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Tuesday, May 17, 2022

The underlying housing policies

By Vo Dinh Tri, PhD

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A major challenge for many governments worldwide is how to have an effective housing policy benefiting low-income people, especially in cities

Housing prices in major cities always tend to rise, causing house leasing or ownership costs to edge up as a result, and the housing expense to account for a major share in the family’s total expenditure. However, many governments have managed to formulate policies to improve people’s access to housing, thus narrowing the gap of inequality in society.

Natural and market rules

Mechanical population growth is a natural process when people migrate to and live in places convenient for work, travel and living. Jobs, infrastructure and living environment form a closed cycle, with one factor serving as the prerequisite for another to emerge and vice versa. For example, jobs will stimulate population growth, and population growth will attract investment, which in turn creates more jobs. And the cycle will get increasingly enlarged.

But, as land in cities is limited, the supply always falls short of the demand. Even if land is ample, the investment is costly and takes time. Further, administrative procedures are also a hindrance in expediting housing projects.

When demand outpaces supply, prices will rise as a market principle. In cities that are major economic centers, the housing price always tends to rise, fast or slow. However, on a national scale, there are also localities that see the falling housing price index.

The OECD in a housing policy report (1) indicates the housing index in almost all member countries has increased, except in some nations like Greece, Spain, Italy, and Slovenia. Meanwhile, the house leasing index has risen in almost all countries, except Greece and Japan where the leasing prices in 2019 were lower than in 2005.

When housing prices increase, house owners often pass the increase onto tenants, and in some cases the leasing price outruns the housing price. The higher leasing price results in the housing expense accounting for a larger share in many families’ overall regular expenditures.

Even during periods of low interest rates when owning a house is more cost-effective than renting one, it is still very difficult for many young people to access housing due to limited supply. Low interest rates underpin demands and spur the housing price, stripping many people of the benefits of low interest rates.

Housing policies in the making

Many governments are aware that housing for low-income earners is a pivotal policy in the social security strategy to create and maintain a harmonious and stable society. China has launched the “common prosperity” policy via regulating the real estate market for the aforesaid reason.

While it is acceptable that urban housing prices always tend to rise, there must also be policies to help low-income people to access housing as a basic need. And one of the pivotal policies is to have social houses for lease. According to statistics from the OECD (2), the total number of social houses for lease in member and non-member countries of the EU is 28 million units, accounting for 6% of the total number of houses. Countries with a high proportion of social houses include the UK and France, with the respective proportions of 17% and 14%.

Apart from subsidies for social houses, many countries have also offered subsidies for house leasing in the private sector. Countries with strong subsidized housing include France, Finland, Iceland, Belgium, Germany, and Switzerland. Many governments allocate substantial budgets for this purpose. In 2020 for example, the UK spent 1.38% of the national budget for the purpose, Germany 0.73%, and France 0.69%.

Another solution in place is to cap the house leasing price increase or set the lid on the leasing price of each square meter in major cities, like the way Paris authorities have applied. Regulations to control house leasing prices in many countries apply to both existing or new tenants. For existing tenants, for example, there are regulations on the rate of increase, and the interval between increases.

However, many countries have faced difficulties due to the budget constraints, so there must be a choice between housing support and maintaining expenditures for other important sectors like education, healthcare and infrastructure development.

Budget constraints also hinder any rise in the supply of social houses for lease and maintenance of the current ones. Countries like France and the UK have often seen harsh disputes over the use of budget for developing social houses.

Vietnam’s issues

Housing for low-income people is a big headache in Vietnam as well due to real estate speculation, rapid housing price rise and the pressure of mechanical population growth in major cities.

People’s access to housing is based on many factors like the housing price compared to income, the housing expense as a proportion of the total income, and the quality of houses. If people’s income rises quickly and the housing expense as a proportion of their total regular expenditure is at an acceptable level (30-40%), then the housing challenge will not lead to more complicated social issues.

To realize this goal, policies need to focus on boosting supply, especially the supply of social houses for lease. The tax policy needs to be tightened to ward off speculation, and regulate income of those with multiple houses for lease to create more funds for housing support. In addition, the first-home policy for young laborers needs to be enacted via soft loans and borrowing guarantees.

Finally, complicated administrative procedures should be simplified so that investors can expedite their housing projects to boost supply, while the segment of private houses for lease should be closely supervised as a way to improve housing access for low-income people.

(1) OECD (2021), “Building for a better tomorrow: Policies to make housing more affordable”, Employment, Labour and Social Affairs Policy Briefs, OECD, Paris, http://oe.cd/affordable-housing-2021

(2) OECD (2020), “Social housing: A key part of past and future housing policy”, Employment, Labour and Social Affairs Policy Briefs, OECD, Paris, http://oe.cd/social-housing-2020

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