Thursday, January 22, 2015

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.


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.


  1. "...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..."

    This is a critical insight that many people don't seem to understand. These are those who think that restricting redevelopment will preserve affordable housing because "the developers will only build expensive new stuff." Of course they also forget that if a neighborhood is in demand, then "rich people" will find a way to live there one way or another and still cause displacement. At least when allowing new development there's a *chance* that it will be enough to satisfy demand, otherwise there's little hope.

    1. Another key point that people seem to miss is that restricting development also restricts who gets to be a developer in the first place. So the more restricted the market, the larger the fraction of development that ends up being done by large evil corporations from out of town, as opposed to local upper-middle-class professionals buying up Speculative Low-Rise Apartments being built by local contractors.

  2. In the extreme case, you go full-Socialist and the government takes over the housing market entirely and is responsible for all construction, maintenance, allocation, etc. as was the case in the Soviet Union. That model definitely had some advantages, in that a lot of housing did get built, most of it of better quality and much larger quantity than what it replaced. Of course, this had all the usual downsides of socialist allocation (basically, incentivizing people to find ways to game the system), and to some extent it was reliant on the propiska system of internal migration controls, which basically prevented newcomers from showing up in the cities in the first place unless there was room for them. Of course such a system would definitely not be acceptable in any free country for obvious reasons.

    I think the other part of the problem is that housing regulations and the politics surrounding them are at least as much about enforcing standards of middle class propriety as they are about providing enough housing, ensuring safe and sanitary conditions, promoting "housing as an investment" (itself a middle class value), and so on. To a certain extent, Japan could allow things like danchis because the post-war housing shortage was so dire that they couldn't afford to waste resources on middle-class propriety. The US, meanwhile, had an endless supply of land, and an endless supply of economic opportunity in still-growing cities where housing was still cheap. Things got too expensive in NY? Just move to LA! Can't afford LA? Move to Vegas.

  3. I've come to a similar tentative conclusion based on my thinking thus far. Though I wouldn't necessarily restrict it to being a 'public housing corporation'. A non-profit housing corporation with social goals could work. And a variety of them would be nice.

    Massachusetts has a set of such non-profit housing development and management groups called 'Community Development Corporations' that fit into this sort of mold in some ways. However, my experience is that they largely focus on maintaining existing subsidized housing while looking for occasional opportunities to obtain more. There are some notable examples of community planning conducted by CDCs as well. I think there's a lot more for me to learn about them, and also a lot more that they could probably strive to do in the matter of creating a strong baseline of 'market-rate' attainable housing supply, but without pressure from the relentless upward drive of the bottom-line profit-making motive.

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  5. I can't get the point at all. What I suggest is that the government to put on a corporation where higher and lower classes can get for help. Also, government should provide affordable house facilities for its people.