Why housing and transport costs should always be considered together: A monocentric analysis of prudential measures in housing access

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This paper compares the effects of two prudential measures in housing access on the solvency and welfare of households, with specific attention to transport costs and equity issues. A widespread regulation limits the housing burden (defined as the share of income spent on housing), typically at 33% or so. Using the monocentric model, I show that capping the housing burden drives low-income households away from the city center toward suburban areas, where they face high transport costs. This unintended eviction effect lowers the prudential efficiency of this measure. Capping the housing plus transport burden precludes this eviction mechanism and better protects household solvency, including from strong variations in transport costs such as during fuel price spikes. Additionally, by limiting the bidding capacity of households, both prudential measures lead to a decrease in housing prices. This tends to improve the welfare of households, firstly of high-income ones (being less affected by the constraints). The effect is stronger when capping the housing burden, so that households, again firstly high-income ones, are typically better off (in terms of welfare) than when one caps the housing plus transport burden, however. Considering the primary objective of prudential measures – protecting household solvency, firstly of low-income households – these findings call for the inclusion of transport costs within prudential ratios, as well as indicators of housing affordability. This would incidentally raise public awareness with regard to the high costs of private cars, which are often underestimated. A short application to the Paris region corroborates that a policy change from housing only toward comprehensive housing plus transport prudential ratios might significantly improve the situation of low-income households.