How Affordable Housing Can Be More Efficient

New possibilities emerge when cities think of housing as insurance.

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Based on research by Jack Favilukis, Pierre Mabille, and Stijn Van Nieuwerburgh

When Stijn Van Nieuwerburgh, the Earle W. Kazis and Benjamin Schore Professor of Real Estate, sought a model city to research for his working paper, “Affordable Housing and City Welfare,” he looked no further than the Business School’s home base.

New York City, with its high rents and hypercompetitive real estate market, has a spate of policies governing rent control, zoning, vouchers, and tax credits that attempt to mitigate what the paper calls “an unprecedented housing affordability crisis.”

“Can we improve the efficiency of the affordable housing system?” Van Nieuwerburgh asks.

Van Nieuwerburgh, who co-authored the 2019 study with Jack Favilukis of the Sauder School of Business at the University of British Columbia and Pierre Mabille of the Stern School of Business at New York University, addresses the problem of misallocation of affordable units, and urges policy makers to think of affordable housing as a kind of social insurance.

The research takes on greater relevance in light of new housing laws passed by the New York State Assembly in July, which strengthen rent control and bolster tenants’ rights. Affordable housing advocates in the state generally praised the new legislation, which capped rent rises in controlled and stabilized apartments and broadened renter protections in evictions; real estate industry advocates claimed the new laws are onerous and perhaps unconstitutional.

The paper takes what Van Nieuwerburgh calls a “finance angle” in building his model, which sees the various affordable housing scenarios through the lens of risk.

“A lot of the previous models that have thought about these questions, haven’t really modeled risk, risk aversion, and insurance against risk,” he says. “That is what’s new here; it’s a finance perspective on the world.”

Van Nieuwerburgh notes that people first sought out rent controlled or rent stabilized units when it was appropriate for their economic situation; but then over time, their careers progressed and they began to earned more. The research demonstrates that these very same renters tend to stay in the same unit when they can afford a market-rate unit, effectively taking the place of someone who earns less.

“So now what we’ve done is take a scarce resource and given it to the wrong people,” Van Nieuwerburgh says.

Van Nieuwerburgh’s proposed model, mirroring the process in New York, holds a lottery of eligible people to determine who may apply for units when they become available. The model also adds a means test, proposing that the applicant’s wage threshold for being eligible for affordable units be moved to 30 percent of median income.

“That means that really needy people are going to get these units,” Van Nieuwereburgh says.

Van Nieuwerburgh’s model also calls for those in affordable housing to reapply periodically, perhaps every four years, to see if they meet income thresholds for the unit.

The result for Van Nieuwerburgh is that the model demonstrates welfare gains.

“We can add everybody up, and we can see whether society is better off or not under this new policy,” he says. “The reason we’re better much off with this more efficient housing system is because poor people now get access to affordable housing units that they didn’t before.”

Van Nieuwerburgh sees this relationship as insurance against fluctuations in labor income in the economy.

“You cannot go to Geico and ask, ‘Can I buy labor insurance?’” he says. “You could think of affordable housing as a substitute for that.”

Van Nieuwerburgh’s model, which also studies an expansion of rent control, accounts for certain trade-offs in the real estate market. More rent control improves insurance provisions, but as the affordable housing mandates expand, costs increase and it reduces a developer’s incentive to build more housing.

“It’s a horse race,” Van Nieuwerburgh says. “We’re finding that on the margin, you actually want to expand a little bit, because the benefits outweigh the extra costs.”

Similarly, with regard to other policy initiatives such as housing vouchers, Van Nieuwerburgh says that depending on how much renters can manage to pay out of pocket, vouchers can offer people greater choice in where they live. He adds that the taxes needed to pay for the program result in disincentives to the wealthy.

“In my model and in reality, when you tax the rich more, they work less, so this is a real cost,” Van Nieuwerburgh says. “There is going to be less output in society and we’ve got to take that into account.” The paper also discusses other measures such as “upzoning,” or changes in laws that allow for greater density.

This is a tool used by municipalities to increase housing supply that often causes rents to fall, or at least remain stable. Although Van Nieuwerburgh considers upzoning to be the most egalitarian policy in his model, it tends to have a negligible effect on inequality.

“It’s true that rents go down a little bit for everybody,” Van Nieuwerburgh says. “But it doesn’t help poor people, not nearly as much as these other policies.”

Yet the paper, which was inspired in part by Mathew Desmond’s anecdotal, nonfiction book Evicted, is not merely an analysis of costs and public policy.

Van Nieuwerburgh says the lack of affordable housing can have a destabilizing effect on people’s lives. “It has real consequences,” he says. “When I think about risk, that’s what I have in mind.”

About the researcher

Stijn Van Nieuwerburgh

Stijn Van Nieuwerburgh is the Earle W. Kazis and Benjamin Schore Professor of Real Estate and Professor of Finance at Columbia University’s...

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