The historic global crisis that we are facing has sent shockwaves throughout all strata of society. While the impacts of COVID-19 have been widespread, they have been disproportionately borne by individuals without access to adequate health services, with informal jobs and insufficient savings, and with limited digital connectivity. The pandemic has compounded these existing inequities such that many households are struggling more than ever to afford their housing—as is especially visible in cities around the world.
Globally, almost half of the population lives in cities and this share is expected to rise to 55% by 2050. Cities also concentrate the majority of countries’ economic activity, job creation, and innovation. But the rising costs of urban housing have placed an increasing strain on households: Between 2005 and 2018, rent prices increased in all but two OECD countries, as did real house prices in the majority of Organization for Economic Cooperation and Development (OECD) countries over the same period.
To a large extent, urban sustainability and housing affordability depend on how people live, work, and move within cities. In this context, cities that are sufficiently compact and connected have distinct advantages. They offer easier access to jobs, services, and amenities, while reducing greenhouse gas emissions from transport and construction. However, housing in compact and connected cities is typically more expensive than in sprawling, disconnected urban areas, and this can have negative impacts on certain households. Earlier OECD research in partnership with the Coalition for Urban Transitions has found that the negative impacts of excessive housing costs on renters and first-time homebuyers can outweigh the wider benefits of compact cities, unless housing affordability is tackled in parallel. In OECD countries, one in three low-income renters in the private market spends more than 40% of their disposable income on rental costs alone.
New OECD research in partnership with the Coalition for Urban Transitions, Housing policies for sustainable and inclusive cities, is among the first to examine how national governments can deliver more affordable homes in sufficiently compact cities. The research is one of the key contributions to the whole-of-OECD project on housing started in 2019. It recognizes the difficult tradeoffs governments face and identifies three key interventions that can simultaneously reduce housing costs and nurture vibrant, sustainable urban neighbourhoods. These interventions relate to fiscal tools and rental housing markets, as well as institutional capacity and policy coherence.
First, in order to promote more sustainable housing development, national governments can use fiscal tools to better reflect the real costs of urban sprawl. For instance, single-family detached homes require more space, material, and energy per household than apartment buildings, especially when located in low-density neighborhoods at the urban periphery where associated infrastructure costs are also higher. In the absence of fiscal tools, developers and homeowners do not pay the full costs of the infrastructure needed to service such new developments, or of the loss of agricultural land and forests.
As a result, such developments appear cheaper than their true social and environmental cost, which incentivizes more urban sprawl. To remedy this, national governments can redesign property taxes or introduce impact fees. Ensuring that house prices reflect their true costs to society would incentivize denser development that is more climate-friendly. In parallel, through measures such as inclusionary zoning, national governments can require new developments to reserve a portion of housing units at below-market rent prices. Implementing a split-rate tax, where land is taxed at a higher rate than the buildings on it, is another measure that can deter land speculation, while encouraging more efficient use of space. These approaches have already been applied successfully in several OECD countries, for example in France and the U.S.
Second, national governments should tap further into the potential of rental housing markets to create affordable cities. Certain incentives currently put in place for promoting home ownership, such as preferential tax treatment on home sales or mortgage interest deductions, typically benefit high-income households and contribute to urban sprawl by spurring demand for larger housing units and for single-family detached housing. Measures to support rental housing, such as housing allowances and rent subsidy vouchers, can increase access to affordable housing without directly influencing urban form, although they must adequately target specific and limited constituencies to be efficient and be accompanied by appropriately flexible supply to avoid the fact that the subsidies over time get absorbed by higher rental prices.
Establishing clear and balanced tenant-landlord regulations to ensure that both parties have equal access to information and recourse is another important measure that can bolster a more affordable and transparent rental market. Such measures are especially important given the increases in rent prices over the past decade in nearly all OECD countries. There is also a need for well-designed social rental housing to ensure such housing is accessible to households in need, while avoiding spatial segregation and lock-in effects.
Third, national governments should strengthen institutional capacity and build coherent policy frameworks across levels of government, for instance by defining a national strategy for infill development or by providing technical assistance to local governments to catalogue underdeveloped urban land. National governments can also champion reducing restrictions, such as minimum lot areas and maximum building heights, and utilize land use regulations more effectively to promote denser, mixed-used urban development.
These policy reforms are key for long-term housing affordability, as they can enable markets to make better use of land, increase the supply of housing in inner city neighborhoods and around transport hubs, and reduce house price differences between cities and other areas. To facilitate implementation of these measures, policymakers should consider introducing mechanisms to ensure policy coherence across multiple municipalities, for example on the design of impact fees. This would align the efforts of different ministries and levels of government behind a shared vision for their cities.
Cities around the world are grappling with soaring house prices, the looming climate crisis, and the current COVID-19 pandemic. Changing the way people live, work, and move within cities is key to boost the quality of urban life and reduce our environmental footprint. Instead of addressing one challenge and exacerbating the other, our new and groundbreaking research shows that it is possible for national governments to do both—tackle the housing and climate crises simultaneously and thereby make our cities both more inclusive and more sustainable.
Angel Gurría is secretary-general of the OECD.