Monday, October 31, 2011

Housing Policy--Social Housing in China

The Economist’s article from earlier this month about social housing in China (No way home: giving the urban poor a place to call home) piqued my interest about the economics of housing policy. Income, current housing prices and access to mortgage financing comprise just a few of the factors that influence people’s choices of residential location, and policy makers have long been attempting to expand social and economic opportunity for low-wealth individuals and families through a variety of housing options such as housing vouchers, mortgage interest subsidies, and public housing. Access to affordable housing for low wealth individuals and families promises more than just shelter; their quality of life is increased as they also gain access to better educational and employment opportunities. But what economic implications do policy makers face when trying to achieve “a decent home for all at a price within their means?” I would like to focus on two different policies- one that influences demand and one that affects supply.

The housing voucher program is a demand-side policy that gives rent certificates with a value based on household income and the fair market rent to low-income individuals or families to purchase housing that meets minimum quality standards. As the household’s budget line shifts to the right, there is a trade-off between housing and other goods. Granting households with a larger budget and the freedom to choose the utility maximizing consumption combination of housing and other goods causes an increase in both household consumption and household utility. However, the voucher program causes the demand curve for moderate quality housing to shift to the right as low-income households begin to demand less of low quality housing. As the demand for moderate quality housing increases, the equilibrium price also increases in order to compensate for the excess demand. Additionally, the increase in moderate quality housing prices decreases the supply of low quality housing by slowing the filtering process between housing levels, and consequently the decrease in supply of low quality housing increases the price. This increase in low quality housing prices hurts low-income families that do not receive housing vouchers.

Public housing is a supply-side policy in which the government builds housing units of minimum standards in large quantities specifically for eligible low-income individuals and families and charges a rent of no more that thirty percent of the household income. Similar to housing vouchers, public housing shifts the households’ budget line to the right by decreasing the cost of housing for the individual or family. Again, the ability to make trade-offs between housing and other goods increases the household consumption of goods and household utility. But in this case, the implication is that the cost of public housing significantly exceeds the cost of private housing. According to Green and Malpezzi in “A Primer on US Housing Markets and Housing Policy, the production cost of new low-income housing is twice the market value. A large supply of low quality housing already exists, which means that the least expensive new low quality housing costs more than existing used housing. Additionally, the private sector can build new low-income housing more efficiently than the public sector. Social housing yields low return rates, but the developer may be influenced by the low risk.

In China’s case, the social housing program appears to be more of a political strategy instead of an effort to benefit urban residents. The article states that the central government aims to complete 36 million social housing units by 2015. Zheng Siqi of Beijing’s Tsinghua University expressed her concern over the sustainability of the project; she estimated that the government is only paying for ten to twenty percent of the $204 billion construction costs. Furthermore, the central government declared that they would not allow local authorities to build new office buildings for themselves if they did not meet their social housing quotas. Considering the economic implications of social housing, it seems that there are other housing policies to best accommodate China’s rapidly growing population and to successfully provide affordable housing for the low wealth population. But with the supposed motives of the central government in mind, I would surmise that this housing policy might fail to make the necessary housing additions or changes that China needs.

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