1. HOUSING MARKETS, PUBLIC POLICIES AND GROWTH: EVIDENCE FROM OECD COUNTRIES Dan Andrews Senior Economist & Head of Productivity WorkStream Structural Policy Analysis Division Economics Department, OECD European Commission and ESRI Housing Conference Dublin, 6 November 2015

2. The OECD Housing Study (2011) –New cross-country comparable policy indicators –Links between these indicators and housing market and economic performance: the unintended consequences of poorly designed housing market policies can be sizeable. Housing markets and public policy –Housing finance and banking supervision –Supply-side factors –Housing taxation policy –Rental market regulations and social housing Housing policies and productivity growth 1. Roadmap

3. I. Housing Markets and Public Policy

4. Variations in responsiveness of new housing supply to changes in prices Estimates of the long-run price-elasticity of new housing supply, 1980’s - 2007 When housing supply is rigid, real HP volatility is higher (slide A3) and demand shocks (e.g. financial deregulation) get translated into larger rises in real HP (slide A2).

5. Supply responsiveness is influenced by public policy Source: Andrews, Caldera-Sanchez and Johansson (2011). What to do? Ease rigid construction licensing procedures, zoning restrictions, rent regulations; Provision of complementary infrastructure; Taxation of vacant land and unoccupied properties; Link property value for tax purposes to market prices to encourage development.

6. Despite a weak economic rationale, housing is often tax- favoured in OECD countries: –Mortgage interest deductibility (slide A1) often outweighs the value of tax (if any) on income streams (imputed rent, capital gains) and/or recurrent property taxes (small and/or cadastral values dated). –Regressive and increases macroeconomic vulnerability (slides A2- A3) Transaction taxes distort housing transactions and create lock- in effects, esp. for financially constrained younger people: –Cut transaction taxes and scale-up recurrent taxes on immovable property (slide. A4) Housing taxation

7. Transaction costs of purchasing property, 2009 Transaction costs refer to average costs. The estimates do not take into account the various tax breaks that exist in countries for certain dwellings implying that the estimated cost may overestimate the actual cost in some countries (for example in Italy) where such tax breaks are frequent. In addition, VAT when applied to certain costs is not included due to data limitations. Source: Andrews, Caldera-Sanchez and Johansson (2011).

8. Stricter rent controls (slide A5) are associated with a lower quantity and quality of housing. Stricter rent regulations in social housing than the private rental market (slide A6) may discourage mobility amongst social tenants. Social housing regimes generally means-tested in OECD countries (slide A7). – A targeted approach is more efficient –But can lead to residential segregation and high EMTRs when residents circumstances change. Portable housing allowances as an alternative? –But more effective with a flexible housing supply. Rental market regulations and social housing

9. Rent market regulations Tenant-landlord regulations in the private rental market Increasing in protection of tenants Source: Andrews, Caldera-Sanchez and Johansson (2011). Index=Ease of eviction + tenure security + deposit requirements

10. II. Housing Policies – Links with Productivity

11. Residential mobility varies across countries Percentage of households that changed residence within the last 2 years Source: Andrews, Caldera-Sanchez and Johansson (2011). Residential mobility correlated with: Worker reallocation rates (slide B1) Housing policies (Supply, trans tax, rent regulations; slide B2)

12. Skill mismatch as a constraint on labour productivity Source: Adalet McGowan, M and D. Andrews (2015), “Labour market mismatch and labour productivity: evidence from PIAAC data ” OECD Economics Department Working Paper, No. 1209. Skill mismatch, particularly over-skilling, is harmful for productivity because it constrains the ability of innovative firms to attract skilled workers and grow

13. Skill mismatch results from policy- induced barriers to labour mobility The probability of skill mismatch and public policies Source: Adalet McGowan, M and D. Andrews (2015), “Skill mismatch and public policy in OECD countries” OECD Economics Department Working Paper, No. 1210.

14. New book: out now! Available at: http://www.oecd.org/economy/the -future-of-productivity.htm Book + 5 page policy note + technical paper + videos Authors: Muge Adalet McGowan Dan Andrews Chiara Criscuolo Giuseppe Nicoletti

15. Spares A1-A7. More on housing policies B1-B3. More on mobility C1-C3. More on skills

16. A1. Tax relief on mortgage debt financing is often high, 2009 This indicator takes into account if interest payments on mortgage debt are deductible from taxable income and if there are any limits on the allowed period of deduction or the deductible amount, and if tax credits for loans are available. For countries that have no tax relief on debt financing costs, this indicator takes the value of zero. Estimated wedge between the market interest rate and the after-tax debt financing cost of housing; increasing in the degree of tax relief Source: Andrews, Caldera-Sanchez and Johansson (2011).

17. A2. Real house prices, demand shocks and housing market settings Source: Andrews (2010).

18. A3. HP volatility, banking supervision and housing market settings Source: Andrews, Caldera-Sanchez and Johansson (2011).

19. A4. Taxes on property are low by international standards Share of property taxes as % of GDP, 2011 1 1. Or nearest year Source: OECD Revenue Statistics

20. A5. Rent controls Rent control in the private rental market Increasing in the degree of control Source: Andrews, Caldera-Sanchez and Johansson (2011).

21. A6. Rent controls are stricter on social housing than in the private rental market Scale 0-6: Increasing in degree of rent control 1 1. This indicator is a composite indicator of the extent of controls of rents, how increases in rents are determined, and the permitted cost pass-through onto rents in each country. Source: Andrews, Caldera-Sanchez and Johansson (2011).

22. A7. Design of social housing regimes Source: Andrews, Caldera-Sanchez and Johansson (2011).

23. B1. Residential mobility matters for labour reallocation Residential mobility and worker reallocation rates Source: Andrews, Caldera-Sanchez and Johansson (2011).

24. B2. Residential mobility and policies Probability of moving and policies Source: Andrews, Caldera-Sanchez and Johansson (2011).

25. C1. Skill mismatch: combining self- assessment with skill proficiency Use micro-data from OECD Survey of Adult Skills (PIAAC) to: 1.Create a quantitative scale of the skills required to perform the job for each occupation using the literacy scores of well-matched workers – those who neither feel they have the skills to perform a more demanding job nor require further training to perform their current job satisfactorily. 2.Use this scale to identify min and max threshold values (e.g., based on the 10 th and 90 th percentile), which bounds what it is to be a well-matched worker. 3.Workers with scores lower (higher) than this min (max) threshold in their occupation are under (over) skilled.

26. C2. Over-skilling more prevalent than under-skilling Percentage of workers with skill mismatch On average, over-skilling is ~2½ times more likely than under-skilling Source: Adalet McGowan, M and D. Andrews (2015), “Labour market mismatch and labour productivity: evidence from PIAAC data ” OECD Economics Department Working Paper, No. 1209.

27. C3. Qualification mismatch Percentage of workers with qualification mismatch Source: Adalet McGowan, M and D. Andrews (2015), “Labour market mismatch and labour productivity: evidence from PIAAC data ” OECD Economics Department Working Paper, No. 1209.