Rethinking the Welfare State: The prospects for ... - e-Library

Low-income housing 67
part of low-income unit landlords is unlikely to furnish a sufficient profit. In such
situations, supply-side subsidies which target the construction of new low-income rental
units may be preferable to the alternatives. As mentioned earlier, the Swedish example
certainly speaks to the effectiveness of such policies, albeit under a limited set of
circumstances including low population density, a homogeneous population, and a
relatively low level of income polarization.
The major objection to supply-side subsidies, however, concerns “the substitution
question,” namely, “do [targeted construction subsidies] add to the stock of housing, or
do [units constructed through such subsidies] merely substitute for units that would have
been produced with other finance sources?” 71 That is, how successful are subsidies at
stimulating a sustainable increase in the stock of available low-income housing units?
Malpezzi and Vandell conclude that the critical variable is the price elasticity of
housing supply:
If the market is more or less unresponsive to changes in price, and if the
number of low-income households is largely unaffected by the presence of
absence of this additional subsidized housing, then the additional
[subsidized] housing will have two salutary effects […] First, the [new]
subsidized housing itself will be available for rent, presumably below ex
ante market rents, so households who participated will presumably benefit
from lower rents and possibly better housing conditions. Second, […] the
price of housing will fall in the rest of the market, as [supply increases]
and demand for the [previously] fixed stock falls. […]
On the other hand, if the supply of housing is perfectly elastic […] an
initial fall in the price of housing will lead to a reduction in its supply
Such a reduction will take place until the ex ante market price is restored.
The total stock of housing will be unaffected ex post; but the new […]
units will crowd out an equivalent quantity of unsubsidized housing. 72
Consequently, there is no reason to assume that construction subsidies will automatically
increase the low-income housing stock, particularly where there is reason to believe that
the supply market is highly elastic (highly responsive to price changes). Indeed, Murray 73
finds that over a period of roughly fifty years, the construction of subsidized, moderateincome
housing (targeted at roughly 80 percent of median income) does not have a
statistically significant effect on the total stock of low-income housing. For low-income
social housing (targeted at roughly the poverty line), this crowding-out effect does not
appear to occur.
Moreover, the critical assumption that an increase in subsidized units will not have an
effect on the number of low-income households may not hold true; that is, in an inelastic
market, new households could form from the city’s existing population as larger
households can afford to split up and “doubling up” decreases, while households could
also migrate to the city if discouraged by the cost and availability of housing elsewhere.
This increase in demand could deplete the housing stock and drive rents back up, thus
mitigating the alleged benefits of construction subsidies. 74
Furthermore, given the relatively small profits to be had through investment in lowincome
housing, there is no reason to assume that investor interest will necessarily be