Affordable housing and subsidized housing: Should governments intervene directly in housing?

I've taken many positions in favor of deregulation of urban developments on this blog, notably against municipal zoning that restricts the building of new housing in established areas. So, if government intervention through zoning is generally not all that great, is there a way for government to intervene that can actually be helpful?

Subsidized housing

Subsidies are a regular government tool to help certain vulnerable groups of society or create incentives to reward behavior and actions believed to be beneficial for society as a whole. And so it is normal that subsidized housing is often one of the first measures that come to mind when dealing with the issue of people who cannot find affordable housing. This can either take the form of purpose-built housing (the Projects) or specific units in privately-owned buildings that are targeted for subsidies.

Habitations Jeanne-Manche in Montréal, a public housing project

Whether the government builds housing on its own or it subsidies private units, the dynamic is the same: some housing units are rented below market price AND the building cost. To some extent, it can work for a few vulnerable groups, but in the end, it is not a good idea.

The main problem is a question of fairness. Housing costs are often the single greatest spending category of the regular household, so subsidizing it is extremely expensive. This fact means that the number of subsidized units available to rent will generally be much smaller than the number of people who are recognized as in need of them.This means that not everyone can get them, worse, as these require subsidies, this means that the funding for this housing will need to come from taxes.

Unless the taxes for this are specifically targeted only so the richest individuals have to pay, this will mean that people who need access to that subsidized housing but haven't been able to get access to it because of a shortage of spaces, or people who are just above the criteria required to have the right to apply, end up on the private market for housing, likely getting a worse apartment for a higher price AND have to pay taxes to allow those who had access to the housing to pay less for higher-quality apartments.

So, it's great for recipients, but not for anyone else. That's the issue of fairness of the subsidized housing solution... it may be justifiable for a few vulnerable groups, but as a solution for affordable housing, it is seriously lacking. It doesn't make the situation of housing affordability better for society, it arguably makes it worse, just with a few people being able to escape it.

Rent control

This is especially controversial as it is extremely common in big cities. Québec has a form of it, as do many other Canadian provinces, New York has it, San Francisco has it, etc... The idea is that rents will be kept from rising too fast and capped to a certain rate of growth. This protects current renters from rapidly accelerating rents that would force them to look elsewhere for cheaper, smaller or worse located apartments.

One of the criticism of this kind of intervention that is commonly heard is that this reduces the profits from building rental units and so discourages building new housing. Personally, I think that argument is overblown, for a simple reason: no regulation I know of determines rent for new units. New units' rents are therefore fixed by the market, and when the rent-controlled units are in shortage, people may have to go for the new units' higher rents, or the new units may be condos instead of rental units. There may be a small disincentive in that after construction, rents will not be able to increase quickly, but anyway, housing built to be unprofitable at current rental rates, only becoming profitable if rents increase much faster than inflation can be called speculative and ill-advised. So it's not necessarily a bad thing.

The main opposition to rent control is the same as that of subsidized housing: you create two categories of people, people who have the chance of living in older rent-controlled housing, and people who don't. Though there is no direct wealth transfer from the latter to the former, that is still an unfair situation, and one that doesn't help all people or help make affordable housing available to all.

Some people say that rent control is responsible for the high rents in San Francisco and New York, I'm more inclined to blame zoning. I doubt rent control has such a big impact. Montréal has it and remains pretty affordable. But rent control may indeed discourage new rental developments and encourage condos instead, and it discourages investment in old housing, which is more likely to filter as a result... unless it's bought outright, destroyed and replaced.

Still, rent control is not a solution to unaffordable housing prices. It favors incumbent residents and does nothing to help newcomers. It is a "solution" to protect some from the impact of a housing market in shortage... which is perhaps its greatest flaw as it allows people who live in the area to be unaware of the problem of increasing unaffordability. Thus, inertia in public policy can continue.

Of course, when there is no major affordability problem, rent control is absolutely useless. Rents in an healthy housing market should not be increasing constantly, and may even fall in real terms (filtering).

So, what then?

So if using subsidies in a major way and trying to control costs through regulations are not good ideas and do not solve issues of housing affordability, what can government do that can actually help, if anything?

One thing I said in an earlier post, using an example with the car industry, is that if the amount of products one can build is limited, then the market tends to concentrate on the most profitable product they can build. In most cases, that is luxury housing. When the top end of the market gets saturated, developers will go down market. That is because private developers want to maximize profits.

Where the government could act is that it could set up a public corporation to act as a housing developer. Instead of maximizing profits, this public corporation could instead be given specific goals that society sees as good in themselves: provide a certain number of units, favor affordable units for lower-middle-class and poorer people, etc...  In a way, that corporation could act as an altruistic developer, but with a rule that says that it must not be unprofitable. If an unit costs 150 000$ to build, then it must sell it for at least 150 000$.

In other words, if private developers tend to aim for the top end of the market to maximize profits, this public corporation should rather aim for the bottom end of the market while having to avoid financial losses. Avoiding losses means avoiding having to be subsidized by the government, which is a big problem as I mentioned earlier in terms of fairness, as only a minority get to access below-cost apartments of higher quality than similarly priced units on the market as the rest of the population, including people of similar social status who haven't had the chance of getting a subsidized unit, are taxed to make it possible.

This is not without a precedent. Again, let me use Japan as an example, after WWII, much of Japan's housing had been devastated. Even when they were starting to rebuild, they faced a major problem of housing shortage, so in 1955, they set up the "Japan Housing Corporation" which had the mission of building plenty of housing at affordable costs and as quickly as possible. This led to the adoption of the "danchi" as a model for housing (inspired by Soviet housing apparently):

A computer model of a danchi, balconies in front

...stairs in the back, each pair of units on a floor having stairs of their own.

Example of danchi in Sapporo

...and in Yokohama

Even today, the corporation still exists but is now renamed "Urban Renaissance". It is still building around 10 000 units per year and owns more than 900 000 units in all of Japan. Older buildings have been torn down or sold to developers.

What they did was often select cheap lands within close range of train stations or with good bus service, then build these 3- to 5-story buildings, typically without elevators. The units themselves were small, as they needed to be affordable to occupants. So you still have these groups of Danchis all over Japan. However, they tend to be in relatively breezy areas as they didn't build them really close to one another, some form of "tower in the park" ideal.

An extreme example of this model is Singapore's Housing and Development Board, which now owns 82% of all housing in Singapore and has started building middle-class and even luxury housing. Though it's not exactly the same as it tolerates a yearly deficit covered by the government.

Conclusion

If government is to intervene in housing, it must do so understanding the dynamics of the housing market. Subsidies ultimately only help a minority of the population and are not a solution. But an approach wherein the government sets up a public housing corporation tasked at solving certain socio-economic issues and addressing the lack of affordable housing can be a valid intervention, as long as that corporation is asked to achieve at least a balanced budget. The housing it may build may be too simple or too small for middle-class or richer individuals, but may satisfy a need for affordable housing.