Affordable homeownership policy: Implications for housing markets and housing elasticities

1. Affordable homeownership policy: Implications for housing markets and housing elasticities Professor Sock-Yong Phang Singapore Management University ERES, June 2009, Stockholm

2. Outline • Homeownership as policy objective • Indicators of housing affordability • House price to income ratio target – market implications • Singapore • Conclusion

3. I. Homeownership as policy objective Advantages of homeownership • Dwelling – size and quality • Accumulation of wealth • Non-tangible benefits, positive externalities • Better maintenance • Better citizens and communities • Better children Evidence is not overwhelming

4. Homeownership as policy objective Some negatives: • Household immobility • Overconcentration of household investment • Risks from interest rate and price fluctuations Proposals: • Insurance on market values • Hedging against house price risk

5. Homeownership rates

6. Determinants of variations • Legal • Economic • Income • Demographic • Relative price of ownership to rental costs • Availability of mortgage finance • Cultural • Ethnicity • Political: Government policies

7. Government policies • Tax • deductable mortgage interest payments • Special treatment of capital gains from housing • Property tax subsidies • Tenant protection laws • Mass privatization • Supply side subsidies to producers • Demand side subsidies: grants and mortgage interest subsidies • Mandatory housing funds

8. II. Indicators of housing affordability • Income-based • Rental expenditure to income ratio • House price to household income ratio • Mortgage payment to household income ratio • Ratio of median family income to income required to qualify for a conventional mortgage • Cost-based • User cost of housing capital (with and without capital gains) • House price relative to fundamental costs of production • Basket of measures for complete picture

9. Homeownership affordability as policy objective • Examples: Norway, Singapore, Hong Kong, South Korea, China Homeownership policy decisions: • Target group • E.g. Income<Y* or y*% median income • Target affordability ratio • House Price to Income Ratio < x* • Choice of instrument • Supply side, demand side, hybrid

10. Deviation from targets • Unknowns, demand shocks, lags: • Actual PIR x > or < x* • Housing supply decisions: • short run disequilibrium • waiting lists or unsold units • Example of positive income shock: • x < x*, waiting list increases when targeted house price is held stable • Housing authority housing starts increase • Spillover price and crowding effects on non-targeted segment

11. A simple model of the aggregate housing market (Malpezzi-Mayo) Demand QD = α0 + α1 Ph + α2 Y + α3 D Supply QS = β 0 + β1 Ph Equilibrium QD = QS Q=log of quantity of housing Ph=log of the relative price of housing services Y=log of per capita income, D=log of population (households), =>Ph = α0 - β0 + α2Y + α3D β1 - α1 β1 - α1 β1 - α1 or Ph = γ0 + γ1 Y + γ3 D + ε

12. Estimating the price elasticity of housing supply 1) Estimate Ph = γ0 + γ1 Y + γ3 D + ε 2) Assume values for the price elasticity (α1 ) and income elasticity of demand (α2 ) 3) Compute the supply elasticity β1 = α2 + α1 γ1

13. Estimating the price elasticity of housing supply 1) Estimate Ph = γ0 + γ1 Y + γ2 D + ε 2) Assume PY ratio is constant – policy target γ1 = 1, γ2 = 0 3) Compute the supply elasticity β1 = α2 + α1 Since α2 and α1 are generally estimated in the literature to be less than one, we expect price elasticity of supply β1 < 1

14. Regulated market with housing affordability target • Crowding out of non-targeted sector, targeted sector expands over time • Housing affordability fairly constant across income groups and over time • Greater housing consumption equity, income elasticity of demand for housing <1 • New construction in response to waiting list rather than prices, supply is price inelastic • House price changes inelastic wrt to population growth rates and construction costs

15. Singapore’s housing - public • sector dominance • Population 4.84 m (1.2 m foreigners) • Land area 700 sq km • 90% of land state owned • 90% homeownership rate • GDP per capita US$35,163 • 86% of resident population reside in HDB developed flats (99 year leaseholds) • Mortgage lending by HDB • Central Provident Fund housing schemes

16. Per capita income and house prices

17. Expansion of targeted group HUDC: S$4,000 (1974), S$8,000 (1985) Executive Condominium Scheme: S$10,000 (1997) Exchange rates: S$1 = US$0.69; S$1 = Euro 0.49

18. HDB flat types and prices S$ (new)

19. Housing affordability

20. House price to median household income ratio, 4-rm HDB flat

21. Income and housing `gaps’

22. Housing supply elasticity estimates

23. V. Summary • Housing policy: setting homeownership affordability targets • Norway, Singapore, Hong Kong, South Korea, UK… • Market implications: • Expansion of targeted housing sector over time • Relative constancy of housing affordability indicators • Greater housing space equity • Income inelastic housing demand • Price inelastic housing supply • House prices relatively inelastic to population growth rates and construction costs

24. Thank you