Sources of inefficiency in subsidized housing programs: A comparison of U.S. and German experience

Abstract

Many developed countries include some mix of housing programs oriented toward either demand-side (consumer) or supply-side (producer) subsidies. Demand-side programs take the form of rent or housing allowances of various types, some of which are characterized by direct cash payments to program beneficiaries, while supply-side programs focus on either new construction or rehabilitation with a multitude of subsidy elements which cover both capital and operating costs. Debates over the efficacy of demand-side and supply-side subsidy programs are common in countries with a mix of housing subsidy mechanisms. Such debates have emphasized a number of differences in demand-side and supply-side programs. Major arguments in favor of demand-side subsidies are that they allegedly are less costly than supply-side subsidies, permit greater freedom of choice in housing and neighborhoods, are more equitable in that they permit more widespread participation among eligible populations, are more efficient in that they make better use of the existing stock of housing, and are more flexible for program administrators in that they can be easily turned on and off in response to changing needs and priorities. Arguments against such subsidies are that they allegedly result in little or no real housing improvement, fail to stimulate the supply of new housing, and drive up housing prices. In the U.S., many of these alleged advantages and disadvantages have been investigated through a series of social experiments such as the Experimental Housing Allowance Program (EHAP) and rigorous evaluations of major subsidized housing programs.’ More recently international comparisons of program outcomes have been permitted as a result of development