Crowding out effect in housing markets - differences between the characteristics of private and subsidized apartment buildings in Helsinki

Abstract

State and local government aim to guide and regulate the housing market. One of the key housing policy instruments are supply-side housing subsidy programs, which support the construction of new rental apartments for low-income residents. These apartments’ rents are lower than market price and they have restrictions for their resident selection processes.

Key aspect affecting the success of supply-side housing subsidy programs is how they affect the housing market equilibrium: the total housing stock and the price level of the housing market in question. Subsidized housing construction may generate crowding out, which means that increased government involvement decreases private involvement in the market. In housing market, subsidized housing construction offers a substitute for the private housing supply. As a result, the construction of a new subsidized housing unit might increase the total housing stock only partially, due to its decreasing long-term effects on the private housing supply and/or demand.

The crowding out effect decreases the effectiveness of supply-side housing programs. In housing markets with inelastic housing supply, such as in Helsinki, the crowding out effect can also be increased by the differences in the efficiency of use of land between privately funded and subsidized housing. My thesis is based on this hypothesis, and answers the question: “Do private and subsidized apartment buildings in Helsinki differ in their characteristics?”

The empirical part of my thesis conducts descriptive regressions for 6 different dependent variables, which depict apartment buildings’ key characteristics and their efficiency to provide housing and to use land. My results suggest that in Helsinki, municipal or state-owned subsidized apartment buildings tend to have more residential floor area, more apartments, and bigger plots than privately funded apartment buildings. Both building types seem to be built and use land as efficiently.

Despite this, the results are likely affected by the limitations of the used dataset. In my thesis, both privately funded apartment buildings with mostly owner-occupied apartments and rental apartment buildings are treated similarly, even though their efficiency measures likely differ significantly. It is probable that rental apartment buildings are more efficiently constructed than municipal or state-owned subsidized apartment buildings. In addition, my results show that subsidized housing owned by other organizations is constructed significantly more efficiently than municipal or state-owned subsidized housing.

My results suggest that the construction and land use efficiency of municipal or state-owned subsidized housing may increase their crowding out effect, and therefore negatively influence the effectiveness of municipal or state-owned supply-side housing subsidy programs in Helsinki.