Housing sector performance is fundamentally shaped by market forces. The interplay of supply and demand determines what people pay for housing and what they receive for their money. Empirical regularities characterize expenditures on housing and suggest that housing conditions should systematically improve with economic growth and development. However, largely reflecting policy differences across cities and countries, rising expenditures for housing are translated into housing outcomes at different rates in different cities and countries.
Priorities for use of strengthening interventions and enabling instruments vary from country to country. According to a World Bank Policy Paper, the priorities in low-income countries are to develop market-oriented systems of property rights, facilitate the housing supply by increasing infrastructure investment, and enhance building industry competition, In highly-indebted middle-income countries, priorities are fiscal and financial policy reform, particularly improving housing finance institutions and reducing budgetary transfers to the housing sector, and expanding infrastructure investment. In centrally-planned and formerly centrally-planned countries, priorities for reform are property rights, housing finance, subsidies, land and building regulations, land development, materials production and distribution, and the residential construction industry. In other middle-income countries, priorities are regulatory reform in land-use and building, facilitating transition to a more responsive system of housing supply and the development of mortgage finance.
The importance of policy differences in shaping housing sector outcomes is supported by recent data on 52 countries collected by the Housing Indicators Programme, a joint programme of the UN Centre for Human Settlements and the World Bank. Among the most important of these indicators are physical measures, such as crowding or structural durability, and house prices, rents and the house price-to-income ratio, which often reflect the relative efficiency of housing markets. Comparisons of such measures indicate, for example, that the responsive housing market in Bangkok provides better, more affordable housing, even for the poor, than the heavily regulated market in Kuala Lumpur.
Supply-side distortions in these and other countries arise largely from policies affecting the inputs for housing: land, finance, building materials, or infrastructure with the legal and regulatory framework affecting housing suppliers exercising a dominant effect on the price and quality of housing. In Thailand, for example, where regulation is simple and efficient, housing supply is more than 30 times as responsive to shifts in demand than in either the Republic of Korea or Malaysia, where regulation is complicated and cumbersome. This is reflected in striking differences in housing affordability, measured by house price-to-income ratios, among the three countries.
Policies affecting the responsiveness of the supply side of the market to changes in demand, therefore, often offer the greatest potential for improvement in sector performance. Policies which constrain market efficiency and the responsiveness of the housing-supply system result in reduced investment, housing which is less affordable and of lower quality, and a lower-quality residential environment.
The UN Centre for Human Settlements recommends the following measures to improve the performance of the housing sector for the provision of low-cost housing: (1) developing skills in construction techniques; (2) promoting public/private partnership; (3) attracting private sector investment; (4) modifying/revising (if required) building regulations and by-laws; (5) improving maintenance and upgrading of housing; and (6) facilitating and encouraging the participation of small-scale contractors in shelter and infrastructure construction works.
When housing markets fail, it is the poor who tend to bear the brunt of the failure. In part, this reflects the fact that policies are often inimical to the functioning of the rental-housing sector, which houses the majority of urban populations throughout much of the developing world. While housing costs and prices have been higher than necessary, they have also had negative macro-economic consequences, affecting investments in other sectors, savings rates, budgetary deficits, inflation, interest rates, labour markets, productivity, and even the balance of payments.