The EU’s response to the housing crisis risks being worse than the problem itself

Yesterday, the European Commission published the draft of the Affordable Housing Act, a proposed regulation aimed at tackling the problem of high housing costs. The text sets out certain criteria according to which an area may be classified as experiencing ‘housing stress’: the ratio of house prices to (median) income has risen over the last decade; it exceeds a certain threshold; and it is unlikely that these conditions will cease to apply within the next three years. For areas classified as under housing stress, national authorities (for example, a mayor) would be authorised to adopt restrictive measures on lettings and property sales that do not concern a primary residence. In essence, the regulation would provide a legal framework for the plethora of local measures aimed at limiting short-term lettings and, potentially, the second-home market.

The Commission’s measure tackles a real problem with the wrong tool. In some local European property markets, demand for housing far exceeds supply and this, as the textbooks would have it, drives prices up. There is an issue of fairness, of course. But also one of efficiency. In these markets, demand for housing is high partly due to so-called agglomeration economies – that is, the productivity gains offered by a mix of density, human capital, innovation and so on. To put it more simply: Milan – a city on a growth trajectory far more intense than the Italian average – attracts workers, businesses, universities and research centres, whereas some provincial towns do not (remember the controversy about Milan ‘stealing’ talent? Well, it isn’t stealing anything; it’s simply attracting it). Excessively high property prices can limit the realisation of such economies of scale.

Firstly, the proposal is flawed because it severely infringes property rights, whilst offering no discernible benefits. The Commission itself acknowledges this: restrictions on short-term lettings ‘are not sufficient to address the structural causes of the long-term housing shortage’. Indeed, such powers should be regarded as exceptional and used with caution. However, handing an 18-year-old a bottle of whisky and the car keys whilst advising them to drink sparingly is rarely a good strategy. Even less aggressive measures could prove ineffective. For example, imposing an administrative price cap would further reduce supply. Finally, the criteria for determining whether a local market is under stress are difficult to apply, and this ambiguity could easily give rise to a huge amount of litigation (do we have reliable data on ‘median’ income by neighbourhood/city in Italy? No. How do we deal with tax evasion, which skews income data? Who knows. How do we estimate the probability that the stress will not subside over the next three years? Who knows).

If the problem is a shortage of supply, restrictions on new builds and renovations must be eased, thereby tackling the problem at its root. This involves facilitating urban development, primarily through vertical expansion or by speeding up changes in land use. Improving the speed of the civil justice system could also encourage some landlords to increase the supply on the long-term rental market. Finally, it would be useful to provide a clear regulatory framework for remote working. These measures would come at no cost to the public purse.

Then there are other measures which, on the other hand, do come at a cost. The first is the upgrading of infrastructure and transport links between attractive cities and their suburbs or surrounding towns – which are often in the process of depopulation – thereby facilitating access to the most sought-after areas (for example, because they house offices or services). Moreover, this could address the twin crisis that has been completely ignored: namely, that of properties losing value and remaining unoccupied, whilst still incurring costs for their owners, often because they are far from labour markets. The second is the construction of student accommodation to tackle the problem of high rents faced by students. The third concerns social housing projects – on which we spend very little – that would help the most vulnerable sections of society. We are aware that these are very costly measures. But following the debacle of the Superbonus and the NRRP, this criticism should be directed elsewhere – towards those who pushed through these measures yesterday and now wish to correct the property market in ways that are blatantly interventionist, illiberal and harmful.