Comparing Rental Housing Across the Atlantic

photo by Tiago Fioreze

The Harvard Joint Center for Housing Studies has released a working paper, Rental Housing: An International Comparison. The abstract reads,

This report compares rental housing in 12 countries in Europe and North America, using individual records from household surveys. Differences in housing characteristics, conditions, and costs across countries reflect a number of factors, including demographics, geography, culture, and government policies. A lack of comparable data can make international comparisons difficult to execute, but such analysis is valuable for understanding and contextualizing differences in affordability and other characteristics of renter households and housing.

The analysis revealed the US, along with Spain, as notably unaffordable for renter households, based on a number of measures. The greater apparent cost burdens reflected a variety of factors, including differences in characteristics of the housing stock and differences in tax burdens, as well as measurement problems.

However, two major influences – differences in the size and availability of housing allowances and the degree of income inequality – emerged as the main drivers of differences in housing affordability. The effects of supply-side factors such as the extent of social housing supply, supply subsidies, and rent controls were unclear, due to problems with the identification and description of below-market rentals in the household survey data. (1)

The housing stock and political context is so different among countries, but this type of analysis is still very useful and can offer valuable lessons to the United States:

One factor that appears to contribute to the pervasive affordability problems in the US is the degree of income inequality. That is not a feature of the housing market per se, but there may be opportunities to address the consequences of income inequality through appropriate housing policies.

Other countries have devoted more resources to ameliorating the problems of unaffordable housing. The US provides fairly generous housing benefits to only a small share of needy households. In the UK, a broadly available system of housing allowances offsets what would otherwise be a much more severe affordability problem than exists in the US. In other countries, affordable rental housing supplied by governments or nonprofits helps to address affordability issues, although the efficiency of that practice, relative to the provision of housing allowances, has been questioned, as it has been in the US. The EU-SILC data used in this analysis did not adequately identify or describe below-market-rate housing, making it impossible to adequately assess the effects of such housing.

The somewhat larger size and perhaps higher quality of units in the US rental stock also affects relative affordability, although relative quality and its effect on cost differences are difficult to assess using the available data. The large share of single-family detached rentals in the US reflects preferences, the demographic mix among renters, land availability, etc., but it could also reflect zoning and other regulations limiting the supply of less expensive multifamily rentals. It is hard to imagine that regulations are more stringent in the US than in some of the more dirigiste nations of Europe, but regulations elsewhere may dictate, rather than constrain, density and cost reductions. The size and quality of the housing occupied by low-income renters in the US reflect the fact that most of those units were originally built for owner occupancy or for higher-income renters. That’s probably true in other countries as well. Whether the extent of such filtering is greater or less in various countries is perhaps worth exploring in the future. (37-38)

Income inequality, housing subsidies and land use reform — the report hits on a trifecta of key issues that housing policy should be dealing with. While I do not see much of an appetite for major reform of the first two items in today’s political climate, there might be support for some loosening of land use restrictions on housing construction. I wonder if there is some room for movement on that third front. Can local jurisdictions be incentivized by the federal government to build more housing?

Reiss on Foreign Buyers in NYC quoted me in Foreign Buyers Driving Up Rental Prices Impacts New York Residents. The story opens,

Emir Bahadir, a native of Turkey, purchased two apartments in Manhattan for the purpose of renting them out. The 24-year-old paid a total of $9 million for the apartments in the West Village and Chelsea and earns some $40,000 a month in rental income.

”Entry into the real estate market in Manhattan by the foreign buyer has become easier because of technology,” Bahadir told MainStreet.

As a result, foreign buyers are increasingly coming into the Manhattan market and buying properties worth $2 to $5 million for the benefit of rental income. That can push rental prices higher for those on Main Street.

“[Foreign buyers] are not keeping them empty but filling them with tenants,” said Tamir Shemesh, a Realtor at the Corcoran Group. “A $2 million apartment can be rented out for as much as $8,500 a month, while a $3 million apartment can go for $11,000 to $12,000 a month.”

The tenants who can afford to pay thousands a month in rent are largely foreign as well.

“The reason we invest in real estate in New York is because of the exorbitant amount of rent that people are willing to pay,” Bahadir said. “That doesn’t happen anywhere else except in the U.K., but because of complications in the Middle East, London is not so popular these days.”

The downside for Americans is that escalating prices impact the overall rental market.

“It lets landlords know what the ceiling is and may encourage them to reach for it,” said David Reiss, professor with Brooklyn Law School.

Housing Affordability Across The Globe

The 11th Annual Demographia International Housing Affordability Survey: 2015 has been released. The survey provides ratings for metropolitan markets in Australia, Canada, China, Ireland, Japan, New Zealand, Singapore, the U.K. and the U.S. There are some interesting global trends:

Historically, the Median Multiple has been remarkably similar in Australia, Canada, Ireland, New Zealand, the United Kingdom and the United States, with median house prices from 2.0 to 3.0 times median household incomes. However, in recent decades, house prices have been decoupled from this relationship in a number of markets, such as Vancouver, Sydney, San Francisco, London, Auckland and others. Without exception, these markets have severe land use restrictions (typically “urban containment” policies) that have been associated with higher land prices and in consequence higher house prices (as basic economics would indicate, other things being equal).
Virtually no government administering urban containment policy effectively monitors housing affordability. However, encouraging developments have been implemented at higher levels of government in New Zealand and Florida, and there are signs of potential reform elsewhere. (1-2)
These findings are consistent with Glaeser and Gyourko’s research on U.S. housing markets. Not too many local politicians seem to acknowledge the tension between land use policies that limit residential density on the one hand and housing affordability on the other. The de Blasio Administration in NYC is a refreshing exception to that general rule.
The explicit bias of the Demographia International Housing Affordability Survey “is that domestic public policy should, first and foremost be focused on improving the standard of living and reducing poverty.” (2) Those who favor policies that create more affordable housing should take to heart the call for greater density and less restrictive zoning for residential uses. Otherwise, we are left with subsidy programs that can only help a small percentage of those in need of affordable housing and a lot of empty promises about affordable housing for all. Subsidies have a place in an affordable housing agenda, but so does density.