Why housing and transport costs should always be considered together: A monocentric analysis of prudential measures in housing access

This paper compares the effects of two prudential measures in housing access on the solvency and welfare of households, with specific attention to transport costs as well as equity issues. A widespread regulation is to cap the housing expense ratio (defined as the share of income spent on the rent or the monthly loan installment), typically at one third of income or so. Using the canonical model of urban economics, the monocentric model, we show that capping the housing expense ratio drives low-income households to move away from the city center toward suburban areas, where they face high transport costs. This unintended eviction effect lowers the efficiency of this prudential measure as far as household solvency is concerned. Capping the overall housing plus transport expense ratio precludes this eviction mechanism and unequivocally proves more efficient in protecting household solvency, including from strong variations in transport prices such as during fuel price spikes. Additionally, by limiting the bidding capacity of households, both prudential measures lead to a decrease in housing prices. This tends to improve the welfare of households, firstly of high-income ones (as they are less affected by the constraints). The effect on housing prices is stronger when capping the housing expense ratio, so that households, again firstly high-income ones, are typically better off (in terms of welfare) than when one caps the housing plus transport expense ratio, however. Considering the primary objective of prudential measures-protecting the solvency of households, firstly of low-income ones-our findings call for the inclusion of transport costs within prudential ratios, as well as indicators of housing affordability. This would incidentally raise public awareness with regard to the high costs of private cars, which are often underestimated. A short numerical application to the Paris region corroborates that a policy change from housing prudential ratios toward comprehensive housing plus transport prudential ratios might significantly improve the situation of low-income households.