# **<u>Part I : Methodology</u>**

# <u>1) Background and Applied Literature on Housing Subsidies</u>

This section begins with a basic overview of the economic justifications for housing subsidies and their evolution until now. We then focus on the economic impact of housing subsidies, through the standard classification of policy effects given by Musgrave (1959).

# _Economic Justifications for Housing Subsidies_<sup>_7_</sup>

Housing has typically received a lot of attention from policy makers for a number of years, if merely from the basic needs perspective. Historically, it seems that government intervention in housing was an externality argument: in large cities such as Paris at the end of the nineteenth century, the population density was well over 20,000 inhabitants per square kilometer. Recognition that overcrowding, lack of appropriate water and sanitation, and poor building conditions were at the root of epidemics and health hazards paved the way for government intervention in housing, for example in the form of units constructed by State-owned cooperatives. The public health argument is still valid today for some less developed countries, where population density and health hazards are still comparable to or higher than in Europe a hundred years ago.

In European countries, state intervention in housing continued during the first half of the twentieth century. Two successive wars caused massive destruction of housing units and many governments felt responsible for alleviating the housing shortage. Thirty years later, the picture had changed dramatically. Serious housing shortages were no longer an issue, and justification for state-funded housing subsidies had become harder to support. In some countries, it had become clear that structural shortages were due above all to an inadequate legal and regulatory environment, such as very stringent rent controls. In his famous survey, Rosen (1985) asks whether housing subsidies are not just either a manifestation of paternalism from the state or an indirect means for the federal government to subsidize the construction sector.<sup>8</sup> These differing rationales for state intervention in the housing sector resulted in two main themes of discussion and research:

- Positive externalities generated by housing. If families are not fully aware of the benefits<sup>9</sup> they or the community get from their consuming housing of good quality, housing will be produced in insufficient quality/quantity. Therefore, there is clearly room for government intervention in the housing sector. Thus, a whole branch of empirical economics has been devoted to the identification of those externalities, though mainly in developed countries (for a recent review, see Dietz and Haurin, 2003).

- Market imperfections and incompleteness. If the poor do not have access to financial markets and relevant information, or are discriminated against, housing subsidies targeting the most disadvantaged sections of the population can be justified. Imperfections in other markets such as the job market also justify housing as a privileged means of intervention, considering the “safety net” role played by housing.

> 7 This section is not intended to be exhaustive in any way.  The reader should refer to Rosen (1985), Mayo (1986) and Hoek-Smith and Diamond (2003), among others.

> 8 In France, subsidizing construction is almost natural and beyond question. As the saying goes, “when construction is well, everything is well”.

> 9 In the form of lower crime rates, better results of children in school, better health, etc.

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