Housing Policies O’Sullivan, Ch. 15 © Allen C. Goodman 2006

Three Types of Policies Housing assistance Community development programs Rent control

Housing Adequacy Overcrowding is a modest problem. Affordability is more prevalent –Benchmark is 30% or more of gross income being spent on housing. –Biggest problem among poor, black, households. There has been considerable progress in improving the housing stock.

Public Housing Not “originally” poverty housing. Federal government is involved in 4 ways –Capital subsidies -- tax exempt bonds –Operating subsidies. With a maximum rent/income ratio of 0.25, federal gov’t covered remainder of costs. –Modernization subsidies –Tenant selection

Public housing and well-being Household starts w/ $500/mo. Income. Buys 600 sq.  $150. Provide 800 sq. ft. for $100. Housing All else B C 800

Will it ALWAYS increase well-being? Household starts w/ $500/mo. Income. Buys 800 sq.  $200. Provide 600 sq. ft. for $100. Increase in well- being? Maybe yes, maybe no. Housing All else

Or? Household starts w/ $500/mo. Income. Buys 800 sq.  $200. Provide 600 sq. ft. for $100. Increase in well- being? Maybe yes, maybe no. Housing All else

Recipient well-being Suppose it costs gov’t $200 to build unit that it is renting to tenant for $100. How much is public housing worth to tenant? Same old question. Would you rather have $100 worth of a particular good or $X that you could spend any way you want? In this format, researchers have found that tenants receive benefits worth about $0.75 per dollar of housing.

Recipient well-being Research has found that it actually costs about 33% more than private housing. So, the $200 unit costs 200*1.33 = $266 Consumer pays $100, so net cost to gov’t is $166. Benefits are $75. Bang/$ is $75/$166 or about $0.45 per dollar.

Demand side policies Rationale. There’s plenty of housing out there. The problem is inadequate income. Two restrictions –Minimum standards for housing unit. –Can’t pay more than “fair mkt rent,” a reasonable rent

Demand side policies Suppose income is $600/mo. FMR = $400/mo. Subsidy = Actual rent * Income So, maximum subsidy is * 600 = = 220. Housing All else Suppose dwelling unit that household wants would cost market rent of $300.

Interesting results Here, we’re giving a $120 subsidy, and all of it is going to non-housing expenditures. If it’s expensive to move, households gen’lly try to get fixed up where they are. This makes them better off, but HUD isn’t happy, because HUD is in the business of providing more housing.

Lots of studies Seemed to be low participation rates. Small changes in housing consumption. Suggest a small income elasticity, at least at those levels. Relatively modest mobility (i.e. changing dwellings).

Community Dev’t/Urban Renewal Stated purposes –Revitalize declining areas of cities –Improve housing of poor households Impacts –Demolished about 600,000 dwellings, mostly of poor people –Built about 250,000 dwellings, mostly for middle income –Considerable commercial development

Best rationale Suppose you have 2 property owners. Face matrix. A Develops B Develops No Yes Yes No A: B: A: B: A: B: A: B: +0.07

Best rationale A’s best strategy? NO. B’s best strategy? NO If gov’t steps in, they can internalize this problem. However, so could a private developer. No Yes Yes No A: B: A: B: A: B: A: B: A Develops B Develops

Rent Control Textbook story. If we set the controlled rent below the eq’m rent, we get excess demand. In short run, supply is quite inelastic. Quantity Price P* Q* P** QDQS Demand Supply

Winners and losers Winners –Nonmovers. Pay lower price for same unit. –Successful searchers, if they can find a unit quickly -- otherwise they lose. Losers –Displaced households, if building is converted. –Landlords.

Supply DOES adjust Rent control discourages routine maintenance. Some housing is converted. Some housing is abandoned. Some negative impacts on incentives to build new units.

In fairness, Some rent controls are less Draconian. –Some rent adjustment is allowed. –New construction is generally exempted. –Some rent control also restricts conversions, thus keeping more of the rental supply intact. –Subsidies for new construction. –Some allow decontrol when units become vacant.