Economy: Well functioning housing markets are key

This is according to a new OECD study offering governments a roadmap for sounder housing polices.

The study, Housing and the Economy: Policies for Renovation, says reforms to financial sector regulation, taxation, land-use, rental market rules and the provision of social housing will improve the real estate sector and spill-over to the economy as a whole.

“OECD countries have seen the damage caused by badly designed policies through their effects on housing markets,” said OECD Secretary-General Angel Gurria. “As we search for new sources of growth, as we seek to restore trust in our financial sectors, as we try to green our economies, policies related to housing can have a huge impact on our future.”

The OECD says that easy credit over the past two decades amplified price volatility, with real housing price jumps of 90% or more in Australia, Belgium, Finland, Ireland, Netherlands, New Zealand, Norway, Spain and the United Kingdom over the study period. Deregulation and innovation in mortgage markets – coupled with inadequate supervisory frameworks – contributed to a significant relaxation in lending standards, an increase in non-performing loans and the sub-prime crisis.

The report, a chapter in the OECD’s forthcoming Going for Growth publication, suggests that future innovations in mortgage markets be coupled with tighter regulatory oversight and prudential regulations.

Other key policy reforms should:

  • Increase responsiveness of new housing supply to market demand. Countries should reassess licensing procedures that limit new housing starts and reconsider land-use regulations that unduly prevent development. More responsive supply can limit price volatility, excessive price increases and encourage labour mobility.
  • Encourage labour mobility. Lowering transaction costs would enable more financially-constrained households to move. Redesigning strict rent control regulations could increase housing supply. Better targeted social housing could improve access for households in need. Policymakers should avoid concentrating low-income households. Portable housing allowances may be preferable over direct provision of housing.