Thursday, February 17, 2011

Breaking the cycle in France

Professor François Ortalo-Magné is member of the council of economic advisors to the French ministry in charge of land use and housing policy, among its many mandates (Economic Council for Sustainable Development, Ministry of the Ecology, Sustainable Development, Transports and Housing). At its latest meeting, on Monday February 14th, the council discussed the current taxation of land in France and opportunities to improve the system.

To move the debate forward, Ortalo-Magné presented key ideas from his latest research paper on the political economy of urban growth (pdf download). He and co-author Professor Andrea Prat (London School of Economics) highlight a major flaw in the design of housing policy in many countries including the U.S. and France: “Both countries promote housing affordability for all and homeownership for most. Andrea and I find that these two objectives are not compatible when local voters get to decide on local urban growth, as happens in the U.S. and France,” says Ortalo-Magné.

When homeownership is subsidized, voters are encouraged to own more housing. Because they own more housing, they lose more if local housing supply increases given the same level of demand. Therefore they have an incentive to vote against urban growth. In their research, Ortalo-Magné and Prat demonstrate how vicious cycles may emerge whereby voters invest in housing because they expect the voting process to protect their investment, and they vote to protect their investment because they invested a lot. As a result, a city may remain smaller than what voters would have preferred had they been asked to vote together, before they bought any housing.

To break this cycle, Ortalo-Magné proposes that homeownership subsidies in France be greater in cities that commit to increase local supply. “Short of blocking the latest round of first-time buyer subsidies, introducing a bit of conditionality in the subsidies is a step in the right direction to break the type of vicious cycle Andrea Prat and I identify in our research. Maybe in the future, local communities won’t be eligible for any subsidies unless they also release some supply. That would help!”

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