When Covid struck and millions were suddenly forced to work from home, many speculated that the bright side might be a mass exodus to the suburbs and countryside, helping to tame high home prices in cities. They couldn’t be more wrong.
Driven by ultra-low interest rates, an abundance of savings and a yearning for larger spaces, home prices have rose in most major economies, outpacing income growth. An interest rate hike this year has dampened the rise somewhat, but it is feared that by 2025 some 1.6 billion people will lack adequate housing.
National and local governments in Europe and the United States have introduced rental regulations in major urban centers including Berlin, Paris and Dublin, with varying degrees of success. But the actions are often divisive, Pitting tenants against landlords and investors Even in Sweden Prime Minister dismissed.
Given what’s at stake, economists have scrutinized rent stabilization measures and their impact control. Studies show that these measures prevent landlords and investors from entering the market, reducing the supply of housing and paradoxically increasing prices and rents. So experts tend to recommend supply-side policies, such as building high-rise apartments to increase the availability of affordable housing.
Focus on luxury instead of housing
However, these studies tend to focus on how rent policies distort the market. Moreover, the prevailing solution of oversupply of housing benefits the rich as well as everyone else The poor will benefit most from targeted measures, especially in cities with high levels of inequality.
What if, rather than their impact on the housing market, rental policy measures were evaluated for their impact on a more fundamental measure: welfare? For this reason, my co-authors and I created a model to simulate and evaluate housing affordability policies for any given location, ranging from rent stabilization (RS) – the maximum annual rent rise – to housing vouchers.
Using real-world data from the New York metropolitan area, we have found That policies improve average well-being, as measured in terms of annual consumption of goods and housing, largely by ensuring low-income residents a roof over their heads. The net welfare gains from affordable housing measures are large enough to outweigh the misallocation of labor and housing markets observed in previous research.
Our model is new for calculating income risk and reward. In other words, if people have precarious incomes or are at chronic risk of losing their jobs – which is unfortunately common in large cities – then affordable housing policies that help them keep their homes are valuable. This is special considering that most people are risk averse, i.e. they hate having to change their housing consumption such as moving to a smaller apartment.
The stability of rent and the city
Cities attract people from all walks of life through opportunities for work and education as well as a range of cultural and lifestyle amenities. To understand the effects of affordable housing policies on different urban residents, my co-authors and I built our model to capture key features of the housing market: housing prices, rents, construction, labor supply and production, income, wealth inequality, and household location decisions. With the correct input, the model can be used to study any city.
We calibrated our model to the New York metropolitan area and conducted five experiments. In the first, we increased the number of RS houses, that is, dwellings whose rents in general cannot be more than a few percentage points each year. In real life, RS covers as much a third of the apartments In New York, with another third dealing with market prices and the remaining third being occupied by landlords. Our model shows that if RS housing increases by 50 percent (in square feet), it will increase the access of low-income families to stable housing. In contrast, the average well-being of New Yorkers will increase by 0.91%.
But this policy is not without costs. Condominiums in RS are usually older, smaller, and are often allocated without means testing, which means they sometimes go to people who can actually afford to live in larger apartments other than RS. Rent suppression inevitably weakens incentives to build and maintain housing while driving up rental unit prices in the market. As a result, some highly skilled professionals and workers may have to live in cheaper suburbs and waste time moving to the city centre.
Next, we tested two metrics that might compensate for the misallocation mentioned above. The first is a more targeted approach that tests the income of each RS tenant periodically to ensure that more RS units reach the people who actually need them. However, we found that income testing reduces the incentive to work because earning more may result in a person being excluded from RS housing. Because some long-term RS tenants are replaced by new (needy) tenants, the average support is smaller as new RS tenants get lower rent discounts. Finally, the policy yielded a significant welfare gain of 0.66 percent.
The following policy simulation moves all RS residences from the heart of the city to the suburbs. Unsurprisingly, the result is an improved city center with fewer but higher-income residents, larger apartments and increased home ownership. Viewed from a positive perspective, it means that more highly skilled and highly productive families can live in the heart of New York, contributing more to the city’s output than lower-productivity families.
The flip side is the marginalization of low-income families in the suburbs. Not only does this separate the haves from the have-nots, but a large portion of the population also misses out on the amenities – museums, theaters, and the like – that are only available in the city centre. Overall, average well-being increases by a relatively modest 0.25 percent.
Our fourth policy experiment increases the volume of housing available to everyone — not just low-income residents — by easing land-use restrictions or elevating housing construction in the city centre. As a result, rents are dropping across the board. However, because this measure generates only a modest improvement in the plight of low-income families, the overall well-being of the population rises by only 0.11 percent.
vote with their feet
Interestingly, giving an additional $800 million in housing vouchers, primarily cash transfers, to low-income families does not result in any welfare gains in our model. Any interest earned is offset by the high taxes imposed by the authorities to finance the expenditures. This alienates some of the higher-income population, which entails higher taxes to fund the same expenditures, which in turn drives out more wealthy residents, etc. Meanwhile, the influx led to a decrease in the housing stock, which drove up rents.
Our model can be a useful policy tool Makers investigate the benefits and costs of various rent stabilization measures for their cities. While there is no one-size-fits-all solution, one thing is certain: rent stabilization policies can be a net positive for average well-being in unequal cities like New York and Seoul after accounting for the associated risks and efficiencies. (Although it is probably less so in cities that are more equal with extensive social safety nets.) By assuring financially unstable residents of long-term housing stability, these policies ultimately give more than they take.
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