8. Improving the Governance of Housing

While the organisation of the housing market varies a lot across OECD and partner countries, a broadly shared trend has been to allocate more housing responsibilities to the local levels. Over the last 30 years, many national governments have implemented policy reform to allow local governments to assume a larger role in developing, coordinating and implementing housing policies, including those focused on the social housing stock and affordability challenges. Subnational expenditure on housing and community amenities is the most decentralised area of spending; as noted in Chapter 2, current spending on housing has been rising while investment in social housing has been on a declining trend.

Consequently, in the majority of countries, housing policy responsibilities are shared between national and local governments. National governments are usually responsible for setting overall policy priorities. Local governments typically have more responsibility for the output and budgeting decisions of social housing provision. This chapter discusses the impact of governance arrangements and the need, in some cases, to strengthen coordination mechanisms to ensure intergovernmental policy coherence and consistency.

In the majority of OECD and key partner countries, the governance of the housing sector is shared between national and local governments, with national governments having a more predominant role in setting the overall housing policy priorities, and local governments being generally responsible for the implementation and allocation of housing programmes, such as social housing, land-use regulation and sustainable urban development. The recent trend of decentralisation experienced by most OECD countries in the last 30 years has resulted in subnational governments being responsible for more than 75% of expenditures in housing and community amenities.

National and local governments share social housing responsibilities in most OECD countries. Typically, national governments are more responsible for decisions regarding the budget of social housing, while local governments are in charge of output and monitoring of social housing provision (Figure 8.1). Canada, Estonia, Colombia, Iceland and the Netherlands are among countries with the most decentralised setting (Figure 8.2) (Phillips, 2020[1]). The delivery and management of social housing is often provided through non-profit social housing organisations: the case of Denmark is typical in this respect (Box 8.1).

While local delivery helps to ensure that the supply is adapted to local conditions, there is a role for national coordination to ensure that social housing rights are portable. Without effective portability, there is a risk that being allocated a social housing dwelling becomes an obstacle to mobility, in particular complicating the take-up of better jobs (Chapter 6).

Land-use planning is generally a responsibility of local governments and sometimes of regional governments (OECD, 2017[3]). In contrast, many of the policies that shape patterns of spatial development and the demand for land are decided at the national level. As a consequence, national policies would need to be evaluated concerning their impact on land-use at a local scale. They would also need to become more responsive to the objectives of local and regional governments concerning land-use. Currently, many countries lack the structures to achieve the required co-ordination across levels of government. One of the few organisations in place today that can provide such coordination is the Austrian Conference on Spatial Planning that assembles representatives from all levels of government to discuss spatial policies (Box 8.2). Further, as it is located at the centre of government (within the office of the chancellor), it may also be able to carry out the necessary cross-sectoral policy co-ordination between different branches of the national government.

In countries where there has been a rescaling of the governance of land-use planning, spatial plans that transcend local government borders can establish new ways for localities to work with one another despite sometimes conflicting interests and different capacities. Furthermore, other land-use policy instruments, such as tradable/transferrable development rights, can become much more effective when these transfers occur within the same metropolitan area. Additionally, spatial planning objectives related to housing and the residential environment are expected to be better met when strategic spatial plans at the regional/metropolitan level provide more detail and are enforceable.

However, the majority of the regional plans only provide general guidelines (Figure 8.3). A study carried out by the OECD (2017b[4]) found that dedicated metropolitan and inter-municipal plans are rare in the OECD: only 11 types of such plans were identified at the time of the study. Some of the plans, such as the new Territorial Coherence Plans (TCPs) in France (Box 8.3) and the Metropolitan Area Plan in Korea are prepared for every metropolitan area of the country. However, many others are unique plans that are prepared only for a single metropolitan area. In this category falls the Finger Plan for Copenhagen. It was developed in 1947 and is one of the oldest examples of planning for transport oriented development. Other metropolitan plans for specific metropolitan areas include the Auckland Plan, the Budapest Priority Region Plan and the London Plan. Some of them are prepared and approved by the national government (Budapest, Copenhagen) and others (Auckland, London, Portland) by metropolitan authorities (2017b[4]).

National policies can embed housing strategies within a broader vision for cities and regions by providing guidance about the long-term strategy and goals (Table 8.1). Together with local planning systems, a national strategy could specify the land-uses that should co-exist within cities, the service provision levels linked to new developments, the densification thresholds and the specific conditions for urban boundary expansion, links between public transport and economic and social activities (OECD, 2013[7]). National governments can also provide technical assistance to local governments to identify and catalogue underdeveloped land, and to create reliable and updated information systems.

Housing policymaking is distributed across ministries at the national level, with different aspects of housing policy assigned to different agencies. A few OECD countries have a dedicated housing ministry, but on average three ministries are directly involved in housing policymaking across OECD countries (Figure 8.4). For example, there is no lead housing ministry in Greece, and, in Australia, responsibility is shared across the national government, states and territories, and the local governments. Sweden shares housing responsibilities across several national ministries, including the Ministry of Finance, the Ministry of Justice (most housing and real estate related legislation), and the Ministry of Health and Social Affairs (housing benefits, homelessness, housing for the elderly). Better integration and intergovernmental policy coordination are essential given the wide range of policy instruments used to influence housing outcomes.

Land-use regulation is a key determinant of housing supply. It plays a central role in meeting housing demand by opening up new areas for development, transforming existing spaces and uses, and setting parameters that influence the shape and population density of cities. Land-use regulations are a leading factor behind increases in housing costs. Land-use regulations that restrict the conversion of undeveloped to developed land constrains the responsiveness of supply to changes in demand and therefore affect house prices (Chapter 4). Where land is already developed, regulations may limit the amount of floor space that can be built at a location, thus constraining supply responsiveness. There is a statistically significant negative relationship between the growth of built-up area per capita and the growth of house prices (Figure 8.5).

On the other hand, unregulated land-use fails to incorporate the hidden costs of additional developments, for example for the environment. Developers would ignore the negative externalities of new buildings (i.e. the undesirable effects on nearby residents), and the supply of public goods, such as open spaces or roads, would be insufficient. Furthermore, it would be difficult to provide public services and transport to entirely unplanned neighbourhoods. The environmental impact of unregulated land-use in the form of noise, pollution, and loss of historic character would also be severe, detracting from the liveability of neighbourhoods. A balance between the two extremes is therefore needed for optimal housing outcomes. In places where house prices are above construction costs – as is the case in many cities across the OECD – imposing too-stringent land-use regulation could undermine housing affordability (Cheshire and Sheppard, 2005[9]; Cheshire and Hilber, 2008[10]). By favouring the adjustment of housing supply to demand pressures, flexible land-use regulations can further play an important role in facilitating the efficient reallocation of labour and capital towards more productive areas. Herkenhoff, Ohanian and Prescott (2018[11]), for example, estimate that easing land-use restrictions in California and New York would significantly raise the U.S. aggregate productivity and consumption. Policy reforms that remove obstacles to labour reallocation, such as making land supply more flexible, are particularly important in the wake of the huge shock generated by the COVID-19 crisis.

Zoning should be sufficiently flexible to allow neighbourhoods to change over time according to evolving population patterns and changes in housing demand. Single-use zoning, (see Annex 8.A1 for definitions) except for specific purposes, such as hazardous industrial areas, has the disadvantage of rigidity while also increasing the use of personal vehicles. For example, zoning regulation can prevent the construction of a grocery store in a neighbourhood that is defined as residential even if most residents would benefit from being able to do their daily shopping nearby instead of driving further away.

Many of the shortcomings of zoning regulation can be avoided by using flexible regulations of permitted uses in different zones that focus on preventing the most important negative externalities and do not regulate land-use beyond what is required for this purpose (OECD, 2017b[4]). For example, such zoning rules do not prohibit mixed-use developments as long as they do not create nuisances. They generally would not include frequently used requirements, such as a prohibition of multi-family homes, mandatory design criteria that rule out entire classes of buildings or the prohibition of commercial activities that cause no nuisances. Furthermore, flexible zoning regulations do not set tight density restrictions or include provisions that allow for a gradual increase in the density of a neighbourhood in line with infrastructure capacity and population growth. An example of a flexible approach to zoning that focuses primarily on the prevention of negative externalities is the national zoning of Japan (Box 8.4).

Flexible instruments, such as urban growth boundaries (UGBs), urban service boundaries (USBs) and greenbelts, set temporary limits on urban expansion (see Annex 8.A1 for definitions). They are effective at increasing infill development and limiting sprawl in certain circumstances. Receding these boundaries can better contain development in areas that face population decline, while expanding them can provide more room for housing development in areas with increased housing demand. As in the case of pro-densification policies, however, regulation that alters urban area boundaries need to take into consideration the environment and citizens’ quality of life.

Flexible zoning plans allow developers and investors to put underused areas and office space to new uses, which can increase the density of development and improve environmental sustainability, while reducing burdens on transport infrastructure. Flexible zoning also ensures efficient patterns of spatial development, especially in low-density areas close to city centres and along public transport corridors. Relative to rigid zoning restrictions, transferable development rights can be used to compensate landholders when their development has been restricted by land-use regulations, such as downzoning or establishment of protected areas. However, increased flexibility may come at the price of uncertainty, and -requires local government capacity to monitor land-use and intervene when development falls short of policy objective. It also requires ongoing collaboration with higher levels of government and other actors of the spatial planning system.

Recurrent taxes on immovable property play a role in attaining an efficient allocation of resources, a less unequal distribution of income and stable house prices. As a result of value-based property taxes’ relative inelasticity – taxpayers usually only modestly react to changes in tax policy because their tax base is immovable – they are relatively efficient and among the taxes that are least detrimental to economic growth (Brys et al., 2016[13]; Cournède, Fournier and Hoeller, 2018[14]). In the case of residential property taxation, there is also a close link between taxes paid and public services received, which follows from the benefit principle of taxation in public finance, with expenditure often having a high degree of progressivity. Finally, they can be used as a policy instrument for property price stabilisation since they tend to reduce the volatility of house prices.

These taxes are also seen as an effective tool for containing urban sprawl and promoting compact and environmentally-friendly land-use (Chapter 7). Nevertheless, in the context of land-use regulation, recurrent taxes on immovable property are best employed as a complementary tool. While taxing vacant or under-used land can have strongly positive effects on densification in the use of newly developing areas, with building height restrictions in an already built-up area, for instance, the use of property taxes as a tool to affect land-use can be limited. In this situation, the tax burden may translate into higher property prices rather than affect land-use decisions. Thus, although pure land taxes and split-rate taxation can be used to foster denser development under certain conditions, their success depends on their interaction with other land-use policies and the stage of development of the targeted region (OECD, 2021[15]).

Urban growth boundary (UGB): A dividing line drawn around an urban area to separate it from surrounding rural areas. Areas outside the boundary are zoned for rural uses where urban development is restricted, and inside for urban use where urban development is promoted.

Urban service boundary (USB): A dividing line restricting where public services, such as water supply and sewers, can be administered. These regulations make it illegal for utility companies or local authorities to provide services outside of these boundaries.

Greenbelts: Areas of open space surrounding urban areas that act as physical boundaries against city expansion.

Single-use zoning: Sometimes also called Euclidean zoning, single-use zoning operates according to the principle that only one specified land-use is permitted in a zone. For example, a zone defined as commercial may only contain commercial buildings such as offices.

Social housing: Social (subsidised) housing is defined by the OECD broadly as residential rental accommodation at sub-market prices that is allocated according to specific rules.

Tradable/Transferable Development Rights (TDR): A market-based incentive programme generally structured so that landowners forfeit development rights in areas targeted for preservation and then sell those development rights to buyers who want to increase the density of development in areas designated as growth areas by local authorities.

References

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[1] Phillips (2020), “Decentralisation and inter-governmental relations in the housing sector”.

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