A home truth: We need better quality and more affordable housing

Alice Pittini, OECD Directorate for Employment, Labour and Social Affairs

A home is meant to be a safe and secure shelter for individuals and families, fulfilling the basic need to have a roof over your head. Yet a home is also a tradable asset, an investment from which there’s potentially big money to be made, or to be lost as the global financial crisis has shown us. Although the crisis led to a general drop in house prices in the short term, house prices have since picked up again in most countries and today they are growing faster than incomes in Austria, Canada, Germany, Luxembourg, New Zealand, Sweden, Switzerland, the United Kingdom and the United States.

Particularly in attractive metropolitan areas, house prices and rents are soaring, with a negative impact on access to opportunities and jobs, especially for people on low incomes. For example Auckland, New Zealand, has one of the most heated housing markets on the planet. Despite a recent reform increasing the taxation of housing property transfers, ‘flipping’ – i.e. the practice of buying properties and re-selling it at a much higher price over a short time span – has become increasingly common, with some properties reported as having been sold up to five times its initial value in four days. At the same time the capital is faced with an unprecedented housing affordability crisis, which led the Government to announce for the first time in its 2016 budget a four-year programme for emergency housing. Increasing house prices make it impossible for people to buy a home and step onto the property ladder, particularly young people. At the same time big cities and capitals are also faced with a shortage of affordable rental housing, and the spread of Airbnb and other short-term letting agencies is further aggravating the situation.

As a result, housing costs constitute the single highest expenditure item from the household budget, with an increase in the OECD average share of housing-related expenditure from 20.3% in 2000 to 22.9% in 2013. Housing costs represent a substantial financial burden for low-income households in many OECD and EU countries. For example, in Chile, Croatia, Greece, Portugal, Spain, the United Kingdom and the United States more than half of poor tenants (those in the bottom fifth of the income distribution) spend more than 40% of their disposable income on housing costs. Furthermore, in nearly all countries, the overcrowding rate increases as household income decreases, with countries like Hungary, Mexico, Poland and Romania experiencing overcrowding rates that are over 40% among poor households. Lack of sufficient living space for household members can significantly hamper wellbeing, with negative effects on health and on child outcomes. Worryingly, poor children are most prone to living in overcrowded dwellings, compounding their economic disadvantage and hurting their chances of succeeding in life compared with children from richer backgrounds.

Moreover, there are many people who have no permanent roof over their heads at all. Even though the homeless make up less than 1% of the total population in OECD countries surveyed, that is still a significant number of people without a home. The United States reports 564 708 homeless people, and Australia, Canada and France all report having over 100 000 in their most recent surveys. Progress on this front has been uneven in recent years, with the number falling in Finland and the United States, but increasing in Denmark, England, France, Ireland, the Netherlands and New Zealand.

Improving access to affordable housing, particularly for low-income households and those in need, is an important policy objective across OECD countries. What can countries do to meet this goal? There is no one-size-fits-all solution, but countries are implementing a range of different instruments. Most countries have housing allowances and/or social housing arrangements as well as different kinds of financial support towards homeownership. Indeed, housing allowances are now one of the most widely used instruments of housing support. At 1.4% of GDP, public spending on housing allowances in OECD countries is by far the highest in the United Kingdom, followed by France and Finland. Most countries also provide social rental housing (either directly or increasingly through supporting not-for-profit housing organisations). However, in a number of countries there has been a decline in the amount of social rental housing available, partly due to the slowdown in construction and privatisation of social housing, such as in Germany and the United Kingdom. That being said, social rental accommodation still represents over 20% of total housing in Austria, Denmark, and the Netherlands.

Grants, subsidised mortgages and mortgage guarantees are common ways to help low- and middle-income people buy homes. Chile is the country with the largest share of support to home buyers through grants, and most other countries are aiming to ease access to mortgage credit. Tax relief is another frequently used instrument for homeownership support: mortgage interest deductibility alone costs 0.5% of GDP in the United States and 2.1% of GDP in the Netherlands. However, the extent that measures supporting home buyers really target those in need varies across countries and schemes. The OECD’s new Affordable Housing Database helps countries monitor access to good-quality housing and provides governments with clear evidence to design the best combination of policy options to tackle homelessness, unaffordable housing, and overcrowding.

Useful links

There’s no place like home

homelessValerie Frey and Angelica Salvi Del Pero, OECD Employment, Labour and Social Affairs Directorate

The mother had lost everything: her minimum wage job, the father of her children, and, finally, her apartment. Homeless, she stood by the street with her two young boys, their yellowed mattresses, second-hand books, and dinnerware piled around them on the sidewalk. The kids had been through this before. Her older son dreamt of becoming a carpenter so that he could build her a home.

This scene could come from a Depression-era Steinbeck novel, but instead it is one of the many tales in Matthew Desmond’s harrowing new ethnography, Evicted: Poverty and Profit in the American City. Desmond narrates a handful of stories drawn from the millions of poor Americans who are evicted from rented apartments or houses each year, despite their Herculean efforts to keep their homes.

Sadly, although OECD countries are among the wealthiest in the world, they fail to ensure that all of their residents have a safe, stable, and affordable place to live. Millions of households throughout the OECD struggle to afford good-quality housing.

Across countries, housing is usually the largest expense a household faces. Recent OECD research finds that nearly 15% of tenants and 10% of mortgaged homeowners are overburdened by their rent or mortgage, on average, across the OECD – that is, they spend over 40% of their disposable income on housing.

An even greater share of households report feeling pinched by housing costs, even if they are not counted as overspending in income and spending statistics: more than one in three respondents in a 2012 European survey reported feeling ‘highly burdened’ by their housing costs.

Poor households suffer the most when paying for housing. Households in the bottom 40% of the income scale face much higher housing costs, relative to income, than their wealthier counterparts, reflecting a lack of affordable options. Even middle-class households are not immune: across the OECD, nearly nine percent of middle-class mortgaged homeowners pay over 40% of disposable income on their mortgage.

Of course, affordability of housing does not guarantee that a home is of decent quality. Many homes are overcrowded and unsanitary. On average, 15% of OECD households lack sufficient living space in their home, and overcrowding is worse in poor households and among renters. Over 14% percent of low-income households live without access to an indoor flushing toilet, and rates are highest in Eastern Europe, Chile, and Mexico.

What can be done to help the millions of households who cannot afford good homes? OECD countries have developed housing support policies as a key part of their social protection systems. Improving access to affordable housing is an important goal in OECD countries: the majority of countries we surveyed identify affordability as one of their five most important housing objectives. Despite using a wide set of housing policy instruments, however, governments have not always been effective in achieving their objective.

Homeowner benefits, social rental housing, and housing allowances are three common social policies to support housing. Owner-occupied housing receives much social support in many countries, but this often fails to reach those who need the most help. Grants and financial assistance are provided to home-buyers, often with a focus on low-income households, and owner-occupants also benefit from tax relief for home purchases. However, poor households typically do not benefit from favourable taxation of residential property. Besides being unequitable, these subsidies can distort incentives to invest in other assets and drive prices up in housing markets.

Countries also provide support via social rental housing. Historically, in many OECD countries, the central government has funded (and local authorities directly provided) social housing. In recent years, however, public funding has decreased and has been directed to other providers, including non-profit and for-profit organizations and landlords. As a result there is an increasing concentration of low-income and vulnerable households among social housing tenants, and social housing providers will have to adapt to new incentives, objectives, and client characteristics.

Means-tested housing allowances are another instrument commonly used to help lower-income groups access housing. These allowances offer some advantages for delivering housing support to poor households (e.g. fair access to benefits and housing mobility), but have drawbacks compared to social rental housing; for example, allowances cannot guarantee good housing quality, and may perversely affect rent prices.

As public spending has shifted away from social housing, the private rental market has played an increasingly important role in offering affordable housing. OECD governments need to ensure that their housing policies do not discourage the supply or affordability of private rentals. We need to develop a better understanding of how housing allowances, rent regulation, tenancy protection, and other tenancy laws facilitate or deter the private sector from offering good-quality affordable housing to poor households. Indeed, many of the saddest tales of eviction in Desmond’s book come from poor families who were barely ineligible (or waitlisted) for social housing, and were instead forced to navigate a predatory private rental market. The American mother profiled by Desmond was lucky to find a two-bedroom apartment in a poor city for $550 per month. But with an income of $628 per month, she had almost no cash left over and no way to cushion unexpected costs.

An affordable and safe home is on the wish list of many families this year. More research and data are needed to develop effective housing support policies, and OECD governments must find ways to implement good policies efficiently and equitably. In the wealthiest countries in the world, no one should go homeless or live in unsafe conditions. With coordinated and well-informed social policies, OECD countries can go a long way towards ensuring that all individuals and families can live in affordable, good-quality homes.

Useful links

Salvi del Pero, A., W. Adema, V. Ferraro and V. Frey (2016), “Policies to promote access to good-quality affordable housing in OECD countries”, OECD Social, Employment and Migration Working Papers, No. 176, OECD Publishing, Paris.

OECD ((2015) Integrating Social Services for Vulnerable Groups: Bridging Sectors for Better Service Delivery, OECD Publishing, Paris , Chapter 4 – Homelessness, the homeless and integrated social services.

OECD Focus on house prices

OECD Better Life Index – Housing

Property policies – some renovation required

Spare a thought for Alison O’Riordan. In 2008, she “ploughed in head first” and paid an eye-watering €525,000 – about $700,000 – for an apartment in Dublin. Just two years later, as Irish property prices crashed, neighbouring apartments were fetching less than half that, about €190,000.

As Ms. O’Riordan discovered, she was among the last to be sucked into the Irish property bubble: Fewer than a dozen of the properties in the complex were sold. “Today,” she laments, “the other apartments in my building are filled to the brim with wise renters.”

To buy or to rent? An agonising question, especially when you know that getting it wrong could seriously hurt your finances. But, as the recent crisis demonstrated, such decisions can have a much wider economic impact – look to how countries like Spain, Ireland and the United States cope are still coping with the hangover from property bubbles. That’s one reason why there’s increasing interest in how government policy can shape individuals’ housing decisions and reduce the harmful side effects on the economy.

A new paper from the OECD looks at a number of these issues, and argues for policies that would reduce volatility in home prices and provide greater flexibility for buyers and renters.

Take the decision to buy. In a number of countries, governments have promoted home ownership in recent decades, in part because they believe it gives people a stake in society and promotes responsible citizenship. But at a time of high unemployment, that can have a downside: In effect, people who are tied to their homes – and, in some cases, burdened with negative equity – may be less willing to move to another part of the country to start a new job. 

The solution, says the OECD, is not to discourage home ownership, but to reduce barriers that discourage people from moving. There are many such obstacles, but one striking example is the charges you pay when you buy a new home – stamp duties, property registration, notary and property agency fees and so on. These differ greatly between countries: In Denmark and Iceland, they amount to only about 4% of the value of the property; in Belgium, France and Greece they’re equal to at least 14%.

Another area where government policy can help determine people’s property decisions is taxation. In many countries, the tax system effective encourages people to buy property, typically by providing tax relief on mortgage interest payments. That helps people buy homes, but there can be downsides. Firstly, by making it attractive to take out mortgages, and so cut individuals’ tax burdens, it can encourage property speculation. Secondly, it benefits only people who pay tax; low-paid workers outside the tax net get no benefit.

The OECD paper suggests such tax incentives should be scrapped, and that an investment in property should be treated like any other investment. This, it argues, would curb excessive property investment – and limit price bubbles – and free up funds for investment in more productive areas of the economy.

Useful links

Going for Growth 2011 
OECD work on housing
OECD Insights: From Crisis to Recovery