Affordable Housing Policy Economics 312 Martin Farnham
Introduction Housing affordability is a significant problem in Canada (especially in Victoria) There are tens of thousands of homeless in Canada Many of them live on the West Coast (partly due to milder winters) As wealthy retirees move to Victoria, home values and rents get driven up, exacerbating homelessness problem Has implications for competitiveness of firms located in Victoria (tourism industry, other industries) 2
Report on Homelessness in Canada http://www.homelesshub.ca/ Report on State of Homeless in Canada 2013 30,000 homeless on any given night in Canada 3000 unsheltered; 14,000 in emergency shelters; 7,000 in violence against women shelters; 4,500 temporary institutional shelters. 50,000 near homeless (couch surfers) 200,000 Canadians experience homelessness in a given year 3
Should Government Intervene in Housing Markets? Depends, to some extent on our criteria for judging appropriateness of government intervention If we care about efficiency, it s not immediately clear that government should get involved Arguably, housing prices reflect scarcity and costs of housing production If prices get high, then workers may get driven out of Victoria The resulting outmigration of workers will lower housing prices, and drive up wages, making housing more affordable 4
Should Government Intervene in Housing Markets? However, even based on an efficiency argument, we may find arguments to intervene Homelessness imposes externalities On children of the homeless On neighbors of the homeless On taxpayers to the extent that they pick up the tab for poor health resulting from homelessness Preventing homelessness may therefore be efficiency improving Basic housing may be a good that can be provided to the poor without prompting non-poor people to pretend to be poor Rich don t want to live in public housing 5
Should Government Intervene in Housing Markets? If equity is a concern, then intervention is easier to justify Some view housing as a basic right or as a merit good (a good elevated above usual commodity status) Healthcare spending in Canada is justified by some on efficiency grounds, but also (by many) on grounds that healthcare is a basic right This reasoning lies outside the basic microeconomic model 6
Policies to Address Housing Affordability Demand-side policies (make housing affordable by lowering price or increasing purchasing power of poor) Housing vouchers or subsidies Rent control Supply-side policies Public Housing Community development programs (including housing rehabilitation) 7
Vouchers or Subsidies? Economists usually argue that cash transfers do more (per dollar spent) to improve the welfare of the poor than subsidies (assume no externality here the story changes if there s a positive externality) Why? Poor can spend money as they choose, rather than being coerced into spending it certain ways by distortions of the price mechanism Vouchers are equivalent to cash transfers for many people 8
How do (non-transferrable )Vouchers Differ from Cash Transfers? In some cases, the voucher gives a utility gain that is less than with cash In other cases, it s just as good as cash Voucher is never better than cash in terms of the utility boost it provides its recipient with. Here, the utility from the cash transfer is higher than from the voucher Consumption Cash Transfers vs. Vouchers Voucher BC Cash BC U v U 0 U ct Housing 9
The Effect of a Housing Voucher Voucher shifts out household budget constraint If housing is a normal good, voucher will increase housing consumption Notice that other consumption rises as well In this case, the voucher is as good as cash Note that if a voucher can be sold for face value, then it is de facto as good as cash. Housing Voucher Consumption Housing 10
Vouchers or Subsidies? But perhaps there are economic arguments for forcing people to spend money on housing Maybe cash (or vouchers) aren t the best approach Neighborhood effects--if you get the poor to invest in a new paint job for their house (because ownership makes them want to protect their investment), maybe other neighbors benefit (externality) Their children may benefit (externality) If you induce someone to move off the street with a subsidy, you reduce the external costs of homelessness. 11
The Effect of a Housing Subsidy A housing subsidy (e.g. govt. pays 25% of your rent) changes rel. prices Notice 2 things Under subsidy (consumer chooses S), consumption of housing rises more (due to added substitution effect of price change) The consumer gets the same utility gain as under voucher (chooses V), but at higher cost to government (vertical distance between bc s is greater) Housing Subsidy Consumption V S Housing 12
Cash vs. Vouchers vs. Subsidies? When there is no market failure (externality, etc.) economists always prefer cash Highest utility gain per dollar spent Voucher is sometimes as good as cash, and it doesn t distort relative prices, so that s the next best option Subsidies distort prices, and cause deadweight loss, in absence of market failures (show this) But subsidy is best, if we think there is a positive externality associated with consumption of the good! Subsidy can correct market failure. 13
Rent Control Rent control involves preventing landlords from raising rents beyond some level cap (or growth cap say the rate of inflation) Intended to keep poor from getting priced out of the market Creates problems in both short run and long run (SR) Reduces incentive to rent out apartments. (LR) Reduces incentive to build new affordable housing; reduces maintenance incentives and leads to more rapid deterioration of housing stock Theory predicts excess demand with rent control 14
Short-run Effects of Rent Control Rent control imposes a price-ceiling on the rental market Rent Ceiling Rent Short run effects are shown here S At sub-market price, quantity demanded rises, and quantity supplied falls. R eq People have to queue to get apartments R c Excess Demand U eq U supplied U demanded D Units 15
Short-run Effects of Rent Control Given excess demand, who gets the apartments? People who have waited a long time People with connections People who landlords view favourably (they can be picky, after all) People who pay bribes (key fees, etc.) Landlords like turnover, so will do things to drive out current (rent-controlled) tenants In extreme cases, people have been threatened Landlords will be slow to do repairs, etc. 16
Long-run Effects of Rent Control If rent-control is specific to a certain class of buildings, incentive to build/maintain such buildings declines Landlords may attempt to convert existing rentcontrolled units to condos, so they can sell them May prefer to build higher-end units that won t be subject to rent control In long run, supply of affordable housing may fall even further. 17
Note Theoretical Case where Rent Control is OK If there s a monopolist landlord in a town, then they have incentive to restrict supply in order to increase rents A price ceiling below the equilibrium rent in that market will induce the landlord to increase supply of units, while simultaneously lowering price. Because now the landlord no longer faces a downward sloping demand curve he faces the price ceiling. 18
Other Policies That Lower Housing Supply Cities that want affordable housing should avoid excessive: Growth limits Building height limits Building code requirements Historic preservation (or other policies that make it difficult to replace low-rise structures with high-rise structures) Renter protections Note that some of these policies are desirable for other reasons! 19
Public Housing as Affordability Policy Arguably a more sensible way to create affordable housing is to encourage its provision Could subsidize low-income housing (but leave housing in private hands) Note that a subsidy can be optimal if there is a positive externality associated with consuming housing. Government could directly provide low-income housing Allows government to ration housing according to income Introduces significant bureaucracy 20
Brief History of Public Housing in North America US began building public housing in 1930s Canada passed National Housing Act in 1949, but built public housing at slow rate until 1963. Mostly viewed as political cover from criticism that federal government was ignoring housing problems Canada began major public housing construction in mid-1960s. Most of current public housing stock was built between mid- 60s and mid-70s Coordination between federal government and municipalities 21
Brief History of Public Housing in North America 1973: Major reforms to National Housing Act Assisted home ownership program Neighborhood improvement program Housing rehabilitation program One feature of 1973 reforms was to relax the income requirements to qualify for social housing Intended to prevent concentration of poverty in public housing Allow some non-poor to live in public housing 1984: Scaleback under Mulroney 22
Brief History of Public Housing in North America Under Mulroney, funding of public housing programs was cut Initial shift to housing voucher programs, though these programs were cut back for budgetary reasons Annual new construction of social housing went from 25,000 units a year in 1983 budget to zero in 1993 budget 23
Brief History of Public Housing in North America Federal Liberals did little to step up affordable housing programs Very small increases in spending between 2000 and 2016. Provinces have refused to match federal funding In 2017 the Federal govt announced $20b spending on encouraging affordable housing over 10 years. Meanwhile, welfare generosity has declined substantially in real terms Welfare payments in BC have fallen by $1000- $4000 annually in real terms since 1994 24
Brief History of Public Housing in North America By some measures Canada has the most free-market approach to housing affordability of any Western economy (including US) US has also shifted away from public housing, but has done more with voucher programs 25
CRD Affordable Housing Policy http://www.crd.bc.ca/regionalplanning/gr owth/rhas/ http://victoriahomelessness.ca http://www.housinghomeless.ca Top link is the CRD s Regional Housing Affordability Strategy. 26
CRD Objectives Increase supply of affordable housing Reduce number of people with core housing need Reduce homelessness 27
CRD Strategies Increase funding for low-end housing Promote pro-affordability policies among CRD jurisdictions Facilitate community partnerships Build neighborhood level support Expand Victoria homeless plan to region as a whole 28
What Level of Government Should Deal with Affordability? Makes sense for higher levels of government to do this, given externalities of poverty. Housing affordability subject to NIMBYism People don t want poor living near them, oppose local public housing etc. If all neighborhoods act this way, none will provide affordable housing Hence, makes sense for higher levels of government to deal with this (Federal and Provincial govts) If CRD tackles homelessness, but Vancouver doesn t, homeless may migrate here This reduces CRD s incentive to deal with problem Again, provincial intervention could help. 29