On The Importance of Tenure-Neutral Housing Policies

It’s safe to say there has been a lot of focus on the housing market lately, with all sorts of experts weighing in and trying to predict where prices and interest rates are heading. This is important for all manner of reasons, of course, but lost in this discussion at times is the plight of the rental market. While home prices have certainly had a wild ride these past few years, rent rates have been even more volatile. Like much of our other housing market woes, this volatility can be traced back to a lack of supply in most cities. While the demand is there (Los Angeles is one of many majority renter cities, for example), the supply has not kept pace. This, it has been shown, has much to do with our housing policies and their tendency to favor home ownership over renting. I’ll get into more specifics on that in a later post. This week, I want to address the importance of tenure-neutral housing policies in creating a well-functioning housing market.

We used to be a country of renters. Until the middle of the 20th century, in fact, over sixty percent of households in the US were renters. In the matter of a couple of decades, however, that proportion flipped. Today, the US homeownership rate stands at just under 66%, a rate that is high compared to most nations. This dramatic shift can be attributed to a number of factors, not the least of which are government policies. It does not necessarily reflect a huge change in consumer preferences, only a big change in consumer options. The rental housing market is still crucial in providing housing options for individuals and families. Since the middle of the last century, however, our housing policies have favored home ownership over renting, resulting in a lack of sufficient and well-functioning rental housing options. I’ll get into specifics about this in a later post, but this week let’s take a look in general at the importance of tenure-neutral housing policies, which do not discriminate between ownership and renting, in order to create a healthy and sustainable rental sector.

So, why is it that home ownership has increased so dramatically? Many studies find that it is the manner in which a country approaches housing policy that is the biggest determinant of the manner in which housing tenures evolve, not consumer preferences. It has even been argued by the influential housing scholar Jim Kemeny, among others, that a housing policy that leans toward homeownership becomes self-perpetuating at the cost of other alternatives. The argument is as follows: housing policies favoring home ownership eventually work to squeeze out other options from the market, and this leaves fewer options available to households, increasing the number of households that opt for homeownership. Increasing rates of homeownership are then misconstrued to be reflective of an inherent predilection toward homeownership in the population, which then works to validate and increase policies aimed at promoting homeownership. In working to promote the establishment of a well-functioning rental sector, then, the goal is not necessarily to promote a housing policy that favors renting—this could have the same effects cutting the opposite way—but rather to remove any tenure bias from housing policy altogether. As such, the goal is to work to establish a tenure-neutral housing policy, that allows households to fairly choose the best tenure option for them.

Now, owning a home can have benefits, but it is not necessarily the best option for all households. So in order to approach a more tenure-neutral policy, it is worth arguing against a blind adherence to the belief that increasing homeownership for everyone is always good. For starters, the empirical evidence in favor of homeownership is not as conclusive as is presented in policy circles. A study by the Inter-American Development Bank (IDB) reports on the subject:

“First, the benefits of homeownership may occur only under certain circumstances or may not accrue to all homeowners, particularly low-income homeowners…second, the effects of home ownership must be disentangled from factors such as income, education, and location…third, previous studies have omitted the risks associated with home ownership and the social costs imposed on low-income households…In addition, while homeowners may save more, they also hold most of their wealth in a single asset, whose price volatility can wipe out a lifetime of savings.”

Indeed, a number of studies agree with these assertions. In a paper for Harvard’s Joint Center for Housing Studies, William Apgar finds that while homeownership is a good choice for many, it is not necessarily a good choice for all, especially low-income households. “Unable to properly assess the real risks and responsibilities of homeownership, many low-income and low-wealth households become homeowners even if this choice is a risky and potentially costly mistake,” he observes. He continues by stating that:

“When families take on debt that they are unable to repay, homeownership does not build wealth, but rather diverts scarce resources away from meeting other pressing needs. In the worst case scenario, lower-income homeowners may become trapped in declining neighborhoods with little access to employment, good quality schools or social services and equally limited potential for price appreciation. In these situations, all too often the dream of homeownership becomes the nightmare of a financially devastating foreclosure.”

The immobility that homeownership can impose on households can also have detrimental effects. Immobile workers become stuck in jobs for which they are ill-suited, which is inefficient as it raises prices, reduces incomes, and makes some jobs uneconomic. Additionally, homeowners tend to commute farther than renters, which causes congestion and makes commuting more time-consuming and costly for everyone.

Taking this one step further, it has been shown that high rates of homeownership contribute to higher rates of unemployment. According to the economist Andrew J. Oswald, a 10 percent point increase in the owner-occupation rate is associated with approximately 2 percentage point increase in the unemployment rate. The main reason for this correlation, he explains, is the increased immobility of the labor market as homeownership rates increase. As he puts it, “mass unemployment exists because of a secular change that has happened in all but a few Western housing markets—the rise of home ownership and the decline in private renting.”

A housing policy that is biased toward homeownership can also end up disadvantaging major segments of society. Jim Kemeny argues that when housing policies favor homeownership a bias is created in favor of two-income households that can afford to buy a home. As such, single-income households are severely disadvantaged in gaining access to housing. This, argues Kemeny, becomes a major impediment to gender equality as “access to adequate low-cost housing is one of the most important preconditions for gender equality. The ability of women to run their own household independently... is crucially dependent on the availability of housing, and particularly rental housing.”

All this is not to say that rental housing should be prioritized any more than home ownership should be. Nor do I have any issue with homeownership as a goal: it can be great for many households. In the end, though, tipping the scales in one way or another ends up being disadvantageous for the entire system over time. Tenure-neutral housing policies are crucial to creating a healthy and sustainable rental sector and housing system overall. Households should be able to choose the best tenure option for them without policy tipping the scales.