# <u>Introduction</u>

Housing subsidies exist in almost every country in the world. Meanwhile, in most countries pursuing housing reforms, there is a growing need for integrating various interventions into comprehensive and explicitly articulated housing strategies. This is reinforced by fiscal needs to trim public spending and thus focus budgetary subsidies on better targeted household categories.

The efficiency and equity performances of particular types of housing subsidies have been studied for a long time.<sup>1</sup> On the other hand, monographs of the entire housing subsidy system in a specific country, or comparisons of specific subsidy instruments across countries, are often undertaken by academics and development agencies. These studies essentially analyze how the different types of subsidies fit together, where the leakages are, and who captures the subsidies, often with the purpose of reforming the housing subsidy systems. Such studies make abundant use of public finance criteria to assess the performance of housing subsidies. Thus, it is generally possible to assess the “quality” of particular types of housing subsidies based on simple notions of public finance. However, the criteria used differ from one study to the next.<sup>2</sup> At a different level, while analysts and policy-makers usually focus on comparing housing subsidy systems across countries, no systematic framework seems to exist to easily compare packages of housing subsidy systems.

The main reasons for this apparent omission can be summarized as follows:

- The intrinsic complexity of the housing subsidy systems may encompass dozens of different channels<sup>3</sup> with sometimes highly idiosyncratic features, which together make cross-country system comparisons difficult<sup>4</sup> .

- Different levels of development between countries often preclude an immediate ranking of “good” versus “bad” systems. The relevance as well as the economic efficiency of a particular housing subsidy program depend on many factors, including the level of poverty in the country, the development of mortgage markets, the importance of the banking system, and the land titling system. Thus, comparing housing subsidies across countries on the basis of gross figures alone may lead to conclusions that are not operational in terms of policy recommendations.

The goal of this paper is to provide an organizing set of principles for evaluating the maze of subsidies affecting the housing sector. The paper thus aims at providing operational criteria allowing comparisons to be drawn between housing subsidy systems across countries, both at the individual program level as well as the aggregate level. The principles guiding our analysis are the following:

> 1 Examples of studies which have focused on particular programs are Crew-Cutts and Olsen (2002) on section 8 housing vouchers, and Gyourko and Linnemann, (1989) on public rental housing in the US.

> 2 Many studies have focused on evaluation of housing subsidies. Some of them are quoted in this paper. For a general overview and country examples, the reader should consult Buckley and Mayo (1989), Conway et al. (1996), Gilbert (2004), Mayo and Gross (1987), Merrill et al. (1999), Struyk (2000), and the World Bank (1993).

> 3 To quote but a few: direct subsidies  to rental or ownership, tax cuts on mortgage interest,  provision of plots of land at below market prices, and all subsidies to legal producers.

> 4 One exception is Mayo (1986), who compares the US and German systems.

3