Tackling fundamental housing market constraints

When the housing supply is inelastic and therefore does not respond to price increases with quantity increases, subsidies are ineffective in increasing the housing supply. In such cases, subsidies will not only be insufficient to address affordability gaps, but also risk simply transferring rents to housing suppliers. Unlocking a supply response therefore requires policy reforms to increase the elasticity of supply, by addressing the fundamental constraints behind high land and construction costs (see technical annex).

Unlocking land for housing requires removing the constraints to, and thus lowering the costs of, obtaining formal land that is well-connected to the city. These include:

  1. Stringent land-use regulation. Although land-use regulation is often essential for effective zoning and infrastructure rationing, it can hugely raise the cost of land. Land-use regulations in San Francisco for example have increased house prices 20-40%1. This can be even more problematic in the developing world where land-use restrictions are often a legacy of colonial planning laws, completely removed from the needs of ordinary citizens. In Dar es Salaam, the legal minimum size of a housing lot is 375m2as compared to approximately 30m2 in Philadelphia, US, at similar stages of economic development2. As a result, most urban residents cannot afford to comply with this regulation, frustrating the emergence of a large-scale formal sector housing market to serve this population.
  2. A lack of infrastructure provision to maintain a well-connected supply of urban land. In 19th century London, the underground and commuter-railway system ensured a constantly expanding supply of well-connected urban land for housing. This was key in meeting the city’s rapidly growing demand for housing. New York’s grid system, created in 1811, played a similar role in expanding the effective urban land supply.
  3. Challenges in securing well-located public land for housing can be overcome through reforms to public land management. This enables often under-utilised, and well-located government land to be used for housing development.

Construction sector reforms to increase supply elasticity can include:

  1. Reforming construction regulations. In many cities, regulations on local building materials or incremental housing restrict safe but low-cost construction 3. In Kigali, reforms to legalise the use of local building materials have helped to bring large numbers of informal households into the formal sector.
  2. Streamlining permitting and compliance procedures. A recent study in South Africa showed that the township application process for affordable housing developments can last up to 157 months; this is important because a 24-month delay was found to increase development costs by 175%, translating into a 124% increase in sale price 4. The uncertainty involved also means many investors consider housing to be too risky a sector to invest in.
  3. Reducing monopoly power which limits the competitive incentive of developers to respond to price rises with increases in quantity. Policy to tackle this is challenging, but reforming contractual procedures and stimulating the growth of alternative housing providers can be useful tools.