Housing policy has always been a local matter in Ireland, the UK, the US and Europe.
Setting housing policy at the local level seems to make sense. It puts power into the hands of those closest to the affected place. Those lawmakers should be well placed to make good decisions based on the information at hand.
Now we’re facing housing shortages all over the rich world, and policymakers are reconsidering the way we regulate and control land.
Local government control over land use regulation might be part of the problem. Research has shown that the incentives faced by local lawmakers have an impact on how much housing they are willing to permit. Local governments are motivated by local issues (the costs and benefits of new housing in a particular area). National governments are more likely to think about the big picture (is the overall system short of housing; will industries have a place for their workers; is the economy benefiting from agglomeration).
Local governments face a lot of the costs of new housing (unhappy residents and overstretched public services) but won’t capture all of the benefits, which range from larger labour markets and agglomeration effects to increased affordability of homes and reduced homelessness.
Housing shortages in our most important cities are a problem for entire countries, because it’s these cities that are increasingly driving our economies and overall growth rates. They’re where the highest paying, most productive jobs are, and where innovation tends to happen. And they provide economic opportunity to lower-skilled workers, who can move to cities where there will be lots of demand for their labour.
Housing is moving up the political agenda. From Dublin to Brussels to Sydney, national politicians and policymakers are getting more interested in helping. But their hands appear to be tied: how can they incentivise good housing policies at the local level, where much of housing policy is controlled?
A new piece of legislation in the United States might point the way to the answer.
Carrots and sticks
The ROAD to Housing Act is a rare case of bipartisan reform. Republican Tim Scott and Democrat Elizabeth Warren, who both sit on the Senate Committee on Banking, Housing, and Urban Affairs, co-sponsored the bill. It passed that Committee with a resounding 24-0 vote and was later passed by the Senate 77-20.1
The bill has forty sections, embracing a multi-pronged approach to America’s housing problem and helping it receive support from both parties. I’m going to examine just a few of those sections below. The mechanisms used are novel, and provide carrots and a stick to local governments.
First, the Build More Housing Near Transit Act (BMHNTA). For context, the Department of Transportation, a national body, funds (some) transportation projects in local areas. Local governments apply for this funding on a competitive basis.
Naturally, a transit project deserves funding if it’s going to be used a lot, compared with a project that will see less use. But recall what we discussed above – local governments aren’t approving houses where they’re most needed. They might get a new transit project, but they aren’t necessarily going to follow that up with more housing so it can get greater use.2
The BMHNTA tackles this incentive problem directly by giving a scoring boost to applicants whose jurisdictions have increased housing supply. That means removing State or local government barriers to housing construction or preservation (including affordable housing), like reducing parking and lot size requirements and increasing height limits.3
Suddenly, local governments have more reasons to approve new housing – they’re going to get national funding for new transportation projects.
Second, the Innovation Fund. It’s a $200 million annual pot of funding designed to scale reforms that increase housing supply. It builds on an earlier scheme, the Department of Housing and Urban Development’s PRO-Housing program – a competitive grant to help jurisdictions identify and remove barriers to affordable housing, including land use and permitting policies, housing-enabling infrastructure, and financing measures.
In other words, it’s a YIMBY grant. If you build housing, you get a grant from the national government. As the Niskanen Center puts it, the Innovation Fund “creates a powerful incentive for local officials to move from talking about reform to actually implementing it. It shifts the federal role from a passive funder of process to an active partner in rewarding success”. These funds can be deployed in a variety of ways, whether to improve roads, sewers, or clean water programs, or go further with pro-supply reforms. They can address the concerns of locals, who, as we discussed earlier, might otherwise be unhappy at new housing in their area. Along with the BMHNTA, it offers a carrot to local governments when it comes to housing supply.
Lastly, the Build Now Act offers a similar policy mechanism – but with a twist. It utilises a large federal pot of funding, the Community Development Block Grant (CDBG). The CDBG currently distributes some $3.5 billion each year to encourage economic development in poorer areas, but has been criticised for an outdated and ineffective allocation formula. CDBG funds are “a scarce resource that should be allocated to optimize [their] effect”, as a 2023 report put it.
The Build Now Act does just that. It creates a new, additional formula which makes CDBG funding in high cost cities based on housing outcomes. It works as follows: high cost jurisdictions are placed into a special category. If a jurisdiction has below average housing growth (demonstrating failure to increase housing supply), then they lose 10 per cent of their CDBG funds. What’s more, those funds then flow to jurisdictions who have increased housing supply, proportional to their housing growth rate. Any high cost jurisdiction with 4 per cent or higher housing growth is automatically counted as a winner. Places where housing costs fall exit this plan and get their normal CDBG grant, as before.
The Build Now Act combines carrot and stick. It identifies places which are failing when it comes to housing, penalises them, then rewards successful areas at the same time.
This is reminiscent of Chris Elmensdorf’s proposed mechanism for leveraging the Low Income Housing Tax Credit (LIHTC), a federal subsidy for affordable housing in the states. Cities above a certain size and housing cost threshold, would only get LIHTC if they adopted pro-housing supply policies. Should the national government adopt this measure in a future bill, they’d have another stick to go along with their carrots.
A path forward
Even though this bill hasn’t become law yet, it has plenty to teach anyone interested in how to solve the political economy problem of building more homes.
National governments should develop a full range of carrots and sticks for local governments. The exact mechanism here will vary from one country to another, but a broad scope will provide multiple opportunities to incentivise local governments.
And this doesn’t have to cost the earth – the Build Now Act simply redirects funds that were already flowing to local jurisdictions each year and which were under pressure to update their allocation formula. They can also create just as many winners as losers – one jurisdiction might be upset at losing out, but another will be pleased to have been rewarded.
Alternatively, if national governments have funding available, rewards to jurisdictions that remove barriers to housing can also be useful. They can be used to cover some of the costs associated with more housing, like pressure on infrastructure or public services.
The ROAD to Housing Act’s proponents do not assume that any individual reform is going to solve the housing crisis on its own. There is no silver bullet for housing. Instead, stacking solutions one on top of each other could add up to a significant dent in the problem. Reforms which increase the construction of private homes are part of the solution – not least because new market rate housing helps the less well off by freeing up units at the lower end of the market.
A one-for-one transfer of the ROAD to Housing Act to another developed country isn’t a good idea; the European or Antipodean context is not exactly the same as the United States. Nevertheless, incentives are the most important tool for policymakers in Brussels and national capitals to keep in mind.
It was passed as part of the National Defense Authorization Act. The bill now needs approval from the House of Representatives before it can become law.
