HOUSING MARKETS, PUBLIC POLICIES AND GROWTH: EVIDENCE FROM OECD COUNTRIES Dan Andrews Senior Economist & Head of Productivity WorkStream Structural Policy

HOUSING MARKETS , PUBLIC POLICIES AND GROWTH: EVIDENCE FROM OECD COUNTRIES

Dan AndrewsSenior Economist & Head of Productivity WorkStreamStructural Policy Analysis DivisionEconomics Department, OECD

European Commission and ESRI Housing ConferenceDublin, 6 November 2015

• The OECD Housing Study (2011)

– New cross-country comparable policy indicators

– Links between these indicators and housing market and

economic performance: the unintended consequences of

poorly designed housing market policies can be sizeable.

• Housing markets and public policy– Housing finance and banking supervision

– Supply-side factors

– Housing taxation policy

– Rental market regulations and social housing

• Housing policies and productivity growth

1. Roadmap

I. Housing Markets and Public Policy

Variations in responsiveness of new housing supply to changes in prices

1. Estimates of the long-run price elasticity of new housing supply w here new supply is measured by residential investments. All elasticities are signif icant at least at the 10% level. In the case of Spain, restricting the sample to the period 1995-2007, w hich w ould reflect recent developments in housing markets (such as the large stock of unsold houses resulting from the construction boom starting in 2000 and peaking in 2007-09), only slightly increases the estimate of the elasticity of housing supply from 0.45 to 0.58. Estimation period early 1980s to early 2000s. See Caldera Sánchez and Johansson (2010) for details.

0.0

0.5

1.0

1.5

2.0

2.5

Estimates of the long-run price-elasticity of new housing supply, 1980’s - 2007

When housing supply is rigid, real HP volatility is higher (slide A3) and demand shocks (e.g. financial deregulation) get translated into larger rises in real HP (slide A2).

Supply responsiveness is influenced by public policy

A. Scarcity of land B. Land-use regulations

CHE

NLDAUT ITA

BELFRA GBRDEUPOL

ESPNOR

AUS IRLNZL

FIN JPN

CAN DNK

SWE

USA

ISR

0.0

0.5

1.0

1.5

2.0

2.5

0 100 200 300 400

Population density2

Supply responsiveness¹

Correlation coeff icient: -0.45**

CHENLDAUT ITA

BELFRAGBRDEU POL

ESPNOR

AUSIRLNZL

FIN JPN

CANDNK

SWE

USA

ISR

0.0

0.5

1.0

1.5

2.0

2.5

0 50 100 150 200 250

Supply responsiveness1

Number of days to obtain a building permit³

Correlation coeff icient: -0.56***

Source: Andrews, Caldera-Sanchez and Johansson (2011).

What to do? Ease rigid construction licensing procedures, zoning restrictions, rent regulations; Provision of complementary infrastructure; Taxation of vacant land and unoccupied properties; Link property value for tax purposes to market prices to encourage development.

• Despite a weak economic rationale, housing is often tax-

favoured in OECD countries:

– Mortgage interest deductibility (slide A1) often outweighs the value

of tax (if any) on income streams (imputed rent, capital gains) and/or

recurrent property taxes (small and/or cadastral values dated).

– Regressive and increases macroeconomic vulnerability (slides A2-

A3)

• Transaction taxes distort housing transactions and create

lock-in effects, esp. for financially constrained younger

people:

– Cut transaction taxes and scale-up recurrent taxes on immovable

property (slide. A4)

Housing taxation

Transaction costs of purchasing property, 2009

Transaction costs refer to average costs. The estimates do not take into account the various tax breaks that exist in countries for certain dwellings implying that the estimated cost may overestimate the actual cost in some countries (for example in Italy) where such tax breaks are frequent. In addition, VAT when applied to certain costs is not included due to data limitations.


• Stricter rent controls (slide A5) are associated with a lower

quantity and quality of housing.

• Stricter rent regulations in social housing than the private rental market (slide A6) may discourage mobility amongst social tenants.

• Social housing regimes generally means-tested in OECD countries (slide A7).

– A targeted approach is more efficient

– But can lead to residential segregation and high EMTRs when residents circumstances change.

• Portable housing allowances as an alternative?

– But more effective with a flexible housing supply.

Rental market regulations and social housing

Rent market regulationsTenant-landlord regulations in the private rental market

Increasing in protection of tenants

0

1

2

3

4

5

6


Index=Ease of eviction + tenure security + deposit requirements

II. Housing Policies – Links with Productivity

Residential mobility varies across countries

Percentage of households that changed residence w ithin the last 2 years

0

5

10

15

20

25

30

%

Percentage of households that changed residence within the last 2 years


Residential mobility correlated with:• Worker reallocation rates (slide B1)• Housing policies (Supply, trans tax, rent regulations; slide B2)

Skill mismatch as a constraint on labour productivity

Source: Adalet McGowan, M and D. Andrews (2015), “Labour market mismatch and labour productivity: evidence from PIAAC data ” OECD Economics Department Working Paper, No. 1209.

Skill mismatch, particularly over-skilling, is harmful for productivity because it constrains the ability of innovative firms to attract skilled workers and grow

Skill mismatch results from policy-induced barriers to labour mobility

The probability of skill mismatch and public policies

Source: Adalet McGowan, M and D. Andrews (2015), “Skill mismatch and public policy in OECD countries” OECD Economics Department Working Paper, No. 1210.

New book: out now!

Available at:

http://www.oecd.org/economy/the-future-of-productivity.htm

Book + 5 page policy note + technical paper + videos

Authors:

Muge Adalet McGowan

Dan Andrews

Chiara Criscuolo

Giuseppe Nicoletti



Spares

A1-A7. More on housing policies

B1-B3. More on mobility

C1-C3. More on skills

A1. Tax relief on mortgage debt financing is often high, 2009

This indicator takes into account if interest payments on mortgage debt are deductible from taxable income and if there are any limits on the allowed period of deduction or the deductible amount, and if tax credits for loans are available. For countries that have no tax relief on debt financing costs, this indicator takes the value of zero.

Estimated wedge between the market interest rate and the after-tax debt financing cost of housing; increasing in the degree of tax relief


A2. Real house prices, demand shocks and housing market

settings

Source: Andrews (2010).

A3. HP volatility, banking supervision and housing market settings


1.

2.

Increasing the estimated supply elasticity from the level observed in Ireland to the level in Canada.

Reducing the tax relief on mortgage debt financing costs from the level observed in Netherlands to the level in Sweden.

The policy experiments are roughly equivalent to the impact of a one standard deviation change in the policy variables ofinterest on real house price volatility. Estimates are based on random effects panel regressions for betw een 16 and 20 OECDcountries, over the period circa 1980-2005. The dependent variable is the standard deviation in annual real house price grow thand the model also controls for macroeconomic volatility and time f ixed effects (see Andrew s (2010) for details).

Over the sample period, loan to value ratios range from a minimum of 56% to a maximum of 110% in OECD countries.

Real house price volatility can be reduced by…

25%

20%

19%

11%

Policy experiment

A further improvement in banking supervision equivalent to that observed on average in OECD over the 1990-2005 period.

Reducing the maximum loan to value ratio by 10 percentage points.2

A4. Taxes on property are low by international standards

0

0.5

1

1.5

2

2.5

3

3.5

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

LUX

AUT

CZE

MEX

CHE

TUR

EST

DEU

NOR

SVK

CHL

HUN

SVN

FIN

NLD

KOR

PRT

SWE

GRC

IRL

ESP

OECD IT

APO

LBE

LAU

SDN

KIS

LNZ

LJP

NIS

RFR

AUS

ACA

NGB

R

% of GDP % of GDP

Share of property taxes as % of GDP, 20111

1. Or nearest yearSource: OECD Revenue Statistics

A5. Rent controlsRent control in the private rental market

Increasing in the degree of control


0

1

2

3

4

5

6

A6. Rent controls are stricter on social housing than in the private rental market

0

1

2

3

4

5

6

Private rental market Social housing

Scale 0-6: Increasing in degree of rent control1

1. This indicator is a composite indicator of the extent of controls of rents, how increases in rents are determined, and the permitted cost pass-through onto rents in each country.


A7. Design of social housing regimes


B1. Residential mobility matters for labour reallocation

Residential mobility and worker reallocation rates


B2. Residential mobility and policies

Probability of moving and policies


C1. Skill mismatch: combining self-assessment with skill proficiency

Use micro-data from OECD Survey of Adult Skills (PIAAC) to:

1. Create a quantitative scale of the skills required to perform the job for each occupation using the literacy scores of well-matched workers – those who neither feel they have the skills to perform a more demanding job nor require further training to perform their current job satisfactorily.

2. Use this scale to identify min and max threshold values (e.g., based on the 10th and 90th percentile), which bounds what it is to be a well-matched worker.

3. Workers with scores lower (higher) than this min (max) threshold in their occupation are under (over) skilled.

C2. Over-skilling more prevalent than under-skilling

Percentage of workers with skill mismatch

On average, over-skilling is ~2½ times more likely than under-skillingSource: Adalet McGowan, M and D. Andrews (2015), “Labour market mismatch and labour productivity: evidence from PIAAC data ” OECD Economics Department Working Paper, No. 1209.

C3. Qualification mismatch

Percentage of workers with qualification mismatch

Source: Adalet McGowan, M and D. Andrews (2015), “Labour market mismatch and labour productivity: evidence from PIAAC data ” OECD Economics Department Working Paper, No. 1209.

Documents

HOUSING MARKETS, PUBLIC POLICIES AND GROWTH: EVIDENCE FROM OECD COUNTRIES Dan Andrews Senior Economist & Head of Productivity WorkStream Structural Policy