Housing plays a special role in the social and political dialogue in most societies. It is often the largest single category of household expenditure, and the housing sector is a large part of the economy. Housing is also a major component in creating stable and healthy communities and a very visible indicator of social conditions. These economic and social characteristics of the housing sector are the reason that almost all societies intervene in housing markets through an array of policies intended to increase housing consumption by various groups. This chapter focuses on one category of government intervention in housing markets—subsidies related to housing finance, that is, the way in which the housing asset is being paid for. Housing finance subsidies can be applied to reduce equity contributions and improve availability and lower the cost of debt for construction, sale, and resale of housing in the ownership and investment markets. Of all forms of housing subsidies, housing finance subsidies are among the most prevalent policy tools and are currently much discussed in the context of overall reforms of housing finance systems.
The current period of macroeconomic stability, sustained economic growth, and lower interest rates in a growing number of developing and emerging market economies has caused governments to take a look at the existing housing subsidy policies and programs, which were often designed during periods of turbulent macroeconomic conditions that prevented the development of financial systems in general and housing finance in particular. Much progress has been made by many governments in improving the conditions for financial sector development and in strengthening the legal infrastructure for housing finance. Some examples include improved land titling and property registration systems and transferability of titles; greater enforceability of contracts, including foreclosure procedures; and reforms in judicial systems that are frequently strongly biased in favor of the underdog. Such macroeconomic and legal improvements have increased the interest of the private sector in expanding the scale and extent of its mortgage and consumer lending for housing. Current subsidy systems are often not well aligned. These changing circumstances and the expansion of formal housing markets to lower-middle income groups have been disappointing in many countries. In addition, most such subsidies are linked to mortgage finance and are not accessible for low-income households.