Lec-5 Housing Policies

1. Lec-5 Housing Policies Engr. Dr. Attaullah Shah

2. Rent Control • Many cities of the world have imposed rent control laws. • The law limits the increase in rent during tenancy period • When vacated and rented again, the rent is reset as per market prices • The rent control though favored and liked by the household living in the rented residences, yet it is not favored by the economists-Why? • In the presence of lower rents under rent control law, the landlord will try save cost of house maintenance. In NY, it has been observed that the houses in rent control areas are more likely to be dilapidated • The hosing investors may avoid investment in the rent controlled areas, • In the presence of rent control laws, the residents would prefer to live for long time and even for many generations, making their vacation very difficult and hence the owner would not be able to vacate the houses to earn market based salary

3. Stock Flow Model of housing • The existing stock of houses is much large than the flow of new houses due to its durable nature • In US the stock of houses is 100 million with annual houses 1 to 2 million per year ( In Pakistan 20 Million with annual increase of 0.40 M only). The stock flow model makes use of this distinction between stock of houses and flow of new houses • For simplicity, the model assumes that the houses are rented and ignore the owner occupied houses. • The quantity of houses measured in S.ft of floor space is denoted by H is represented along x-axis. • The price per S.ft is p on vertical axis. • For Supply of So, the quantity of S.ft is Ho, which equals to size of existing stock • The curve shows perfectly inelastic supply and the entire stock of houses will be rented regardless per S.ft price.

4. The left side indicates the stock side • The right side indicates the flow side • The upwards sloping curve SH is the flow supply curve, which indicates net flow of new houses represented on horizontal axis • When p is high net flow is high and when p is low, the net flow is negative • When rental values are high few old houses are demolished/reconstructed and mostly houses new are constructed. When rental values are low no new houses are added and with demolition of existing units, the land is converted into other units is done • At pcr The SH line cuts the vertical line and there is no net increase in the number of houses and the No of houses demolition and new constructed are equal • At initial supply So, Stock Ho, the price is po, but when the stock increases, the supply also shifts to left and the prices go down, unless equilibrium is reached when the Pe and He is reached

5. Demand Shock and imposition of Rent control • A housing market initially at equilibrium is subject to a demand shock. This shifted the demand curve to the right due to increase in population in the market. For example the influx of two million refugees in Peshawar had led to sudden increase in the housing demand in few months • The demand curve shifted to D’ and the price per sq ft shot up to p’. This price increase is due to scarcity of houses. The housing stock has not been increased in the period and most of the people have preferred to live with the relatives in short term as the area of sq ft has not been increased. • The new demand increases the new construction and the housing stock increases. The price is adjusted at pc • With successive increases in the housing stock, the equilibrium price is reached • The demand shock increases the prices, which leads to more construction and • ultimately the price is adjusted at equilibrium The existing residents are suffering during this transition in the absence of rent control. Hence they would prefer the Local Govts to impose such controls

6. Effects of Rent control on new constructions • The rent control somehow restricts the prices of houses • This also restricts the new developers to take advantage of the demand shock and the housing burst can’t tale place as a result. • Thus the rent control is counter productive as the slow growth in the housing stock and it takes longer time to reach an equilibrium point Misallocation of households to dwellings under rent control: • Rent control is aimed at serving the interest of particular group who would enjoy the comfort at the expense of other. • The refugee family would prefer to go to the basement of his relative house as they wouldn’t be able to pay the high rent price. At the other hand, the elitists with large and comfortable houses would like to enjoy the large houses.

7. In monopolized rental housing market, a single landlord controls all the supply of dwellings hence the demand remains too high and supply remains too small. • The rent control mechanism and laws, would serve the interest of society to control monopolies like other control laws. • In fact the housing market is not monopolized to few hands hence the rent control as response to market concerns is probably not justified

8. House Subsidy Programs • An alternative to rent control, house subsidy is used to reduce the cost of housing in various forms throughout the world. • The house subsidy program serves two major purposes: • Improve the quality of living and standards of life of people particularly the low income groups by giving them suitable dwelling as their basic need. • Eliminate the negative externalities owning to the substandard housing in the form of slums, which may otherwise reduce the quality of urban life . The non poor residents of the city would prefer to pay the taxes. The slum reduction effect in turn contributes to better urban life for them as well

9. Analysis of Housing Subsidy Program • In the given housing consumption • Curve , the budget constraint of low income household is c+pq=y • Solving for q , q = y/p – c/p • The resulted line is drawn which shows q on the vertical axis and c on the x-axis. • Slope of the budget line -1/p and the c intercept is y. The low income household would like to get the maximum utility of housing at the tangency point . • The resulting level of housing consumption is denoted by q0, which is low and corresponds to slum dwellings Under the Proportionate Rent Subsidy Program (PRS), the Govt, pays a proportion β of the house bill and the resultant budget constraint becomes c+(1- β)pq=y. This changes the slope of budget line from -1/p to - 1/(1- β)p • As a result the budget becomes steeper and a new level of housing consumption is achieved at qPRS • The housing consumption as a result of subsidy would increase the qPRS is greater than qo. Thus the housing consumption would increase under house subsidy program

10. Thus under housing subsidy program, the utility level of the low income household increase and the indifference curve shifts up as a result and at the same time the housing consumption also increases. The Govt. pays the housing PRS as βpqRPS =G which is the portion of house hold rent bill • There are various Housing Rent Subsidy, some of which are explained as follows: • - Fixed increment to its income independent of the housing consumption ( Income Grant: IG) . This grant G is added to the income of house hold and the budget constraint of household becomes c+pq = y+G • This shifts the budget line away from the previous one and the tangency point shifts downhill • - The qPRS > qIG which means the slump reduction effect under PRS is more than IG. This is a common observation that subsiding a good leads to its increased consumption but little increase in its utility

11. Housing Voucher Program • Like food vouchers or Food stamps, the low income households are given housing Vouchers (HV) • The housing vouchers can’t be used for buying bread unlike IG • The consumption of HV on housing can only be utilized for housing and as result the qHV>qIG • Why? • The utility level under HV is however less than under PRS • qPRS>qHV>qIG • The slup reduction effect is thus larger in case of

12. Subsidy in Kind • Provision of public housing built by the Govt. as practiced by the UAE Govt.for provision of built houses to the low income groups of society • Another way can be building a larger house and offering to the low income groups at lower prices than market. • Can you give some example for that? • The Public Housing (PH) where the low income household pays the same rent paid for the original dwelling is supplemented with the Govt share to build a larger unit. • The Slump Reduction Effect of the PH is the largest • The ranking of house subsidy programs are given as

13. Actual Housing Subsidy programs • Initially the Public Housing Program was highly favored as thousands of units were built by Govt in 1950’s and 1960’s however soon the program lost its utility and a large number of houses were demolished as a result. • The high concentration of poor and low income groups led to crimes and other social issues. • This led to poor environment and worst life standards for the low and poor people of the society • The PRS program discussed above had more examples resembling it in the practice. For Example in many cases Govts. instead of paying the portion of the house hold rent, paid portion of the home development cost for the low income groups

14. Effects of house subsidy programs on the neighborhood • The spatial concentration of poor households has created negative neighborhood effect • The Moving to Opprtunity (MTO) program was aimed at providing the houses to poor households to the non poor neighborhood randomly at subsidized prices. However the effect of relocating the poor households to the better places couldn’t give the expected results

15. The Dilemma of Homelessness and the policies for its reduction • Homelessness is a global challenge • About one billion people living in slumps pipes tents and non housing places and streets • In Pakistan the current housing units gaps is about 8 million and increasing by 0.20 Million every year • With free housing the housing consumption is zero. q=0 • The shelter less household spends all his income on other consumption • The high non housing consumption may appear in the form of other than bread consumption like alcohol, cocaine to which the person is addicted • Another effect can be the mental illness which is tandem with the addiction many times • The homelessness ratios differ from city to city and it depends on house rents and houses occupancy as well

16. Summary

17. Assignment No.? • Pakistan is faced with severe housing shortages. With a challenge to provide more than 7 million dwellings, there can be many economic interventions to solve this problem. • Please answer the following questions: • The nature and trends of housing market in Pakistan ( Ar. Faisal) • The extent of housing problems and its social repercussions for the country (Ar. Tahir) • Various housing programs of the GoP to solve the issues and its strengths and weaknesses (Ar. Nausheed) • The policy and economic solutions to improve the housing situation in Pakistan ( Ar. Sajid)

18. Mid Semester Exam The following topics will be covered in the exam: • The nature and subject matter of Urban Economics • Urban Growth theories • Urban Spatial Structure • Urban Sprawl • Housing policies and its impacts on the housing problems

19. Semester Research Projects • The Changing urban structure of Peshawar city- The opportunities and Challenges ahead. ( Ar. Faisal) • The housing problems in Pakistan, its extent, repercussion, challenges and solutions (Ar. Tahir) • The economics of Urban Sprawl with special reference to Pakistan (Ar. Nousheed) • The past present and future of the Real Estate Market in Pakistan and its economics ( Ar. Sajid) • Submission date: • Last week of the semester before Final Exam.

20. Format of Research Report (weightage:10% ) • Title Page • Acknowledgments (if any) • Table of Contents • Synopsis/Summary (4-5) • Brief introduction of the chosen topic • Problem Statement • Significance of research and delimitations • Research approach and methodology • Major findings • Main Body of the Research Report (20-25) pages including tables and pictures) • Introduction (1-2 pages) and Literature review would lead to research needs • Research methodology (Population, Sampling, data collection techniques and tools used in the research process ) • Observations and Data analysis • Conclusions - Recommendations • References (1-2 pages) • At least 5 for undergraduate students - At least 10 for graduate students • All references must be properly cited in the report using numbers or last name of the authors with year of publication. ( [1] or (Shah, 2005) ). Use APA referencing style. • Appendices