HOUSING POLICIES and the rationale of Supply and Demand

1 HOUSING POLICIES and the rationale of Supply and Demand Claudio Acioly Jr. Institute for Housing and Urban Development Studies - IHS The Netherlands

Part 1: Basic Concepts Understanding how the housing sector works Principles of Supply and Demand Shifts in Supply and Demand Shortage and Surplus 2 Part 2: Housing Markets Supply and Demand Government Intervention Applying the Axiom Supply-Demand in Designing Policies Part 3: Principles of Policy Intervention Enabling Housing Policies Do s and Don ts in Policy Intervention

3 PART 1 Basic Concepts

4 1. Understanding How the Housing Sector Works

PARADIGM SHIFT IN HOUSING POLICIES DURING THE 1990 S 5 based on neo-classical economics DEMAND SUPPLY Neo-Liberal Orthodoxy Withdrawal of the state Free & unconstrained Market Efficiency Productivity Growth Privatisation Market provision Housing and Macro economic performance

What are the major Inputs to Housing? 6 Labour Land Building Material Infrastructure Capital Regulatory Regulatory and and Institutional In stitutional Frameworks Frameworks

THE SEVEN COMPONENTS OF A HOUSING DELIVERY SYSTEM AUTHORISA- TIONS LAND INFRA- STRUCTURE MUNICIPAL SERVICES PUBLIC FACILITIES COMMUNITY SERVICES LABOUR FORCE BUILDING MATERIALS FINANCING Land subdivision permit Residency/ Occupancy permit Building permit Planning / Zoning permission Concession etc PUBLIC PRIVATE Freehold Leasehold Waqf Cooperative Customary etc Roads Water supply Sewerage Electricity Drainage Gas Garbage collection etc... Schools Clinics Mosque / church Police Post office Playgrounds Open spaces Civic center Cultural center etc Technical (architect) Labour (builders) Wood Concrete Cement Sand Steel Corrugated iron Adobe etc DEBT EQUITY Land acquisition loan Construction loan Enterprise loan Mortgage loan Public subsidy etc... Source: IHS, Lindfield, Dauskardt, Steekelenburg

INSTITUTIONAL FRAMEWORK HOUSEHOLDS Public Co. National budget Provident funds Insurance GOVERNMENT Culture Individual savings International Capital Mkts Urban Plans Norms & Standards Land Use Regulations General regs (Health.) Land Law Common Law Islamic Law (Shari a) Socialist Law etc... Norms Patterns Detailed Engineering Studies Standards Patterns Technology Management Import license Commercial network Transport capacity Institutional & public savings External savings Ministry of planning, env. Local govt. Boads, comms etc... Chief Land agency Land dept Land manager Private owner Municipality etc... Govt. Municipality Land developer Franchise Industry etc... Municipality Technical Ministry Neighborhood Social developer etc... Mason Builder Engineer Architect Planner Dealer Wholesale importer Cooperative etc... Mutual fund Coop saving Private lender Housing bank Comm. bank etc... AUTHORI- SATIONS LAND INFRA- STRUCTURE & MUNICIPAL SERVICES PUBLIC FACILITIES & COMM. SERVICES LABOUR BUILDING FINANCING FORCE MATERIALS Source: IHS, Lindfield, Dauskardt, Steekelenburg

Multiple Actors and Specific Motivations Housing Consumers Housing Consumers Housing Producers Housing Producers 9 Housing Financiers Housing Financiers Local Governments Local Governments Central Governments Central Governments Based on World Bank, 1993.

10 SOME POINTS OF DEPARTURE 1 ECONOMICS is the study of how society allocates its scarce resources to produce and distribute goods that are valued (Steinemann et al, 2005) Decisions that affect the public often depend on microeconomics (Steinemann et al, 2005)

11 SOME POINTS OF DEPARTURE 2 Economic principles for private sector and public sector decisions are similar, yet the goals and analyses differ (Steinemann et al, 2005) PRIVATE SECTOR Maximises profit = total benefits total costs Benefits: revenues from Sales Costs: expenditures on materials for production PUBLIC SECTOR Goals + profit maximisation Equity, employment, environmental protection, quality of life Provide services even if doesn t generate monetary profit Costs to society: environmental pollution

EXAMPLE 12 Land Development for New Houses FROM THE PRIVATE SECTOR: Imposing a Tax Costs: individual citizens and firms Costs for society: loss of trees (not included in developers accounting Benefits: decrease of unemployment (not included either) Government: transfer of resources within the public Costs for some and benefits for others

SOME POINTS OF DEPARTURE (Steinemann et al, 2005) 13 1. Public sector decision makers often need to consider multiple societal goals, not only profit maximisation 2. also the impacts of their decisions on both private and public sector, not only their own agency 3. need to asses various types of benefits and costs, not only those placed in monetary terms.

Land Laws Regulations,Norms Administrative practices Investments Taxes Targeted Subsidies Programmes Projects Finance & Credits Property rights Buildings material inputs Buildings Technology Construction Industry HOUSING POLICY Well Functioning Housing Sector Addressing market failures and dealing with the CAUSES rather than with the EFFECTS 14 Productive & Efficient Responsive to the Needs and Resources Environmentally Sound Free tenure choices Residential mobility Raised welfare Development processes POLICY OUTCOMES Affordable prices in the formal and informal housing markets. General improvement in the conditions of neighborhoods and cities physical Urban Productivity Labor Productivity

15 Affected by regulatory, institutional and policy environment SUPPLY HOUSING AFFORDABILITY "Prices" DEMAND OUTCOMES

The Context of Housing Policy 16 Affected by: Demographic conditions Rate of urbanisation New household formation Property rights & legal basis Housing Finance Fiscal Policies Subsidies Macro-economic conditions SUPPLY HOUSING AFFORDABILITY "Prices" DEMAND affected by regulatory, institutional & policy frameworks OUTCOMES Affected by availability of: land Infrastructure Building Materials - BM Organisation Building Industry Skilled & Productive Labour Self-reliance BM production

17 2. Principles of Supply & Demand

18 Supply and Demand Consumer Preferences Business Cost Consumer demand for commodities Supply of commodities Changes in Supply and Demand Changes in Output and Prices

Common Sense 1 19 The HIGHER the price of a good or commodity the LESS consumers are willing to buy provided that other things remain constant. Other determinants of of demand: average levels levels of of income size size of of population --size size of of the the market market price price & availability of of related related products --tend tend to to perform the the same same function tastes tastes and and preferences --cultural + historical influences special influences

Common Sense 2 20 Relation between PRICE of a good and QUANTITY demanded Relationship PRICE - QUANTITY PURCHASED P Q Inversely Related

The DEMAND Curve Price 21 P2 For a given price P2 there is a quantity Q2 that is demanded. P1 D Q2 Q1 Quantity

What does influence Demand? 22 1. Income Price 2. Size of population - size of the market 3. Price & availability of related products performing same function 4. Tastes and preferences - cultural + historical influences 5. Special influences: (hot climate-airco) P2 P1 D Q2 Q1 Quantity

P Change in Demand Influences change rather than the good s price. P Demand curve shifts For example, what happens if population increases? 23 P2 P2 P1 Q2 Q1 D Q P1 Q2 Q1 D D Q

P What happens if there is a rise in average income? P POSSIBLE CAUSES: Rising average income, Increased population, Lower prices. 24 P2 P2 P1 D P1 D D Q2 Q1 Q Q2 Q1 Q

What happens if there is a 25 decrease in average income? P P2 P1 D D D This is called the shift in DEMAND! Q2 Q1 Q

26 WARNING! Change in in DEMAND Change in in QUANTITY demanded Shift in in the the DEMAND curve! Moving to to a different point in in the the DEMAND curve after a PRICE change!(movement change!(movement along) along)

27 WARNING! P P2 P2 P4 P 1 D D P3 P 1 D Q2 Q1 Q Q2Q4Q3 Q1 Q

28 WARNING! 1. Substitution effect P 2. Income effect 3. Individual needs and tastes P2 market demand P 1 Q2 Q1 D Q

29 The SUPPLY Curve Relates the QUANTITY supplied of a good/commodity to its market PRICE - other things remain constant. Cost of production Prices of related goods Government policies!

The SUPPLY Curve Relationship between its market PRICE and the QUANTITY/amount of that commodity that producers are willing to produce and sell - other things remain constant P S 30 P2 P1 Q1 Q2 Q

What are the elements underlying the SUPPLY CURVE? 31 P S Costs Costs of of Production: When When production costs costs are are relatively low low to to the the market market price. price. When When price price of of inputs inputs and and technological advances are are low low (lowering amounts of of inputs). inputs). P2 P1 Q1 Q2 Q

What are the factors affecting SUPPLY? 32 1. Technology 2. Input prices P S S 3. Prices related goods 4. Government Policies 5. Special influences P2 P1 SHIFTS IN SUPPLY! Any influences rather than commodity/good s own price change! Q1 Q2 Q

33 PART 2 Housing Markets

The 34 Market Equilibrium The amount that BUYERS want to buy is just equal to the amount that SELLERS want to sell. P P2 P P2 S P 1 D P 1 Q2 Q1 Q Q1 Q2 Q

The Market 35 Equilibrium EQUILIBRIUM: There is no reason for price to rise or fall as long as other things remain unchanged. P At a price at which QUANTITY demanded = QUANTITY supplied S P2 P 1 E D Also known as market clearing price Q2 Q1 Q

The 36 Market Equilibrium When the elements underlying Demand and Supply change, this leads to shifts in demand or supply and changes in the market EQUILIBRIUM of Prices and Quantity. P P2 S S P 1 Q2 E D Q1 D Q

37 3. Supply & Demand: what happens if?

Enabling Housing Markets to Work: How to translate that into a strategy? 38 Those who advocate this, divide de Housing Problem in 2 Parts. A Poverty B Markets do not work well Can only be solved with subsidies.

Sellers: people who sell If you offer me zero I sell you nothing. If price is low, those who sell tend Not to sell much: SUPPLY $ PRICE Markets Buy & Selling People S $ PRICE Buyers: D 39 people who consume If price is low, the buyers will tend to buy a lot. If price is high, buyers tend Not to buy a lot: DEMAND Q HOUSING Q HOUSING

40 ow ECONOMISTS look at housing? INPUTS HOUSING LAND HOUSES FINANCE PUBLIC SERVICES The markets for Housing

How ECONOMISTS look at housing? HOUSING = use of a house + associated services for a specific period of time PRICE High S 41 Medium E Low D Based on M. Rodell Quantity

P PRICE P1 D S 42 P2 PE E P2 P1 Q1 Q2 QE Q2 Q2 Q Quantity

43 PRICE Drichrich Dpooroor X1: how much a poor family can decide to buy housing if prices (rent) are low. D S Market PRICE x1 x1 market equilibrium E Total Agregate Social Demand x2 Quality / Quantity Q Market x2

P PRICE 44 Rich people For these prices, only rich people get housing. S Supply of Housing For this high price, a poor will be able to buy NO housing. Poor people This is the result of poor & rich together DEMAND for rich & poor together. For a zero price, a poor will buy that much of Housing Quantity of Housing in the Market. Q Quantity

45 4. SHIFTS in HOUSING SUPPLY & HOUSING DEMAND

Situation: you want to buy housing and then PRICE of housing has doubled!!! WHAT DOES IT MEAN? 46 The demand for housing has increased? OR The production cost has risen? Could be both! Or either one! WE NEED MORE INFORMATION! ECONOMISTS: when PRICES or QUANTITIES change in market, does the situation reflect change on the SUPPLY side or the DEMAND side?

Situation 1: if Housing SUPPLY decreases Housing PRICES increases accompanied by decrease in QUANTITY of Housing = Supply curve shifts to the left! Housing Prices S S 47 P2 E P1 E D Q2 Q1 Quantity of Housing

Situation 2: a shift in the DEMAND curve leads to excess DEMAND for Housing and PRICES will be bid up as equilibrium PRICE and QUANTITY move upward. Demand curve shifts to the right! Housing Prices S 48 P2 P1 E E D D Quantity of Housing Q1 Q2

Situation 1: What happens if only prices change? 49 Housing Prices Then there is a change in quantity demanded. P2 E P1 E D Quantity of Housing Q2 Q1

Situation 2 What happens if only prices change? 50 Housing Prices Then there is a change in quantity supplied. S P2 P1 E E Quantity of Housing Q1 Q2

Practical Example 1 51 Crisis in the cement industry causes LESS cement production and high prices of cement per sack. HOUSING developers produce less housing for the old prices. So, quantity of HOUSING that is demanded exceeds quantity of housing that is supplied

CONCLUSION 1: low supply of cement affects housing supply (shift to the left) raises housing prices, lowering quantity of Housing that is demanded. Housing Prices S S 52 P2 P1 E E D Q2 Quantity of Housing Q1

Practical Example 2 53 New building technology has been developed that allows lower housing production costs. HOUSING developers produce more housing for the old prices. So, quantity of HOUSING that is supplied exceeds quantity of housing that is demanded for the old prices

CONCLUSION 2: technological advances stimulates housing supply (shift to the right) lowering housing prices, increasing quantity of Housing that is demanded. Housing Prices S S 54 P1 P2 E E D Q1 Q2Quantity of Housing

55 5. SHORTAGE AND SURPLUS

SHORTAGE: quantity demanded greater than quantity supplied D S 56 PE E The demand exceeds the supply P1 SHORTAGE Example: price Ceiling QS QE QD Quantity

SURPLUS: quantity supplied greater than quantity demanded. D S P2 SURPLUS 57 PE E Example: price Floor QD QE QS Quantity

SHORTAGE: quantity demanded greater than quantity supplied D S PE E RENT CONTROL Unregulated market rent = $ 1,000.00 / month. Rent control law sets rent = $ 500.00/month 58 Example: price Ceiling P1 QS SHORTAGE QE QD Quantity Figure shows that at rent controlled prices, not all consumers can find rent-controlled apartments. 1. Shortages develop because quantity demanded (QD) is greater than quantity supplied (QS). 2. People obtain units by luck, persistence or prior arrangements. 3. Black markets can also emerge: units that typically go for $1,000.00/month are now only $500.00/month. Black market might offer that unit for $800.00, both seller and byer would be money ahead. 4. Owners may have little incentive to maintain units, quality of controlled units may deteriorate.

59 The Economic Impact of Subsidy can be analysed in terms of shift in Supply and Demand Subsidy can be thought as negative tax.

Before Subsidy 60 D S1 6.00 E1 40 Quantity

After S2S Subsidy to PRODUCERS When subsidy is given to producers, they are willing to accept lower market prices PRICE D S1 61 Before, producers received $6.00/unit. Now, $4.20 per unit sold: $2.00 from Gov. for a total of $6.20/unit. 6.20 S2 6.00 4.20 E1 Subsidy=$2.00 Market Price 4.00 E2 Consumers pay $4.20 when they used to pay $6.00. Incidence to producers is $0.20/unit. Incidence to consumers is $1.80/unit. 40 55 Quantity

After S2S Subsidy to Consumers When subsidy is given to consumers, they pay a higher market price. 62 PRICE D1 D2 E3 S1 Consumers pay $6.20 but actually pay only $4.20 out of the pocket because Gov provides $2.00/unit to consumers. 6.20 Market Price 6.00 E1 Subsidy = $2.00 4.20 Producers receive total $6.20 from consumers. Incidence to producers is $0.20/unit. Incidence to consumers is $1.80/unit. 40 Quantity 55

BASIC CONCLUSIONS 63 Tax or Subsidy given to producer or consumer, the incidence would be the same amount, according to economic analysis, YET societal implications can differ! Providing subsidy or imposing a tax will affect the market price of a good which affects all consumers and all producers. But not all will gain or loose equally. LOW INCOME HOUSING: subsidy to producers or consumers? GIVING TO PRODUCERS: Subsidy could encourage new additions to housing stock, if sufficient to bridge gap between what target population could afford and the cost of construction. Further, need to oversight that subsidy serves the populations they are designed to assist. GIVING TO CONSUMERS: Subsidy would allow to purchase housing that ordinarily may not have been affordable. Not necessarily provide new additions to housing stock. May not sufficiently increase the price to provide incentives to producers to increase the quantity or quality of housing stock.

How Infrastructure provision affects Housing Supply? 64 1. If short in supply, serviced residential plots get a scarcity premium 2. Shortfall in infrastructure fees may elevate land prices 3. Infrastructure iresponsive to demand, supply of service land become inelastic and shifts in demand results increases in land and housing prices 4. The amount, type and price of infrastructure will influence the demand for complementary housing inputs, thus affecting the type of housing supplied in different locations, residential densities, and land and housing prices.

65 APPLYING THE AXIOM SUPPLY-DEMAND IN THE DESIGN OF HOUSING POLICIES

Public Actions affect 66 DEMAND: Housing Supply & Demand SUPPLY: 1. 1. Tenure security 2. 2. Property rights 3. 3. Housing subsidies (rent (rent control) 4. 4. Taxes 5. 5. Availability of of Mortgage Finance 1. 1. Regulatory framework 2. 2. Land use use 3. 3. Building regulations 4. 4. Cost Cost of of inputs: land, labour, building materials 5. 5. Efficiency of of housing development process 6. 6. Provision of of infrastructure BUT.. When supply is competitive,, the long-run price of housing will be determined primarily by production costs rather than demand; increases in demand will be translated into increases in housing output and not into price increases. World World Bank, 1993.

67 Affected by regulatory, institutional and policy environment SUPPLY HOUSING AFFORDABILITY "Prices" DEMAND OUTCOMES

68 PART 3 Principles of Policy Intervention

Enabling Instruments 69 DEMAND SUPPLY INSTITUTIONA L 1.Property Rights 2. 2. Finance 3.Subsidies 4.Infrastructure 5. 5. Development Regulation 6. 6. Building Industry 7.Institutional Framework

70 Enabling Strategy Housing demand side a) Developing property rights b) Developing mortgage finance c) Rationalizing subsidies Housing supply side d) Providing infrastructure for residential land development e) Regulating land and housing development f) Organizing the building industry

71 Enabling Strategy Both at the demand and the supply side g) Developing the institutional framework for managing the housing sector

72 DEMAND 1. PROPERTY RIGHTS Land registration Regularization Tenure & land rights 2. FINANCE Mortgage, lending and credits Regulations to collateral Titling, investment, savings 3. SUBSIDIES Rationalization, dismantling barriers Targeted subsidies Transparency

73 SUPPLY 4. INFRASTRUCTURE Opens new opportunities for housing Servicing land according to technical economical & environmental sustainability Balance between costs & benefits of Land 5. DEVELOPMENT REGULATION Housing developments Facilitating the poor Environmentally sound alternatives Competition 6. BUILDING INDUSTRY Organization, non-monopolies, Coordination

74 INSTITUTIONAL 7. INSTITUTIONAL FRAMEWORK Mechanisms of monitoring housing sector Participation of private sector, NGO, etc. Research.

75 DO s and DON T s in HOUSING POLICY INTERVEVENTIONS

76 DEVELOPING PROPERTY RIGHTS Regularise land tenure Expand land registration Enhance efficiency of social housing stock (partnerships or privatisation) Establish property taxation Undertake mass evictions Implement costly titling systems Nationalise land Discourage land transactions

77 DEVELOPING MORTGAGE FINANCE Allow private sector to lend Lend at market rates Enforce foreclosures Ensure prudent regulations Introduce better loan instruments Subsidise interest rates Discriminate against rental housing investment Neglect resource mobilisation Allow high default rates

78 RATIONALISING SUBSIDIES Make subsidies transparent Target subsidies to the poor Subsidise people, not houses Subject subsidies to review Allow hidden subsidies Use rent control as a subsidy Build subsidised public housing Let subsidies distort prices

79 PROVIDING INFRASTRUCTURE Coordinate land development Emphasise cost recovery Base provision on demand Improve infrastructure in informal settlements Allow bias against infrastructure investment Use environmental concerns as reasons for slum clearance

REGULATING LAND & HOUSING DEVELOPMENT 80 Reduce regulatory complexity Assess costs of regulation Remove price distortions Remove artificial shortages Impose unaffordable standards Maintain unenforceable rules Design projects without link to regulatory / institutional reform

81 ORGANISING THE BUILDING INDUSTRY Eliminate monopoly practices Encourage small-firm entry Reduce import controls Support building research Allow long permit delays Institute regulations inhibiting competition Continue public monopolies

DEVELOPING POLICY & INSTITUTIONAL FRAMEWORK 82 Balance public / private sector roles Create forum to manage housing sector as a whole Develop enabling strategies Monitor sector performance Engage in direct public housing delivery Neglect local government role Retain financially unsustainable institutions

83 END