private rental sector, especially by small-scale individual investors. The extent to which more organized formal investors might enter this sector depends on a number of factors, including tax policies and the availability of financing.

# **Subsidies**

The chief rationales for government intervention through subsidies include negative externalities affecting public safety and social stability; equity concerns, whereby low-income groups are deemed to need housing assistance; and market failures. In practice, the three rationales are not always mutually exclusive or explicitly stated. In fact, Hong Kong SAR, China’s, massive public housing programs grew initially out of concerns for public safety and the needs of low-income groups after a disastrous fire in a large squatter settlement. The initial programs aimed to resettle slum dwellers, but out of a desire to maintain social stability by improving housing conditions, they grew to cover a much broader segment of the population.<sup>17</sup> Similarly, Chile’s housing reforms and policies intended to correct perceived market failures were also motivated by a desire to improve social stability. However, rather than rely on public production, Chile chose to address both these concerns through a combination of regulatory reform and demand-side subsidies to stimulate private sector production and finance.

Subsidies, regulations, and taxation are among the most important interventions by which governments influence housing market outcomes. In principle, the three forms of intervention can be seen as substitutes, but the relative efficacy of the measures depends on their interactions with one another and on specific market conditions. Of the three forms of intervention, subsidies have caused the most intense debate and controversy, reflecting the difficulties and inefficiencies in their design and implementation. The early housing literature on developing countries generally critiqued existing subsidy programs, emphasizing the need to reduce most of them. With growing interest in affordability and social housing policy in middle-income countries, there has been a broader discussion of subsidies’ role in housing policy in developing countries and a greater focus on policies to improve their efficiency, transparency, and targeting.<sup>18</sup>

## **_The case for demand-side subsidies_**

Most of the economic literature on housing subsidies favors market-friendly, demand-side subsidies. These are considered more cost-effective and equitable than project-based, supply-side subsidies. They enable low-income beneficiaries to rely on competitive markets to access a range of affordable choices. Unlike public housing programs, they generate fewer distortions and are simpler to phase out when beneficiary incomes rise. The empirical case for the superiority of demand-side subsidies in cost-effectiveness and equity has relied primarily on extensive studies comparing public housing production programs with rental allowance programs in the United States. These studies found substantial differences between the costs of public housing rental programs and direct subsidies to households through rental allowances. They also indicated that the direct subsidies were better at targeting low-income households.

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