the government, because state-owned land is perceived as a “free” resource, at least in the short run. The issue one may face here is that so much land is publicly held and allocated that it is not clear what the “market” price should be.

- <u>Direct subsidies through housing finance instruments. Frequently, instruments of housing</u> finance such as Housing Contract Savings Schemes (HCSS) serve as vehicles for housing subsidies, or have been subsidized to ensure their success.<sup>33</sup> This paper is not directly concerned with housing finance; however, the subsidies or premiums given to households should be included in the total amount of housing subsidies. The availability of figures in that case will vary by the type of instrument, but can be expected to be high, since those subsidies are typically budgeted.

- <u>Indirect subsidies through finance instruments. This includes the value of State</u> commitments on instruments such as mortgage insurance schemes, liquidity facilities, hedging instruments for mortgage lenders, etc. Pricing those products (which in the case of guarantee schemes amounts to estimating the contingent liabilities faced by the State) is possible in theory, and is effectively done under private schemes. Historically, however, this type of instrument is initially introduced by the State, and subsequently taken over by the private sector. At the beginning of the system, calculation may not be available due to lack of adequate historical data. An example of how data on mortgages can be used to estimate the cost of a subsidy program in the form of low-LTV mortgages at subsidized rates is given in Deng et al. (1996).

# <u>4) Limits of the Method</u>

The usual limits applying to economic analysis of particular programs, independently of the rest of the economy, also affect the analysis of housing subsidies. Interventions or distortions, operating both inside and outside the housing market, can influence the efficiency of subsidy programs as well as the entire housing subsidy system.<sup>34</sup> An example of internal distortion is rent control. Whether rent control should be considered as a subsidy is not clear on _a priori_ basis, and depends on the exact nature of the control involved. However, modeling and estimation of economic and welfare effects of rent control share many characteristics with the evaluation of other types of subsidies (Fallis and Smith 84, 85, Heffley, 1997, Basu and Emerson, 2000, 2002). Of importance also in the rental sector is the legal framework defining the rights and duties of landlords and tenants. Based on the balance between landlords and tenants, it can encourage or hinder the development of the rental market. Subsidizing the rental market in the latter case can be totally inefficient.

Examples of external distortions concern land titling / security of tenure issues (for case studies, see Payne, 2002; for an early paper, see Friedman, Jimenez and Mayo, 1988) as well as in land planning and zoning regulatory frameworks. Inefficiencies arising from inadequate laws or regulations in those areas can largely offset the effects of all public subsidies on housing. This problem has been recognized by economists, both on the theoretical side (Arnott and McKinnon, 1977, Bertaud and Brueckner, 2003) and on the empirical side (Brueckner, 1996, Fu and Somerville, 2001).

> 33 For a description of HCSS systems, see Lea and Renaud (1995).

> 34 Acknowledgment of this has led to increased focus of multilateral agencies on legal and regulatory issues in the housing sector. See World Bank (1993).

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