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François Ortalo-Magné

Policies That Aim to Increase Home Ownership Actually Do the Opposite

by François Ortalo-Magné Wednesday, July 3, 2013
The U.S. federal government expends considerable resources pursuing two prime goals of housing policy: making housing available to all, and making home ownership possible for most. Yet, those who already own property in urban areas tend to favor growth restrictions to limit population density in that area, and to keep prices high so homeowners’ investments will not lose value.

This problem is not unique to the United States. Growth restrictions enacted by city governments constrain the housing stock to a level where supply does not meet demand, drive up prices, and effectively sabotage national governments’ housing policies. In a recent working paper with Andrea Prat of the London School of Economics, soon to be published in American Economic Journal, I conducted a theoretical analysis that illustrates this tension between homeownership and affordability.

Housing subsidies, a common tool to encourage home ownership, actually make the problem worse. These subsidies are enacted to help would-be homeowners cope with high prices, but they have the effect of driving prices higher still, as new homeowners whose purchases were enabled by the subsidies influence local policies to protect their new investment. Before governments act to encourage homeownership with policies such as a mortgage-interest tax credit, they should consider these implications.

For the good of society, people generally support policies that make housing affordable in the abstract, But when it comes time to make a decision as voters, their ownership interest in keeping their home values high wins out. Independent of their ownership interest, most people support larger cities for the sake of affordability and economies of scale in infrastructure, transportation, and public services. But this ownership interest is so powerful that most cities are held below their optimal size, with prices held high and supply artificially limited.

Creating new municipalities is one solution to ease this tension. Another solution would be to reconsider the geography of the voting map. When those who do not own property in a city—renters and rural voters—are given a voice in the city’s housing policy, they will tend to favor growth, increasing the city size and bringing prices down. 

More broadly, our findings add one more argument to the political debate on the mortgage interest deduction. In countries like the United States where urban growth is determined at the local level, our research calls into question the subsidization of homeownership. If we truly care about access to the consumption of housing, we should not subsidize homeownership.