Well functioning property markets are the key to economic stability and growth

Poorly managed property markets played a key role in triggering the recent global financial crisis and may be slowing the recovery, according to a study from the Organisation for Economic Co-operation and Development.

Its new report, Housing and Economy; Policies for Renovation, says reforms to financial sector regulation, taxation,  land use, rental market rules and the provision of social housing will improve the real estate sector and spill over to the economy as a whole.

‘OECD countries have seen the damage caused by badly designed policies through their effects on housing markets,’ said OECD secretary general Angel Gurria.

'As we search for new sources of growth, as we seek to restore trust in our financial sectors, as we try to green our economies, policies related to housing can have a huge impact on our future,’ she added.

The OECD says that easy credit over the past two decades amplified price volatility, with real housing price jumps of  90% or more in Australia, Belgium, Finland, Ireland, Netherlands, New Zealand, Norway, Spain and the United Kingdom.

Deregulation and innovation in mortgage markets, coupled with inadequate supervisory frameworks, contributed to a significant relaxation in lending standards, an increase in non-performing loans and the sub-prime crisis.

The report, a chapter in the OECD’s forthcoming Going for Growth publication, suggests that future innovations in mortgage markets be coupled with tighter regulatory oversight and prudential regulations.

The report also shows how policies favouring homeownership over rental markets have reduced residential and labour mobility. This is particularly true for households with mortgages that went into negative equity positions due to the crisis. Low mobility risks undermining the ongoing jobs recovery.

Reforms that it recommends include increasing the responsiveness of new housing supply to market demand. ‘Countries should reassess licensing procedures that limit new housing starts and reconsider land use regulations that unduly prevent development. More responsive supply can limit price volatility, excessive price increases and encourage labour mobility,’ it says.

It also mentions getting rid of tax policies that favour housing over other investments. ‘Favourable tax treatment lowers borrowing costs, encouraging excessive investment, speculation and price volatility and limit mobility. Tax breaks are capitalized in house prices, preventing some lower income households from home ownership. Property taxes should better reflect market values,’ it continues.

It also advocates encouraging labour mobility. ‘Lowering transaction costs would enable more financially-constrained households to move. Redesigning strict rent control regulations could increase housing supply. Better targeted social housing could improve access for households in need. Policymakers should avoid concentrating low income households. Portable housing allowances may be preferable over direct provision of housing,’ it adds.