Property values, housing subsidies and incentives : evidence from Chile's current housing policies

Abstract

This study evaluates the performance of low income housing subsidy programs currently operating in Chile. The use of detailed microdata allows a close assessment of the relationship between individual subsidy grants, characteristics of the units purchased and actual transaction prices. The study entails both the comparison between programs with different incentive frameworks, and the relative performance of each of these programs in a context of major increases in the levels of assistance provided. The evidence suggests that in most cases virtually the entire increase in the subsidy to the purchaser, which is intended to make housing more affordable, is translated into increased housing prices. In fact, in subsidized transactions between 2007 and 2009 the agreed purchase prices were almost entirely determined by the maximum subsidy amounts set by the housing authority. This occurred repeatedly in transactions performed through programs where the granted subsidy was virtually a 1 to 1 function of the agreed transaction price and where subsidy beneficiaries have little or no incentive to bargain. In such a framework, all the increases in subsidy levels that occurred in the period were translated into equivalent increases in prices with very limited improvements in the quality and location of the units purchased. On the contrary, prices tended to move much more closely with the unit's predicted price (determined by its actual characteristics) in less generous programs that provide lump sum transfers and where beneficiaries are responsible for paying larger proportions of the balance. However, even in these cases, up to 64 cents per dollar of housing subsidy are estimated to be translated directly into house price inflation. The estimated positive impact of subsidy amounts on prices of existing units is a form of wealth transfer that benefits current owners. Although the majority of today's sellers in this segment are low to middle income households that benefited from housing policy efforts in previous decades, these owners are certainly wealthier than current subsidy beneficiaries and also wealthier than other households still waiting to receive housing assistance. Such wealth transfers may be inappropriate, and undermine the declared goal of targeting housing assistance efforts on those who need it most.