decentralisation of land-use decisions is generally associated with more restrictive land-use policy settings consistent with the home-voter hypothesis (lower supply elasticity).
  • Strict rental market regulation inhibits new construction by reducing the incentives to invest in rental housing (lower supply elasticity).

These housing-related policies differ considerably across countries. Accordingly, expected benefits from moving towards best policy practices also vary across countries and policy tools. Figure 2 illustrates the expected reductions in house-price to income ratios.[1]

Figure 2. Housing affects society and the economy in multiple ways

Note: Simulated change between 2020 and 2050 in the number of years over which cumulated average household disposable income equals the average price of a 100m2 dwelling (in years).
Source: OECD (2021), Brick by Brick: Building Better Housing Policies, OECD Publishing.

Residential construction is simulated to expand by more than 20% in Sweden if rent control becomes as flexible as in New Zealand, increasing the housing stock in 2050 by around 11%, which could reduce house prices in Sweden by around 1.5 years of disposable income for the typical 100m2 dwelling. Sweden, alongside the Netherlands, would also be the largest beneficiary in terms of housing affordability from eliminating mortgage interest deductibility. New Zealand, in turn, could boost affordability the most by streamlining the governance of land-use policies across levels of government.

These examples illustrate the great potential of housing policy reforms. Many more are discussed in the report. A dedicated Policy Toolkit including an online Dashboard and Country Snapshots allows policymakers to compare their country’s housing outcomes and policies. Finally, a Policy Action Tool helps implement such reforms by anticipating synergies and trade-offs across various outcome dimensions.


[1] Measured by the reduction, compared to the baseline of no policy-change, in the number of years over which cumulated average household disposable income equals the average price of a 100m2 dwelling.




Monetary policy and housing markets: interactions and side effects

By Ernest Gnan, Oesterreichische Nationalbank (OeNB) and the European Money and Finance Forum. 1

Monetary policy influences housing prices through the level of interest rates (cost of credit, discount rate, attractiveness vis-à-vis other investments). The housing market affects aggregate demand through construction activity and its influence on consumption (wealth and income effects). Housing booms and busts can threaten financial and macroeconomic stability, and thus ultimately also feed through to consumer price inflation. Central banks can thus not ignore housing market developments. But monetary policy is too crude an instrument to target house prices. A new class of instruments – macroprudential policies – has been created and fills this gap since the Global Financial Crisis. Moreover, housing prices are substantially driven by structural housing policies which affect housing supply and demand. At the same time, including owner-occupied housing in the consumer price basket helps to adequately feed this important part of households’ expenditure into central banks’ reaction functions. While monetary policies worldwide have undoubtedly played a central role in containing the economic fallout from COVID-19, potential side effects, such as shooting up housing prices, and the proportionality of long-lasting unconventional monetary policy measures need to gain increasing attention as economies are bouncing back from the COVID crisis.

Why should central banks pay attention to a specific sector such as the housing market?

Central banks worldwide are mandated with ensuring price stability, subject to this (or in parallel with, as in the US Fed) also with supporting growth and employment. Their price stability objective is usually coined in terms of consumer price inflation. Monetary policy is a rather “crude” instrument, which affects aggregate demand broadly, and cannot usually be targeted towards developments in specific sectors. So, why should monetary policy care about developments in a specific sector such as the housing market?

There are several channels in which housing is relevant for the transmission of monetary policy impulses such as changes in official interest rates or in bond market yields through QE. First, the level of short-term and long-term interest rates influences mortgage credit rates. So, it makes purchasing a home more (or less) affordable. Thus, demand for housing – and thus employment, aggregate demand and ultimately also consumer price inflation – rises (or falls). Mortgage loans make up 77% of euro area households’ total borrowing (ECB, 2021). The growth of euro area mortgage loans continued its upward trend observed since 2016 to reach around 5% in nominal terms most recently.  In 2019, in the EU and euro area gross value added in the construction sector made up 5.4% and 5%, respectively, of GDP, with a wide range of 1.7% to 7.4% across EU countries, though. Construction projects are typically financed to a substantial extent through credit. So, financing costs exert a potentially strong effect on construction activity.

Figure 1. Housing makes up a major part of households’ lending and is an important economic sector

Positive and negative wealth and income effects from house price rises

Second, the value of an asset is influenced by the net present value of the stream of income from this asset. In the case of housing, this income can either be rental income or the implicit income from using the house (in the case of owner-occupied housing). If the discount rate falls (as implied by lower official interest rates), then the net present value of a home rises. Looser monetary policy thus, ceteris paribus, raises real estate prices. This rise in housing prices can affect household consumption in various ways. First, it can entail that households feel richer and can take out an additional mortgage on their house, to finance other expenditures. In this case, we observe a positive wealth effect. Conversely, rising house prices can also imply that for instance young households need to spend a higher fraction of the disposable income on housing, leaving less for other consumption (see e.g. OECD, 2021). In this case, there would be a negative income effect from rising house prices. Whether the positive or negative wealth and income effects prevail, depends on the fraction of homeowners versus tenants and demographic factors. If, for instance homeowners benefiting from wealth increases have a lower propensity to consume than those just buying a home, the net effect on aggregate consumption will likely be negative.

Similarly, rising rents (which are the likely consequence, with some lag and to a certain extent, depending on countries’ institutional and legal frameworks, of higher house prices) will benefit landlords, while tenants will have less of their income left for other consumption. Assuming that renters are wealthier and have a lower propensity to consume than tenants, then a rise in house prices and rents will on aggregate dampen consumption for non-housing goods. A very similar argument applies to households which take out a loan to finance their homes: higher house prices imply the need for a bigger loan, implying lower disposable household income after loan servicing.

Thus, the wealth and income effects from residential price swings also imply substantial redistributive effects across individuals and demographic groups (see e.g. OECD, 2021).

Figure 2. Real estate price developments in the euro area

Source: ECB (2021).

Housing booms and busts threaten financial and macroeconomic stability

There is a second reason why central banks carefully look at housing market developments, which has gained prominence in the Global Financial Crisis (GFC): housing market bubbles can trigger and fuel economic booms, which subsequently end up in deep busts. Monetary policy can fuel such housing booms by making credit very cheap, thus encouraging excessive leverage among households. Real estate booms can also, at a more structural level, entail that an excessive fraction of economic activity goes into construction (as was the case in several countries prior to the GFC). Once the housing bubble bursts, a deep financial crisis can be the result, which requires the central bank to take emergency measures to prevent a collapse of the financial system, but also to dampen the resulting recession and the accompanying excessive fall of consumer price inflation, way below the central bank’s target, potentially even into negative territory. Some economists thus argue that central banks should “lean against the wind” in the face of rising real estate prices. Even if the central bank might not target asset prices, leaning against the wind might be justified since it also helps to cushion excessive swings in consumer price inflation which may be triggered by real estate booms and busts. Others argue that such “preemptive” monetary policy tightening entails high macroeconomic costs in terms of foregone employment and output. Monetary policy is, according to this view, too crude a tool to take real estate prices into account and should exclusively focus on consumer price inflation.

Macroprudential policies as a new tool to address housing cycles

This is why, notably after the GFC, a consensus has emerged that an additional set of instruments, “macroprudential rules”, should be applied to cool down overheating asset price developments, e.g. by raising loan-to-value ratios or loan service-to-income ratios applied by banks when they grant housing credits (see e.g. ESRB, 2021, ECB, 2021 and OECD, 2021). These new policies have been implemented around the world and experience is accumulating in their application. Note, however, that in practice the stylized notion of two totally separate tools for two clearly distinct economic goals – monetary policy to stabilize consumer price inflation, and macroprudential policies to prevent asset booms and busts – does not fully do justice to a far more complex reality.

Including owner-occupied housing in consumer price inflation to better reflect households’ comprehensive cost of living developments in central banks’ reaction functions

One way how home prices feed into the central bank’s reaction function is by including the cost of accommodation in the consumer price index. This is already the case for rents. By contrast, at least in most European countries, it is not yet the case for owner-occupied homes. This implies that the cost of housing for owner-occupiers (including e.g. young families buying a home) is neglected in the measurement of consumer prices and thus in the central bank’s reaction function; it also implies that house price bubbles risk to escape the central bank’s formal reaction function. Including owner-occupied housing is thus useful for improving the metrics used to inform monetary policy.

Side effects and proportionality of monetary expansion gain weight as economies bounce back from COVID

Another way how asset price developments, including house prices, can enter the central bank’s reaction function is through explicit consideration of side effects and the proportionality of monetary policy measures. Not even the best medicine comes without side effects. To take the current situation of the COVID crisis, clearly central banks had to step in to contain damage to our economies. Central banks are aware of the “side effects” of these policies, such as rising stock prices but also, in many countries, further rising house prices. To contain the latter, e.g. the ECB explicitly excluded mortgage credit from eligibility for meeting banks’ lending benchmarks in order to benefit from preferential interest rates on the ECB’s Targeted Long-Term Refinancing Operations (TLTROs).

As mentioned, asset price increases in general, and housing price rises more specifically, may also entail large wealth gains for those already owning these assets, implying large distributive effects. Stronglyexpansionary, unconventional monetary policies over long periods thus ultimately raise the question of proportionality. It is not straightforward how to weigh the benefits against the (potential) costs – there is substantial uncertainty and any decisions ultimately rely on careful judgement. What seems clear, though, is that as the duration of expansionary monetary policy measures extends and as signs of “exuberance” in asset markets including residential real estate markets intensify, while the economy seems clearly back on track, the case for taking side effects and proportionality duly into account is becoming more urgent. 

References

ECB (2021). Financial Stability Review, May.

ESRB (2021). Lower for longer – macroprudential policy issues arising from the low interest rate environment June 2021. Report by the Joint Task Force of ESRB Advisory Technical Committee (ATC), ESRB Advisory Scientific Committee (ASC), and ESCB Financial Stability Committee (FSC), June.

Fell, J., and T. Shakir (2021). May 2021 Financial Stability Review. Presentation at SUERF-Baffi Bocconi Webinar, May 19, 2021.

OECD (2021), Brick by Brick: Building Better Housing Policies, OECD Publishing, Paris, https://doi.org/10.1787/b453b043-en.




Housing policy strategies – what is best practice?

by Arent Skjæveland, Deputy Director of the Economic Policy Department of Norway’s Ministry of Finance and Chairman of the Working Party No. 1 of the OECD’s Economic Policy Committee.

The first phase of the horizontal housing project has been completed, resulting in a new OECD Toolkit for housing policy that can guide national reform efforts. The toolkit complements the OECD housing policy strategy. The core importance of the housing market both for welfare and efficiency in our economies makes this toolkit highly relevant and timely.

First, debt-driven housing market bubbles are at the root of many financial crises and may imply harsh and very long-lasting downturns. Let me take my own country as an example. The financial crisis in Norway in the late 1800s, the so-called Christiania crash (that was the name of the capital at that time), left deep scars. Not only among ordinary people who saw their fortunes evaporate, but also in the city’s physical landscape. Large parts of today’s city centre in Oslo were built during the housing market frenzy of the 1890s. When the housing market collapsed in 1899, most building activity came to a standstill that lasted for two decades, leaving the architecture of the 1890s as one of the city’s distinctive characteristics. It took 90-years for house prices, in real terms, to recover most of their losses.

A new financial crisis was then approaching. The Norwegian banking crisis in the late 1980s is one of the worst financial crises in advanced economies in modern times according to Carmen Reinhart and Kenneth Rogoff. Real house prices declined by 40 percent and did not return to pre-crisis levels for more than 12 years. The impact of the crisis was harsh, as the number of unemployed tripled and the three largest banks in the country collapsed.

In recent years, house prices have surged once again, fuelled in part by low interest rates at home and abroad. However, we really have a close eye on this. Much is done

  • at the demand side with macroprudential regulations to contribute to more sustainable household debt
  • at the supply side to reduce building cost.

Certainly, a lesson both from our crises-experiences and similar crises in other countries is that the housing market is at the core of financial stability and far too important to be left at its own. Not only for financial stability, but also for a range of other aspects of the welfare of the population.

To own the house you live in, is of great value to most people. Owning a house often gives a sense of safety and security. In Norway, 80 percent of households own the house they live in. A high level of home ownership is a typical pattern in most OECD countries, with an OECD average of about 68 percent. Housing is typically the largest asset in household balance sheets, as well as one of the largest spending items in household budgets. Housing market developments are therefore of great influence for the distribution of income and wealth. Housing is a fundamental driver of the accumulation and the distribution of wealth and debt within and across generations.

This has a strong link to housing affordability. House prices across the OECD countries have raised to levels that may undermine housing affordability, particularly for low-income households, first-time buyers and in fast-growing urban areas. Access to affordable housing is crucial for achieving a number of key policy objectives, including poverty and homelessness reduction, equality of opportunities and sustainable growth. What policy avenues to follow to achieve housing affordability are challenging. As an example: Tax subsidies to homeownership often favours insiders, as house prices are pushed upwards, making the step into the housing market for first-time buyers even more difficult.

Housing is also important for productivity and the growth potential of our economies. A main channel is via the impact on the mobility of workers. The degree of geographical mobility has strong implications for the functioning of the labour market as it affects the job-matching process and use of human resources. This is of crucial importance when labour market developments between regions show an asymmetric development. In this respect, high transaction taxes on houses or difficult access to reasonably priced housing in other regions can trap workers in unemployment or low-productivity jobs, and workers can even end up falling out of the labour market. Such obstacles to worker mobility may have strong effects on economic efficiency.

Another aspect of housing development is how it may affect environmental outcomes, including thorough interactions with urban land-use patterns, residential energy consumption and transport systems. Here there has been a complete change in many countries over the last decades. One might say that car use strongly influenced urban planning in the former millennium. Currently, public transport, less parking, more cycling, less cars in the city centres and better clustering of living areas are more at the forefront. Net zero emissions are the new keywords in urban planning and transport policy.

Building land is a scarce resource in urban areas, and it is a strong tendency that big cities experience a stronger house price growth than more rural areas. When working on national house policy strategies, we have to address such differences between pressure areas and areas with less pressure. 

Taking all this together – a multi-facetted housing policy strategy is needed. Such a strategy has to cut across many policy areas, including financial regulation, taxation, carbon footprint, urban land use regulation, transport policies, local public finance, social housing, welfare support, housing standards, rental regulation and the enforcement of competition in related activities as construction and real estate. To be successful making such national strategies, we need to learn from the each other. What is best practice? The new OECD Toolkit for housing policy and the OECD Housing Policy Strategy give many of the relevant answers.

Further insights and policy implications can be found in the new OECD report Brick by Brick: Building Better Housing Policies. The accompanying online toolkit features a Dashboard of indicators covering outcomes and policy settings, Country Snapshots of the housing sector, and a Policy Action Tool that allows policymakers to anticipate synergies and trade-offs across various outcome dimensions before implementing housing reforms.




Better Housing For All: How to Square the Circle

by Volker Zieman, OECD Economics Department

Housing is one of the most complex policy challenges of our time. There is, of course, the affordability issue and how to cope with the concentration of demand in supply-constrained areas. Yet, the functioning of housing markets also reflects other burning challenges of our lifetimes, including social cohesion, financial resilience, residential and intergenerational mobility or the ecological transition. Against this background, the OECD has launched a Housing Policy Toolkit to help policymakers address these intertwined challenges. The overarching theme is assessing the performance of housing markets across three main policy objectives: social inclusiveness, economic efficiency and environmental sustainability.

Figure 1. Housing affects society and the economy in multiple ways

Making housing more inclusive

Access to affordable housing – a basic human need and central driver of well-being – has become increasingly challenging for many households in OECD countries. Housing-related spending absorbs on average about one-third of household budgets, a share that has been rising over time. Over the past two decades, prices have risen by 60% more for homes than for goods and services on average across OECD countries. Low interest rates have helped households absorb part, but not all, of these higher prices. Seven of the 23 OECD countries for which the data are available have experienced real house prices in excess of 90%. Moreover, increasingly steep house prices gradients in urban areas make housing close to economic and cultural amenities unaffordable for most families. The resulting spatial segregation by income threatens social cohesion and undermines economic and ecological efficiency.

Making housing more efficient

The affordability challenge very much reflects the housing sector’s failure to raise supply where demand is strong, particularly in jobs-rich urban areas, which drives up house prices and rents. This is due to geographical constraints but also regulatory restrictions in many cities, including land-use and zoning provisions. In some cases, regulations on tenant-landlord relations, introduced to alleviate the near-term burden of housing costs mainly for incumbent tenants, can discourage the supply of rental dwellings or push up rents, thereby undermining affordability over time. Moreover, housing has often been at the core of financial crises, but there is room for policy, especially prudential regulations, to smooth house price fluctuations and make the economy more resilient to housing shocks.

Making housing more sustainable

The transition to a carbon-neutral, clean economy poses a formidable challenge for a sector that accounts for 17% of global CO2 emissions and 37% of global fine particulate matter emissions. Progress in this area calls for lowering the carbon footprint of new constructions and improving the energy efficiency of the existing building stock. Almost two-thirds of countries worldwide still lack mandatory building energy codes. Frontloading efforts is critical as dwellings have a very long lifespan. Besides, energy poverty tends to compound the affordability challenge, as nearly 20% of low-income people in the OECD area experience difficulties heating their homes.

Addressing challenges through concerted policy action

Some policies can deliver progress across multiple objectives. This is the case, for example, of increasing government investment in social housing, alleviating restrictive regulations on land use and shifting housing taxation towards recurrent levies on immovable property. Other reforms may involve trade-offs, calling for compensatory measures to ensure balanced progress. For instance, more flexible regulations on landlord-tenant relations, including rent control, can encourage housing investment, reduce supply-demand mismatches and lower barriers to residential mobility, but they could also penalise vulnerable incumbent tenants. Similar intertemporal trade-offs apply to relief measures taken during the COVID-19 crisis.

Further insights and policy implications can be found in the new OECD report Brick by Brick: Building Better Housing Policies. The accompanying online toolkit features a Dashboard of indicators covering outcomes and policy settings, Country Snapshots of the housing sector, and a Policy Action Tool that allows policymakers to anticipate synergies and trade-offs across various outcome dimensions before implementing housing reforms.




The state of Housing: Trends and Challenges for the Future

by Luiz de Mello, Director, Policy Studies, OECD Economics Department

The OECD has just launched a Housing Policy Toolkit to help policymakers deal with current and emerging challenges in the area of housing, share their experience and identify good practices. The Toolkit puts together evidence and analysis to inform policy choices and, ultimately, deliver better housing outcomes.

The Toolkit recognises that housing policies and regulations need to be forward-looking and anticipate changes in people’s needs, preferences and behaviour, as well as “megatrends” that affect economies and societies. The COVID-19 crisis, along with digitalisation, climate change and population ageing, will most likely have durable, yet uncertain, effects on housing demand and supply, including both the residential and commercial market segments. Buildings, structures and dwellings have a long life span, and as a result today’s policy choices will affect performance for many years to come. To the extent possible, poliymakers also need to foresee and respond to technological changes that affect the construction, use and maintenance of structures.

Starting with the COVID-19 crisis, the changes in preferences and behaviour triggered by the pandemic are likely to influence housing demand over the longer term. For example, if teleworking becomes more prevalent, housing demand may shift away from city centres towards peri-urban and rural areas, and from apartments to single-family dwellings. An associated relief on property prices in city centres would likely be accompanied by pressure elsewhere with an uncertain net effect on affordability, unless supply adjusts in tandem. And it is not only the supply of homes that would need to adjust but also that of urban amenities, transport infrastructure and social services.

Teleworking will also have a bearing on the demand for office space, putting downward pressure on commercial property prices in central business districts. If the fear of infectious diseases lingers, there could also be an increase in demand for larger offices to allow for effective physical distancing. This could somewhat offset the downward trend in demand due to teleworking.

Where these shifting demand patterns lead to a hollowing-out of city centres, there will be increased risk of urban decay and a loss of dynamism in areas where productivity tends to be highest. Alternatively, changing attitudes and work practices may create new opportunities for social and economic transformation in metropolitan areas that could become increasingly polycentric. At the same time, as density gives way to sprawl, the environmental footprint of cities will need to be reassessed, with implications for policy aimed to improve the environmental sustainability of the world’s metropolitan areas.

Digitalisation, beyond its effects through teleworking, also poses challenges. It affects the housing outlook in several ways and has considerable further transformative potential. For example, the expansion of digital platforms for short-time accommodation has put pressure on rental markets in many cities worldwide, a trend that may well continue when the tourism and hospitality industries recover from the COVID-19 crisis. It is also possible that the decline in short-term rentals during the pandemic turns out to be more durable than anticipated, freeing up rental housing for residents and hence making housing more affordable.

Moreover, digitalisation is re-shaping the “high street” with attendant changes in commercial property demand as in-person shopping is replaced by on-line retail trade. This phenomenon adds to the downward pressure on demand for office space in city centres associated with more widespread teleworking. Where regulations allow it, flexibility to convert commercial property and office space for residential use would facilitate the reallocation of housing capital to evolving demand for different uses, potentially making housing more affordable. However, there is a risk that disaffection for city centres gives rise to housing segregation as the better-off move away. These trends would pose challenges for urban planning and the design of land-use and zoning regulations.

At the same time, digitalisation offers several options for technological change and innovation in construction and “smart” management of buildings, not least through artificial intelligence and the internet of things. Innovations in urban planning and management are already taking place and can improve the management of traffic, urban amenities and infrastructure, as well as the energy efficiency of buildings and cities at large. These developments can make cities more attractive. Digitalisation could indeed improve the matching of supply and demand for dwellings. The rise of digital showings of properties during the COVID-19 crisis is likely to remain at least in part permanent, allowing for a better filtering of costly physical visits and ultimately more and better matches.

Yet another aspect of digitalisation is the scope for expanding fintech to offer a broader range of finance for investment in real estate. To the extent that these activities are regulated appropriately and financial stability is safeguarded, the entry of new participants in real estate markets can enhance competition, reduce borrowing costs and facilitate access to finance for those who currently struggle to do so. Investment in the energy efficiency of buildings can lower housing costs further as it reduces household spending on energy and improves their creditworthiness. Ultimately, more flexible housing finance could facilitate the adjustment of supply to changes in the demand for both residential and commercial property after the crisis, facilitating housing capital reallocation.

A final consideration is related to population ageing and climate change, which will influencehousing policies in the years to come.

Changes in demographics have highly asymmetric effects on housing markets. Falling demand in remote areas puts downward pressure on prices, at the same time as changing needs and preferences elsewhere require the retrofitting of buildings, a reconfiguration of living spaces and investment in adapted urban infrastructure. The implications of population ageing for policy go beyond housing and include urban planning and regional development considerations. 

Climate change raises the risk of natural disasters and capital depletion in coastal areas exposed to rising sea levels, just to cite a few. It influences construction patterns and the use of materials in buildings, calling for innovation to improve energy efficiency in response to changing weather conditions. It also has a bearing on the design, maintenance and upgrade of urban infrastructure. The attendant economic (private and public) costs need to be taken into account and pose challenges for urban planning and regional development, as well as disaster risk management and insurance.

Success on all these fronts will require appropriate policies, building on solid evidence, good practices and mutual learning. The OECD Housing Policy Toolkit can help.

References:

For further reading, see Brick by Brick: Building Better Housing Policies




Should I stay or should I go? Housing and residential mobility across OECD countries

by Orsetta Causa and Jacob Pichelmann

Promoting residential mobility is not an end in itself, still it is an important policy challenge, especially in countries with large spatial disparities and labour market skills mismatches. Policies that remove disincentives to move are likely to bring efficiency and equity gains by lifting productivity growth and social mobility. Residential mobility is one way to encourage labour market adjustment and reallocation to encourage a smooth recovery from the Covid-19 crisis.

Recent work by Causa and Pichelmann (2020) presents new evidence on housing and residential mobility across OECD countries and on the role of individual factors and policies, in particular housing policies, in enhancing or hampering mobility. The evidence strongly supports the view that housing conditions and structural policies influence people’s decisions and possibilities to move.

To set the scene, there is a strong negative association between countries’ homeownership rates and their mobility rates, confirming previous evidence in this area. Mobility is particularly low in Eastern European countries exhibiting very high homeownership rates for historical reasons and also in large Southern European countries (e.g. Italy and Spain). The negative cross-country association between homeownership and residential mobility arises because across all countries, homeowners, whether outright owners or owners paying back mortgage debt, are much less mobile than renters, controlling for an extensive array of individual and household drivers of mobility.

By influencing mobility, the housing market can give rise to externalities, in particular on the labour market. The implication is that housing conditions and policies that magnify the cost of moving are likely to affect economic efficiency and equality of opportunities. Analyzing the policy drivers of residential mobility yields the following findings:

  • A more responsive housing supply is associated with higher residential mobility. Reducing policy-driven barriers in this area, for example reforming poorly designed land-use and planning policies, may facilitate moving by reducing house price differences across locations.
  • Stricter rental regulations are associated with lower residential mobility, particularly for low-educated and low-income households. Rental regulations need to strike a balance between tenants’ and landlords’ interests, create security of tenure and encourage the supply of rental housing for all socio-economic groups.
  • Social cash and in-kind spending on housing are positively correlated with residential mobility. While housing allowances are in principle more favorable to mobility than direct provision of social housing, the latter can be designed to avoid lock-in effects, for example, by waiving residency or queuing requirements in the case of unemployed workers taking up a job in the region.
  • Higher transaction costs in buying and selling a home, in particular from transfer taxes and notary fees, are associated with lower residential mobility, especially among younger households, which are more likely to be first time-buyers.
  • Tax reforms shifting housing taxation from non-recurrent (e.g. transfer) to recurrent taxes would help reducing barriers to mobility, on top of making the tax system more efficient with positive aggregate growth effects.
  • Beyond housing policies, more generous cash income support to low-wage jobseekers and minimum income schemes embedded in social transfers are positively associated with residential mobility. By contrast, excessive job protection on regular contracts is negatively associated with mobility, particularly for youth, low-income and low-educated individuals. This suggests that shifting protection from jobs to individuals coupled with job counselling and training may help removing barriers to mobility.

This study highlights the importance of removing policy-driven obstacles to mobility and offers insights enabling policy makers to balance between encouraging people to move from less to more productive areas and avoiding the emergence of left-behind areas. It poses the question whether tax-favoring of owner-occupied housing is in need of rethinking and makes a case for reducing tax-driven barriers to mobility, such as housing transfer takes, while taking resilience implications into consideration. The findings underline the importance of housing-related policies that support affordability, especially for households at the bottom of the distribution: well-designed housing allowances and social housing, balanced rental market regulations, and a responsive housing supply.

Further reading:

Causa, O. and J. Pichelmann (2020), “Should I stay or should I go? Housing and residential mobility across OECD countries”, OECD Economics Department Working Papers, No. 1626, OECD Publishing, Paris, https://doi.org/10.1787/d91329c2-en




Impact of COVID-19 on Housing: how can policies support a healthy recovery?

By Boris Cournède, Federica De Pace and Volker Ziemann, OECD Economics Department

The COVID-19 pandemic has hit the housing sector particularly hard, but governments have swiftly responded with an array of measures to alleviate the negative consequences of the crisis for tenants, borrowers, builders and lenders. Most, if not all, of these measures are meant to be temporary. If they are maintained for too long, they can stand in the way of a robust recovery and/or impair the responsiveness of the housing market to the evolving needs of society. This blog reviews new OECD evidence of the impact of the COVID-19 crisis on construction and discusses policy trade-offs between the objectives of preserving short-term housing affordability for tenants and mortgage-holders, facilitating mobility and ensuring sufficient, environmentally sustainable supply. The full study is available on the OECD “Tackling the coronavirus” online hub: Housing Amid Covid-19: Policy Responses and Challenges.

The COVID-19 crisis has severely hit the housing sector

The spread of the COVID-19 pandemic destabilised the real estate sector throughout the world. Containment measures involved total or partial shutdowns of construction sites in many countries, and the associated income and revenue losses for households and enterprises adversely affected the outlook for the different segments of the property market, depending on the timing and stringency of confinement and the severity of the public health crisis, which differed across countries.

New OECD analysis draws on Google Trend data to mimic the construction sector’s Purchasing Managers’ Index (PMI) for a wide range of countries for which the PMI is not available. The results confirm the slump in the construction sector’s confidence during confinement but also suggest that the conditions have improved markedly across most countries, without, however, reaching February levels (Figure 1). It is noteworthy to remember that, following the original PMI’s definition, a positive reading of the index only suggests that activity is expanding not that output has come back to pre-crisis levels. It will certainly take some time in many countries before residential construction reaches pre-COVID-19 volumes. Besides, there remains considerable uncertainty about the extent to which the economic slump is going to weigh on future demand and the prospects of the sector at large.

Governments have introduced rescue and support measures

With the onset of the COVID-19 crisis, governments responded with a host of specific measures to protect mortgage-holders and tenants in addition to the support from social safety nets. A number of countries also intervened to help the post-crisis recovery of the construction sector (Figure 2). In most countries, emergency support involved a suspension of eviction procedures, temporary forbearance of rent and mortgage payments, and in some cases moratoria on utility payments. Most governments, at both national and local levels, also took specific steps to shelter the homeless during the lockdown.

Crisis-response measures are needed but involve policy trade-offs

While meeting an important objective of supporting tenants and borrowers during the crisis, several measures pose difficult policy trade-offs over the medium term (Figure 3). For example, if they are maintained for an extended period, measures that aim to preserve near-term affordability may create disincentives for the maintenance and expansion of the housing stock, as well as thwarting residential and labour mobility in the longer term. They may also undermine economic and financial resilience.

Measures that preserve housing affordability for mortgage-holders and tenants in the short term can have adverse longer-term side-effects. They can undermine resilience or compromise the long-term functioning of the housing market. If maintained for too long, tax advantages for mortgage-holders feed into house prices, creating instability and eroding affordability. A tightening of rent controls makes it more difficult for people who don’t already rent a dwelling to rent one and over time exacerbates housing shortages. Public authorities would do well to adopt a calendar for the phasing-out of COVID19-related tax advantages for mortgage holders and rental-market restrictions. Doing so would avoid letting emergency measures become new bottlenecks to the long-term efficiency of housing markets that would ultimately undermine affordability, inclusiveness and sustainability objectives.

By contrast, expanding capital spending on social housing, coupled with provisions ensuring that eligibility is portable, can generate benefits for both near-term affordability and long-term supply with limited adverse consequences for mobility. Furthermore, this kind of direct intervention in the market provides an opportunity for governments to promote and accelerate the spread of construction techniques that are aligned with environmental-transition sustainability objectives.

Furthermore, easing land-use restrictions is a way of facilitating the recovery of homebuilding and better aligning the supply of housing with evolving demand and the needs of society. Reforms to ease land-use restrictions deliver greater benefits if conducted within an integrated spatial planning framework across government sectors and hierarchies. The goal should be to encourage housing construction and improve affordability while enhancing neighbourhood liveability and avoid excessive spatial divergence in the access to public services, transportation systems and social infrastructure. Fostering residential construction could also accelerate the transition to a low-carbon economy provided that the new buildings are required to comply with sufficiently ambitious environmental standards.

Facilitating construction and redevelopment would also allow accommodating the possible long-term change in housing demand that the COVID-19 crisis may prompt. There is a possibility that the COVID-19 crisis may lead to lasting mutually linked changes in housing demand and work organisation. Preferences could shift in favour of living in lower-density areas and working remotely. This could slow or even reverse urban-rural divergences. First, such a shift would relieve demand pressures in overly-dense areas. Second, flexible workplace amid more teleworking would free office space for conversion to residential units in city centres, provided land use can accommodate the change. The combination of such demand and supply effects could reduce regional home price differentials and contribute to reducing residential segregation.

References:

Bétin, M. and V. Ziemann (2019), “How responsive are housing markets in the OECD? Regional level estimates”, OECD Economics Department Working Papers, No. 1590, OECD Publishing, Paris, https://dx.doi.org/10.1787/1342258c-en. [6]

Causa, O. and J. Pichelmann (2020), “Should I stay or should I go? Housing and residential mobility across OECD countries”, OECD Economics Department Working Papers forthcoming. [5]

Causa, O., N. Woloszko and D. Leite (2019), “Housing, wealth accumulation and wealth distribution: Evidence and stylized facts”, OECD Economics Department Working Papers, No. 1588, OECD Publishing, Paris, https://dx.doi.org/10.1787/86954c10-en. [2]

Cavalleri, M., B. Cournède and E. Özsöğüt (2019), “How responsive are housing markets in the OECD? National level estimates”, OECD Economics Department Working Papers, No. 1589, OECD Publishing, Paris, https://dx.doi.org/10.1787/4777e29a-en. [4]

Cournède, B., S. Sakha and V. Ziemann (2019), “Empirical links between housing markets and economic resilience”, OECD Economics Department Working Papers, No. 1562, OECD Publishing, Paris, https://dx.doi.org/10.1787/aa029083-en. [3]

OECD (2020), Policy responses to the Covid-19 crisis, http://oe.cd/covid19tablesocial. [1]




Statistical Insight: Location, location, location – House price developments across and within OECD countries

by Pierre-Alain Pionnier, OECD Statistics and Data Directorate

Housing is key to wellbeing. Real estate typically forms the most important asset of households and their most important source of debt. Not surprisingly given their correlation with the economic cycle, house prices are also one of the most widely tracked economic indicators. However, despite their importance, including for macroeconomic policymaking, as the 2008-09 financial crisis well illustrated, there are few internationally comparable statistics to show how house price developments vary across regions and cities within countries. This is despite the common understanding that changes in house prices within countries are rarely uniform (e.g. there may be ‘ripple’ effects). Policies that target the ‘national’ therefore may miss differences across regions and in turn add to the geography of discontent. This Statistical Insights describes a new OECD database on national and regional house price indices that aims to fill this gap.

There are significant differences in house price developments across countries…

The bursting of the housing bubble in the United States played a key role in the 2008-09 financial crisis, which rapidly turned into a global recession. Even though real house prices (i.e. adjusted for general inflation) declined in several OECD countries, the extent of declines and subsequent ‘recoveries’ differed significantly across countries (Figure 1a). For example, in 2018, house prices in real terms in Colombia were double the levels in 2005, whereas they remained 40% lower in Greece.

This shows that beyond global factors such as those that drove the financial crisis, country-specific factors also matter. These include population growth, land-use restrictions, real household incomes, real interest rates, mortgage market regulations and supervision, lending patterns (at fixed or variable rates), tax relief on mortgage debt financing, and transaction costs such as stamp duty.

… but also within countries.

A focus on national price developments does not however tell the full story. Significant differences in the evolution of house prices also exist within countries. For example, while real house prices in Spain declined by 40% on average between 2007 and 2013, and then began to recover, in 2019 they remained nearly 50% lower in Navarra but only 15-20% lower in the Balearic Islands, Ceuta and Melila (Figure 1b). In Mexico, most regions show limited variation around the national average, with real increases ranging from around 10% in the Hidalgo region to around 30% in Yucatan between 2005 and 2018 but this is not universally true. The Federal District for example, which includes Mexico City, saw real prices rise by more than 70% over the same period (Figure 1c). In the UK, Northern Ireland and the region of London show much wider fluctuations in house prices than the rest of the country (Figure 1d).

Figure 1: Real house price developments across OECD countries,
and within Spain, Mexico and the United Kingdom

Note: The evolution of real house prices is the difference between the evolution of (nominal) house prices and the evolution of consumer prices (i.e. general inflation).
Sources: OECD database on national and regional house price indices, OECD national accounts database.

In recent decades, some large cities have seen significant growth in house prices.

In recent decades, an ‘urban resurgence’ (Glaeser 2020), driven in part by better-paid jobs within cities, the willingness to live closer to them, and better access to cultural amenities has led to gentrification and above (national) average house price growth in some of the largest cities. For example, house price inflation in Inner London was around double that of the rest of the United Kingdom between 1995 and 2019. Similarly, house price inflation in Paris between 2005 and 2019 was around 50% higher than in the rest of France (Figure 2).

Nevertheless, this does not exclude large differences across large cities within the same country. For example, the OECD database shows that house prices in the metropolitan area of Los Angeles have grown twice as fast as in the metropolitan area of Chicago since the mid-1990s. Moreover, Glaeser et al. (2012) also emphasise differences in house price developments within cities, with typically faster price growth in recent years in neighbourhoods closer to city centres.

Notwithstanding the fact that economic policy may be suboptimal if one ignores house price heterogeneity within a country, the impact of this heterogeneity on housing affordability may act as a barrier to mobility to households seeking employment in parts of the country where labour demand is higher but cannot always afford to do so due to differences in house prices.

In the years to come, it will be important to assess whether a more systematic use of digital tools to telework following the COVID-19 pandemic will reverse the gentrification of cities and ‘urban resurgence’ phenomena. Granular data on house price developments within countries and cities will become even more relevant for doing so.

The measure explained

House price indices are index numbers measuring the rate at which the prices of residential properties (flats, detached houses, terraced houses, etc.) purchased by households change over time. These indices adjust for quality differences between dwellings sold in the current period, relative to the reference period. In other words, they aim at measuring pure price changes. They cover both new and existing dwellings whenever possible, independently of their final use (to live in or for rent). These prices include the price of the land on which residential buildings are located and they are compiled by official statistical agencies following international statistical standards.

Calculating real house price growth, i.e. controlling for national general inflation, allows for a more meaningful comparison of house price dynamics across countries. The deflator used is the deflator of consumption expenditure of households, compiled according to the 2008 System of National Accounts (SNA). It is important to note that the deflator is typically only available at national level, meaning that the same deflator is used for all regions within a given country, and therefore, that heterogeneity in consumer price dynamics across the different regions of a country is neglected.

Where to find the underlying data
OECD National and regional house price indices: headline indicators
OECD National and regional house price indices: Complete database
OECD National accounts database

Further reading
• Glaeser E.L., J.D. Gottlieb and K. Tobio (2012): Housing Booms and City Centers. American Economic Review: Papers and Proceedings, 102(3), pp. 1-10
• Glaeser E.L. (2020): Urbanization and its discontents. NBER Working Paper26839
• ILO, IMF, OECD, UNECE, Eurostat, World Bank (eds.), (2013): Handbook on Residential Property Price Indices
• OECD (2020): OECD Territorial Grids




Housing, wealth accumulation and wealth distribution: risks and opportunities

By Orsetta Causa and Nicolas Woloszko

Is housing a vehicle for wealth accumulation for middle class and lower-income groups? Can housing mitigate wealth inequality? Assessing housing from a wealth distribution perspective is all the more important in a context where inequality has been rising, where the capital share of income has increased relative to labour and where wealth inequality is much higher than income inequality, potentially undermining equality of opportunity and social mobility.

In a recent paper (Housing-wealth-accumulation-and-wealth-distribution-evidence-and-stylized-facts_) we shed light on these questions and deliver new evidence and stylised facts on housing, wealth accumulation and wealth distribution, relying on an in-depth analysis of micro-data on household wealth across OECD countries. We assess the role of housing in shaping the wealth distribution by focusing on assets and liabilities, with particular attention to the bottom of the income and wealth distributions.

We document a strong negative cross-country association between homeownership and wealth inequality. Housing tends to equalise the distribution of wealth from a static cross-country perspective because it is the most important and most widely owned asset in household balance sheets: housing is the chief asset of the middle class (Figure 1). Households in the top of the wealth distribution hold more diversified portfolios, including business and financial assets, while less wealthy households own virtually nothing.

Housing is the primary asset in households’ portfolios, but is also their primary liability. This is especially true for young homeowners and homeowners at the bottom of the distribution. Yet one lesson from the financial crisis is that debt creates opportunities but also risks, particularly for vulnerable households. We deliver new cross-country evidence on the socio-economic distribution of mortgage debt and financial vulnerability. This is relevant for monitoring the sensitivity of households to income losses and declines in house prices. Our analysis shows that the strong expansion in mortgages over the last decades, and in particular prior to the financial crisis, is very likely to have contributed to high and sometimes excessive housing-related indebtedness. Debt-to-income ratios are well above 100% in most OECD countries and exceed 200% in some of them (Figure 2). Households at the bottom of the income distribution are particularly vulnerable, with values exceeding the conventional at-risk threshold value of 300%.

We compute micro-based tenure wealth gaps, that is, the net wealth ratio between homeowners and renters, in order to shed light on the role of housing as a vehicle for wealth accumulation. We find that homeowners tend to be wealthier than renters, even when housing wealth is excluded. However, we also find that this gap is significantly reduced in a quantile regression framework that controls for household drivers of wealth accumulation. These findings do not strongly support the existence of a causal effect of homeownership on wealth accumulation. Tenure wealth gaps are likely to reflect self-selection mechanisms. Households with a higher ex-ante propensity to save and an appetite for wealth accumulation select themselves into homeownership rather than becoming homeowner making them more prone to accumulate wealth.

Housing is negatively associated with wealth inequality, but also with residential mobility, as documented in our paper: this reflects cross-country differences in the housing tenure mix to the extent that homeowners tend to be less mobile than private renters. This finding is not new. Although causality cannot be easily established, a common conjecture is that mobility is lower among owner-occupiers than renters because owners face higher transaction costs of relocating and therefore spend a longer time in their residence in order to spread the costs over a longer time period.

Overall, even if wealth inequality is lower where homeownership is more widespread, encouraging homeownership is probably not the appropriate policy response to make wealth more equally distributed, as this may imply trade-offs with other policy objectives such as economic resilience and labour mobility.

Read the full paper: Causa, O., N. Woloszko and D. Leite (2019), “Housing, wealth accumulation and wealth distribution: Evidence and stylized facts”, OECD Economics Department Working Papers, No. 1588, OECD Publishing, Paris, https://doi.org/10.1787/86954c10-en.