Curbing Rising Housing Costs: A Model-Based Policy Comparison

Boaz Abramson and Tim Landvoigt

Journal of Economic Perspectives, 2025, vol. 39, issue 3, 27-44

Abstract: Recent decades have seen house prices grow strongly relative to incomes, making housing ever less affordable. We develop and quantify a model of segmented housing markets to study the drivers of rising housing costs and to evaluate policies aimed at curbing these costs. We show that rising wealth dispersion, together with stagnating housing supply, can explain the observed increase in housing costs. Demand-side policies such as down payment assistance and mortgage interest deductions inadvertently cause upward pressure on house prices and exacerbate unaffordability. Supply-side policies such as tax credits for development or construction of affordable housing lower house prices by increasing the housing stock. Which type of new housing is built matters: new construction in the high-end segments improves affordability by more in all segments of the housing market compared to new construction in bottom-end segments.

JEL-codes: D31 G51 H24 R21 R31 (search for similar items in EconPapers)
Date: 2025
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DOI: 10.1257/jep.20241427

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