Friday, November 2, 2012

The Wisconsin Idea Meets Barcelona (Part III)

by Stephen MalpezziProfessor and Lorin and Marjorie Tiefenthaler Distinguished Chair in Real Estate

After the plenary I described in my previous posts, we had a well-received session entitled “Cities and Housing – Closing the Urban Housing Gap,” chaired by the World Bank’s Ellen Hamilton.  The focus of the session was on developing and emerging markets.

As countries grow and urbanize, the efficient and equitable production and delivery of housing and its associated infrastructure are key elements of successful urbanization.  In the aggregate, housing typically comprises something on the order of half a country’s tangible capital stock, a fifth to a third of gross fixed capital formation, and 10 to 30 percent of consumption.  Housing often leads the business cycle, and is often one of the main channels of monetary policy.  It is intimately tied to the development of (and sometimes to serious problems in) a country’s financial markets.

From a social perspective, housing is the most widely held form of wealth in most societies; and through this channel and through the operation of rental markets, housing is an important determinant of the distribution of welfare as well as its average level.  Furthermore, housing is a good that is characterized by important external costs and benefits, i.e. costs and benefits that are not “internalized” or paid directly/received by individual market participants, so it is not surprising that all governments intervene in some fashion in housing through various taxes, subsidies, regulations, and sometimes direct public provision.  But the efficacy of these interventions varies widely.

Three exciting papers were presented by younger researchers.  Basab Dasgupta told us about the connections between housing, location, and transport in South Africa, in light of recent government housing initiatives in “Shelter from the Storm – But Disconnected from Jobs,” co-authored with my friend Somik Lall.  Sohail Ahmad presented new housing demand estimates from Bangladesh that gave us a closer look at households’ actual consumption, and commented on that country’s housing policies in light of those facts.  Ashna Mathema took a look at similar issues in Rwanda; and Kate Owens (a young colleague who is taking time out from international consulting to do a PhD at our Big 10 rival Michigan) examined these issues in Dar-es-Salaam, Tanzania.  These latter papers seemed consistent with long-ago work by myself and the late Steve Mayo, that found budget shares for housing decreasing within cities as household incomes rose, but increasing in the very long run across cities as some grew and developed.

Two other papers were presented by greyer heads, my good friend and coauthor Alain Bertaud, and myself.  Alain is one of the world’s leading urban planners – I would say the leading planner – and in some future post we’ll discuss our joint work more fully.  In this presentation, Alain discussed the effective supply of land and, ultimately, real estate floorspace, in today’s cities.  There are two main channels for increasing the effective supply of land and floorspace; one is to improve the transportation system (shortening travel times increases the effective range of a city’s land market), and the other is to reform how urban regulations affect the translation of land area into floorspace.  Figure 1 illustrates the latter, with case study data from Ahmedabad.


For every 100 square meters of land that’s developed, 26 square meters ends up in the market for housing or other real estate; and given these 26 square meters, up to 44 square meters of floorspace may be delivered.  (In the informal or “slum” sector, another 4 square meters of land yields 7 square meters of floorspace).  Improving the effective yield of floorspace can be accomplished in several ways, for example by reducing the substantial fraction of newly developed land kept in government hands, mostly held as vacant; and by improving the yield of floorspace per unit of land submitted to market forces, for example by reforming Floor Area Ratio (FAR) regulations and so on.

Given the “externalities” argument and the fact that most governments intervene heavily in the housing market (including our own!) the purpose of my own paper was to discuss how to design interventions that work – and how to avoid interventions that do not work – based on experience in a range of countries, and on applied research.  The goal is to provide some directions for housing policies and programs that have proven to be effective – both equitable as well as efficient.

Want a few examples?  Here is a taste:

Nothing good will happen in housing markets without secure property rights; but don’t fall into the trap, as some have recently, of believing that simply granting titles to slum dwellers will be a sufficient solution.  There’s a lot to be done, such as improved registration procedures and information systems, and setting up a modern legal framework that’s truly relevant to low cost housing.

Improving infrastructure is another key area.  In many developing country cities, the supply of basic water and sanitation is even more critical than transportation improvements.  But we can’t simply import the water system of New York or London’s waste treatment solutions; appropriate water and sanitation solutions depend critically on income levels and willingness-to-pay of recipients; on population densities; and often on climactic and soil conditions as well.

A well-functioning housing finance system competes for funds on equal terms with other investments, whether through deposit-based or capital markets-based models of resource mobilization (or some combination of the two).   Directed credit models have proved inefficient, inequitable, and unsustainable.  In particular, forcing housing finance institutions to lend at consistently negative or highly subsidized interest rates proven problematic; deeply subsidized state lenders have created financial problems in countries both rich and poor.

Cities need to regulate development and land use, but in a contextual and appropriate manner.  Most cities (including again many in our own country) need to undertake an exercise “regulatory triage:” separate regulations into (1) those whose benefits clearly exceed costs, and strengthen and enforce them; (2) those whose costs clearly exceed benefits, and remove or reform them; and (3) a middle category of those for whom the net cost-benefit is too imprecisely known to be confident of the need for change.  In many if not most cities, an initial focus on (1) and (2) will keep regulators busy for some time, and will yield significant returns.

Those are just four of a few dozen recommendations elaborated upon in the paper; if you are interested in housing or real estate markets, whether in developing or emerging markets, or here in the U.S., you might find it interesting; download the paper here.

Well, we’ll be wrapping up soon.  I’ll write one more blog post, coming soon, that will discuss a few more findings from our Barcelona meeting; and I’ll discuss some of the next steps that will be taken by the sponsors and participants.

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