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Ensuring Access to Essential Services: Demand-Side Housing Subsidies

Author: H Katsura and C Romanik
Date: 2002
Size: 21 pages (105 KB)

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Summary

How can access to housing for the poor be increased? Are demand-side housing subsidies the solution? This paper by the World Bank examines the strengths and the weaknesses of demand-side subsidy approaches for improving access to housing for poor households. It suggests that different subsidies are appropriate in different situations. Moreover, the design of housing-related subsidy programmes varies in response to philosophical, political and resource considerations.

Housing assistance helps provide adequate shelter for the poor. Stand-alone housing assistance rather than general cash benefits ensures the poor have a minimum level of housing. Earmarking funds also makes it easier to secure political and donor support. In developing countries, housing assistance is shifting away from supply-side approaches towards demand-side subsidies, mainly capital grants or allowances. Capital grants are one-time subsidies to purchase, build or rehabilitate housing. Housing allowances are regular ongoing subsidies to offset housing costs. They can be norm-based, that is, a fixed amount based on current market prices. Alternatively, with the burden limit approach, the level of subsidy varies based on the household’s contribution.

Each subsidy has its advantages and disadvantages with respect to targeting, transparency, price distortion, institutional capacity, administrative costs and funding. The design of subsidies also varies in response to philosophical, political and resource considerations, which impacts on the subsidy’s effectiveness.

• Capital grants are flexible and transparent. They do not distort prices or require ongoing funding.
• Capital grants are popular in South America. Elsewhere, they have been used to respond to particular problems, like helping earthquake victims buy housing.
• Housing allowances are transparent and have good targeting potential.
• There is little price distortion with norm-based allowances. Households pay the difference between the subsidy and the rent. With burden limit allowances, the government pays the difference between the household contribution and the rent, which strongly distorts prices.
• All subsidies require large institutional capacity. Housing allowances are more administratively complex than capital grants as they require ongoing funding.
• Housing allowances in transition countries have helped protect households from reform-related increases in housing costs.

Different subsidies may be appropriate in different situations. Policymakers will have to weigh the strengths and limitations of each approach before deciding which one to use. Factors to consider include:

• Good targeting potential depends on outreach, benefit levels and factors affecting enrolment and participation. For instance, poor people may not participate in housing allowances due to low benefit levels and burdensome enrolment procedures.
• Capital grants are useful for supporting relocation efforts after natural disasters and in complementing housing finance programmes. They work best where there is a well-developed private sector.
• Housing allowances are more appropriate in well-off countries with solid institutional capacity, secure tenure, and high-quality housing stock. It is not appropriate in poor countries where government may be unable to sustain recurring payments. It will also not work in tight housing markets with limited supply of affordable units.
• Norm-based housing allowances are preferable to burden-limit allowances as they do not distort prices.
• Upgrading existing housing and infrastructure may be more cost-effective than high-cost capital grants and housing allowances.
• Capital grants and allowances may help phase out traditional supply-side programmes. The government can use existing funds to replace direct construction programmes with demand-side subsidies.

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Source: Katsura, H. and Romanik, C., 2002, ‘Ensuring Access to Essential Services: Demand-Side Housing Subsidies’, Social Protection Discussion Paper no. 232, World Bank, Washington