Definition: Housing policy

This definition aims to present a wide and general overview of different types of public policies that have an impact on housing demand and supply through varying economic and financial channels. Housing markets are influenced through fiscal, macroeconomic, prudential, and structural policies (Hilbers et al., 2008). Fiscal policies have a stronger impact on income and costs through taxation and subsidies. One of the main fiscal policies with regard to housing is the mortgage interest deduction which reduces user costs and can produce increases in prices (Poterba, 1984).

Macroeconomic policy regulates the money supply through interest rates. Housing has usually been perceived as a conveyor belt for macroeconomic policy as the expansion of the money supply through low-interest rates or quantitative easing has the potential to increase demand during recessions counteracting the procyclical behaviour of financial markets (Muellbauer, 1992).

Prudential policies determine the adequate level of risk attached to lending through Loan-to-Value (LTV) and Debt-to-Income (DTI) ratios. The Great Financial Crisis is usually seen as a failure of prudential policy that has resulted in the tightening of loan requirements  (Whitehead & Williams, 2017) and drawn renewed attention to housing policy from central banks, policymakers, and economists (Piazzesi et al., 2016).

Finally, structural policies regulate housing supply, this includes planning regulations and environmental standards. For example, research from the US has shown that zoning laws can have a relevant impact on housing affordability by constraining supply (Glaeser & Gyourko, 2002).

These policies usually work in conjunction with each other: lax prudential policies and favourable homeownership taxation together with low-interest rates and tight planning controls can lead to higher prices. Conversely, constrained lending, brick-and-mortar subsidies, and higher interests rates are known to mitigate rising house prices.

References

Glaeser, E. L., & Gyourko, J. (2002). Working Paper 8835: The Impact of Zoning on Housing Affordability. NBER. http://www.nber.org/papers/w8835.

Hilbers, P., Hoffmaister, A. W., Banerji, A., & Shi, H. (2008). IMF Working Paper. House Price Developments in Europe: A Comparison. IMF.

Muellbauer, J. (1992). The European Housing Market The role of institutions and macroeconomic policy. European Economic Review, 36.

Piazzesi, M., Schneider, M., Arefeva, A., Hoffmann, E., Kermani, A., Lenel, M., Myers, S., Peter, A., Taylor, J., & Uhlig, H. (2016). Housing and Macroeconomics. NBER.

Poterba, J. M. (1984). Tax Subsidies to Owner-Occupied Housing: An Asset-Market Approach. Source: The Quarterly Journal of Economics, 99(4), 729–752. https://about.jstor.org/terms

Whitehead, C., & Williams, P. (2017). Changes in the regulation and control of mortgage markets and access to owner-occupation among younger households. OECD. https://doi.org/10.1787/e16ab00e-en