Housing Affordability Policy: Implications for Housing Markets and Housing Elasticities

Housing affordability is a policy that is often accorded a great deal of policy attention by governments of many countries. In this paper, we examine the market implications of setting a house price to household income policy target for a market segment by the government. The policy requires active intervention on the housing supply side by the government with regard to the targeted sector. In the presence of uncertainty and resource constraints, the objective of house price affordability is achieved for the targeted household at the expense of greater volatility in residential construction activity. When the size of the targeted sector is significant in size, there are spillover price and volume effects on the non-targeted housing market segment. This results in political pressure on the government to expand housing affordability targets to increasing segments of the population. Using a simple model of the housing market with a housing affordability policy target, we derive price elasticity of housing supply of zero and absolute value of price elasticity of demand for housing to be equal to the income elasticity of demand for housing. The Singapore government intervenes extensively in the housing sector to ensure housing affordability, with a resulting homeownership rate of 91 percent for the resident population. The above hypotheses regarding the implication of setting a house price to income ratio target are tested using data for the Singapore housing market.