2. Promoting Housing Affordability

1. Housing has become less affordable for many households in the OECD area, pushing the issue to the forefront of the policy debate. Less than half of the OECD population, on average, reports that they are satisfied with the availability of good, affordable housing in their city or the area where they live (OECD AHD indicator HC1.4). Over the past two decades, as housing prices have risen in most OECD countries, households are, on average, spending a large and increasing share of their budget on housing. Challenges differ across and within countries: affordability gaps are particularly pronounced in job-rich urban areas and among low-income households, renters in the private market, and youth. While low-income and other vulnerable households have long faced this challenge, an increasing share of the middle class also face affordability issues.

Housing is, on average, the biggest expenditure of households in the OECD, and its share in household spending has risen over time. Housing represents the single-largest budget item in household spending across all income groups, ahead of food and clothing, transport, leisure, health and education (Figure 2.1, Panel A). Moreover, households are spending more on housing than they used to: on average across 20 OECD countries the share of housing spending in household budgets rose by nearly 5 percentage points between 2005 and 2015 (Figure 2.1, Panel B). The share of household spending also increased for other key consumption items, such as transport, health care and education, over this period but to a much lesser extent. Going back even further in time (1995-2015), albeit for a smaller subset of countries, consumption estimates suggest that the share of household spending on housing has increased even further (OECD, 2020[1]).

One driver of increased household spending on housing is a rise in housing costs over the past two decades, especially for renters. On average, real house prices increased in 31 OECD countries between 2005 and 2019, with Colombia, Canada and Israel recording the largest increases (over 80%) (Figure 2.2, Panel A). Just seven OECD countries recorded a drop in real house prices over this period, most significantly in Greece, Italy and Spain. Meanwhile, rents increased in all but two OECD countries between 2005 and 2020, more than doubling in Turkey, Lithuania, Iceland Estonia and South Africa (Figure 2.2, Panel B). High and rising rents make it harder for tenants to save up for a down payment to purchase a home and make them more vulnerable in the event of economic shocks, such as that caused by the COVID-19 pandemic.

Across the OECD, many low-income households face both housing affordability and quality gaps. A large share of households in the bottom quintile of the income distribution are “overburdened” by housing costs, in that they spend more than 40% of their disposable income on rent or mortgage payments, maintenance and utilities (Figure 2.3, Panel A). The challenge is greater for renters: on average, around a third of low-income tenants in the private rental market are overburdened by housing costs, compared to around one-quarter of low-income homeowners with a mortgage (OECD, 2020[4]). Further, since 1995, households in the bottom of the income distribution have experienced the most significant rise in spending on housing on average across countries, relative to middle- and high-income households (OECD, 2020[1]). Rising rents and a high housing cost overburden can cause households to fall behind on their monthly rental payment and face eviction: while cross-country data are scarce (Chapter 9), at least 3 million formal eviction procedures were initiated in the rental market across 17 OECD countries for which data are available (OECD (2020[4]), indicator H3.3).

At the same time, low-income households are also more likely to live in poor quality dwellings. They may not be able to afford regular maintenance or improvements to their dwellings, while at the same time facing barriers to move to better-quality housing. In nearly all countries, households in the bottom quintile have a higher rate of overcrowding than those in the middle- or top-income quintile (Figure 2.3, Panel B). The COVID-19 pandemic renewed concerns around overcrowding among policymakers, because overcrowded conditions make it more difficult for people to effectively self-isolate, putting people at greater risk of contracting and spreading infectious diseases (OECD, 2020[5]).

Rising housing costs is one of many factors that can lead to homelessness, which prior to the COVID-19 crisis affected at least 1.9 million people in the OECD. Pre-COVID data suggest that homelessness increased in a third of OECD countries over the past decade (Box 2.1). Homelessness estimates for 2020 are available for a few countries, but it is difficult to compare these data with previous years and across countries (see indicator HC3.1 in the OECD Affordable Housing Database). Nevertheless, official statistics likely underestimate the extent of homelessness. This is because people experience homelessness in different ways – from “sleeping rough,” staying in emergency shelters or doubling up with friends and family members – circumstances that may be more or less visible to public authorities and thus accounted for in official statistics. Moreover, some countries report an increasingly heterogeneous homeless population: while single men continue to be overrepresented among the homeless, the share of homeless youth, families with children, and seniors is growing in some countries for which data are available (OECD, 2020[6]). The COVID-19 pandemic prompted many governments to introduce emergency support measures to provide shelter and other services to homeless populations (OECD, 2020[5]; OECD, 2020[7]). At the same time, there are concerns about a potential increase in homelessness among households who continue to face economic difficulties once temporary eviction and foreclosure bans are lifted.

Along with differences in affordability across countries, there are also considerable differences across population groups and regions within countries. For instance, on average, most young people aged 20-29, in the face of reduced opportunities in the housing market still live with their parents – with the share reaching over 70% of youth in Italy, the Slovak Republic, Greece, Slovenia, Spain and Portugal (OECD, 2020[1]). Indeed, it takes more than ten years of annual income to buy a house today, compared with less than 7 years a generation ago (OECD, 2019[2]). It is thus no surprise that young people are the most likely age group to report affordable housing as among their top three short-term concerns (OECD, 2019[8]). Empirical evidence further suggests that women are disproportionally more affected than men by high housing costs. In the US, for instance, a vast majority of the households benefitting from rental assistance or housing voucher programmes are headed by women (Quets, Duggan and Cooper, 2016[9]).

Meanwhile, housing affordability tends to be more challenging in job-rich urban areas relative to rural areas, with some countries recording large differences in house prices across cities and regions. For example, house prices have risen twice as much in inner London compared to the rest of the United Kingdom since 1995; similarly, over the same period, house prices in the Los Angeles metropolitan area increased twice as fast as those in the Chicago metropolitan area (OECD, 2020[10]). Moreover, across OECD countries, urban residents are, on average, about 10 percentage points less satisfied with the availability of quality affordable housing relative to rural residents (OECD AHD, Indicator HC1.4). National policies to make housing more affordable should thus take such demographic and regional differences into account.

Demand for affordable housing fails to meet supply in many cases, which results from a range of factors that can vary across countries. First, on average across the OECD public investment in housing has been declining over the past two decades, while overall (public and private) investment has been uneven. Second, building housing is increasingly expensive; while there are differences across countries, some factors include land scarcity (especially in dynamic urban areas), overly restrictive land regulations and planning processes that make housing development more costly, as well as increasing construction costs, not least those related to energy efficiency and other environmental sustainability regulations. Third, demographic changes imply both growing and evolving demand for housing.

Over the past two decades, while combined public and private housing investment has been uneven across the OECD, public investment (public capital expenditure) in housing construction has dropped by more than one-half on average. Government spending on capital transfers and gross capital formation for housing development declined from around 0.17% of GDP in 2001 on average across the OECD to about 0.07% of GDP in 2018. In particular, direct public investment in dwellings has plummeted since the Global Financial Crisis, amounting to less than 0.01% of GDP in 2018. The volume of capital transfers (i.e. public transfers to organisations outside government), which makes up the bulk of public investment on housing, has fallen to a lesser extent. Nevertheless, at less than 0.1% of GDP on average since the Global Financial Crisis, overall public investment in dwellings is not high. By comparison, demand-side housing assistance, measured in terms of public expenditure on housing allowances, has risen slightly over the same period, from 0.26% of GDP in 2001 to 0.31% GDP in 2017 (Figure 2.4). Meanwhile, the share of social housing has declined in most OECD countries since 2010, further reducing the affordable housing supply for low-income households (OECD, 2020[11]).

Building new housing is a lengthy and costly process. An inelastic housing supply, resulting from a scarcity of developable land in urban areas or regulatory policies that make it harder and more costly to build, can make housing less affordable (Bétin and Ziemann, 2019[12]; Cavalleri, Cournède and Özsöğüt, 2019[13]). In particular, more stringent and decentralised land-use regulations can significantly reduce housing supply and drive up housing prices when demand increases (Bétin and Ziemann, 2019[12]; Cavalleri, Cournède and Özsöğüt, 2019[13]). Also, rising construction costs have also contributed to declining housing affordability in many countries, in part due to increasingly stringent energy efficiency and environmental sustainability regulations. In the OECD-EU area, construction costs for new residential buildings increased by over 70% between 2000 and 2019, of which labour costs alone increased by more than 110% (Eurostat, 2020[14]). Since the late 2000s, construction costs have continued to increase, but at a slower rate. In a country-wide effort to drive down construction costs, Germany, for instance, introduced a Construction Cost Reduction Commission, which resulted in over 70 recommendations for all levels of governments and the construction industry (OECD, 2020[15]).

Households are changing, which in turn affects the demand for housing. People across the OECD are living longer, and as a result, the share of single elderly households is rising. Also, marriage rates have been falling, whilst divorce rates have increased. These trends have many implications for housing demand. An ageing population and the trend towards smaller and more numerous households put further strain on housing markets where supply does not respond flexibly to evolving demand patterns. Single-person or single-parent households may find it increasingly difficult to find affordable homes in this context. An ageing population also calls for housing that is more accessible and in proximity to a range of essential services.

Urbanisation, which is projected to continue in the coming decades, changes the intensity and geography of housing demand, putting additional pressures on urban housing markets, where land and housing are already in scarce supply. As discussed in Chapter 1, housing markets respond differently to changing demand, depending to a large extent on the elasticity of housing supply. A more elastic housing supply enables a faster supply response to changes in demand; a higher supply elasticity is thus an indicator of greater economic efficiency and prevents undue increases in housing prices.

At the same time, even before the COVID-19 crisis, many households were facing housing insecurity. This has particularly been the case for households at the lower end of the income distribution. Since 1985, income has grown faster for high-income households than other social groups (OECD, 2019[16]). As a result, as house prices increase, lower-income families spend an increasing share of their budget on housing and struggle to save to buy a home or to cushion against an economic shock. Such households thus tend to be more vulnerable in a crisis. For example, in England (the United Kingdom), before the COVID-19 pandemic, a third of low-income tenants living in social housing were overburdened by housing costs, leading to 64 664 rent arrear claims taken to court by social landlords in 2019 alone, coupled with 50 845 eviction orders (OECD, 2020[11]). The pandemic has already shown signs in some countries of deepening housing instability among vulnerable households, particularly low-income renters (Box 2.2).

Governments could pursue several policy strategies to increase the affordable housing supply, though approaches will need to be tailored to the different challenges and policy settings across and within countries. First, governments could invest more in affordable and social housing. Second, more could be done to improve the targeting of public support for housing. Third, in many countries, there is scope to take measures that make private rentals more affordable.

In the wake of the COVID-19 crisis, investment in affordable and social housing can be a key part of the solution as countries chart a path towards economic recovery (Box 2.3). Australia, Canada and France, among others, have announced major investments in affordable housing since the onset of the pandemic, including AUS 6 billion (about USD 4.6 billion) for the Australian state of Victoria’s “Big Housing Build”; CAD 1 billion (about USD 0.8 billion) for Canada’s “Rapid Housing Initiative”; and just under EUR 3 billion (about USD 3.4 billion) towards housing investments in France’s France Relance economic recovery plan (OECD, 2021). Meanwhile, the Dutch building sector – comprisng the 25 largest trade associations in the housing sector – signed an agreement in February 2021 to build 1 million homes by 2030. Such investments in social and affordable housing can also generate other benefits: helping to support jobs and SMEs in the building sector; underpinning residential mobility (Causa and Pichelmann, 2020[20]); and supporting efforts to prevent and reduce homelessness, particularly through ‘Housing First’ and integrated service delivery approaches (OECD, 2020[6]). At the same time, large-scale investment in renovations to social housing, which is a central element of the European Green Deal, can stimulate economic recovery, support environmental sustainability objectives and boost well-being among residents across the OECD and EU (OECD, 2020[11]). To deliver such investments, countries could consider developing revolving funds as part of a long-term funding strategy for housing, following the examples of Austria and Denmark, which operate through a mix of state-guaranteed and market loans (Box 2.4).

2. Investments in social and affordable housing should be part of broader efforts to build inclusive, socially mixed neighbourhoods, avoiding social and economic segregation. This means, on the one hand, bringing social and affordable housing into neighbourhoods that traditionally have not included such developments. It also means coordinated investments in existing neighbourhoods to improve infrastructure and opportunities related to edcuation, public transport, parks, culture and leisure (OECD, 2020[21]). Chile, France, Mexico and the United States have initiated largescale urban regeneration programmes, such as Chile’s Neighbourhood Improvement initiative (Recuperación de Barrios) and France’s New National Urban Renewal Programme (Nouveau Programme National de Renouvellement Urbain). Lessons from OECD countries suggest that resident consultation should be an integral feature of the regeneration process to ensure that resident views and needs are better taken into account.

Reducing administrative barriers to affordable housing construction can also help to expand supply. OECD estimates that land-use reforms could facilitate the post-COVID recovery of homebuilding, better align housing supply with changing demand, and make housing markets more affordable and efficient (Cournède, De Pace and Ziemann, 2020[22]). Strategies would vary across countries, depending on specific needs and institutional settings, as would the intensity of the effects of different reform scenarios depending on planning regimes in place, but could include facilitating metropolitan or regional land-use planning, streamlining the development permitting process, making it easier to redevelop brownfields, and reforming zoning regulations. In the United States, for instance, the city of Minneapolis (Minnesota) reformed local zoning regulations in 2019, essentially abolishing single-family zoning to allow for higher-density residential development to increase housing affordability.

Governments have at their disposal a mix of demand-side supports (e.g. housing allowances, subsidies for potential homebuyers) to decrease households’ housing costs, as well as supply-side interventions (e.g. subsidies and incentives to housing developers) to stimulate affordable housing construction. The majority of housing policies in OECD countries – and particularly housing taxation (OECD, 2021[23]) – tend to favour home ownership (Andrews and Caldera Sánchez, 2011[24]; Salvi del Pero et al., 2016[25]). Meanwhile, support for tenants in the private rental market is on average more piecemeal. There are many arguments in favour of public incentives to facilitate home ownership (e.g. in terms of wealth accumulation, child outcomes, social capital and social mobility (see (Andrews and Caldera Sánchez, 2011[24]). However, such support can also fail to reach households who most need support, such as low income and young households, impede mobility and crowd out other types of housing support (OECD, 2020[1]).

In a context of scarce public resources, policymakers could consider ways to improve the targeting of housing support to households in greatest need. In some countries, this could include potentially phasing out tax advantages that favour homeownership at higher income levels. Eliminating (or capping) mortgage interest rate deductibility or curtailing capital gains relief on owner-occupied housing can help make housing taxation more progressive (Causa, Woloszko and Leite, 2019[26]).Where the social housing stock is limited, it may be relevant to encourage tenants whose circumstances have improved to move to other forms of tenure, thereby making room for more economically vulnerable households. Different strategies exist, including the introduction of more regular means-testing throughout the duration of social housing tenancy, and not just at the time of entry. In addition to the practical and political challenges associated with the implementation of such measures, the negative consequences of reducing social mixing in social housing (including the potential to exacerbate the spatial concentration of vulnerable groups) should be carefully weighed against the expected gains (OECD, 2020[11]).

In many countries, governments could do more to make the private rental market more affordable to alleviate the difficulties of many low-income and vulnerable households to afford high and increasing rents. One strategy is to strike a better balance between landlords and tenants. This means, on the one hand, ensuring a secure investment for landlords and investors and, on the other, good-quality secure housing for tenants. In the case of tight rental markets, rent stabilisation measures could be one way to provide greater security to both landlords and tenants (OECD, 2020[1]). Unlike strict rent freezes, which impose a below-market rate maximum (or ceiling) on the rent, rent stabilisation measures limit the level of rent increases within (and sometimes between) tenancies. It would be important to weigh the expected benefits of such measures – which may be particularly felt by existing tenants in the short- to medium-term – against possible longer-term drawbacks, including a potential decline in the rental supply and difficulties for some future would-be tenants to rent dwellings. Nevertheless, preliminary evidence suggests that temporary protection for tenants introduced during the COVID-19 crisis, such as eviction moratoria, has been effective in reducing the spread of the disease and in keeping vulnerable households in their home (see, for example, (Jowers et al., 2021[19]) in the U.S. context). As conditions allow, such measures should be phased out gradually to limit adverse long-term effects (OECD, 2020[27]). Meanwhile, it will be important to anticipate strategies to accompany households that have accrued large housing arrears during the extended crisis period once temporary support is lifted, in order to avoid a wave of evictions and foreclosures.


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