The housing affordability crisis and policy responses

Question 1

2 effects increase in the price of high quality housing has on the low quality housing market

Answer 1

1. Less downward filtering - pay off of high quality housing increases so fewer dwellings filter down to the low quality market
2. More upgrading - For large increases, more economical to upgrade low quality dwellings to high quality dwellings

Question 2

2 types of programs to subsidise housing

Answer 2

1.Project-based rental assistance program - Maximum rent property owner can charge. Then close gap between what tenant can pay and market contribution
2. Tax credits for low income housing - Tax subsidies to firms to build low income housing

Question 3

How do tax subsidies for low-income housing work

Answer 3

The government specifies (a) the maximum rent to be charged to eligible households (30 percent of household income)
(b) the minimum fraction of dwellings in the project that must be occupied by low-income households (known as set-asides).
A qualifying builder earns an annual credit (for up to 10 years) equal to 9 percent of the project cost attributable to low-income housing. For example, if the project cost attributable to set-asides for low-income households is $5 million, the annual tax benefit is $450,000 and total benefit over 10 years is $4.5 million.

Question 4

How might subsidies lead to crowding out and what are the 2 effects

Answer 4

Decreases equilibrium price of housing - decreases quantity of unsubsidised house creations
1. More retirement. The decrease in price makes low-quality housing less profitable, and the response for some property owners is to retire the dwellings, either through abandonment or conversion to another use.
2. Slower downward filtering. Owner of medium quality dwelling slow movement of dwelling downward

Question 5

How do housing vouchers work