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Cascade: No. 65, Spring/Summer 2007

Spotlight on Research: Does Subsidized Housing Investment Improve the Neighborhood?

Housing investment plays a vital role in urban development efforts. Often this takes the form of subsidized housing. But much of the economics literature implies that the use of subsidies to develop housing is not an effective approach to compensate for shortcomings in the housing market or to create housing for low-income households. Yet this position is based on the majority of cost-benefit analyses of housing programs, which have focused solely on the benefits conveyed to the occupants of the subsidized housing. If, however, external benefits accrue to the neighborhood and are deemed economically important, then it could be argued that place-based housing investment by governments may well be a critical component of efficient housing markets. A study by Ellen Schwartz, Ingrid Gould Ellen, Ioan Voicu, and Michael Schill sheds some light on this issue by investigating the external effects associated with place-based subsidized housing.1 The following is a summary of their analysis.

Background

The authors point out that housing investment can affect a neighborhood through the generation of several types of externalities. The two most obvious external effects come from removing a dilapidated building and by constructing a new attractive building on the site, both of which may increase the value of surrounding property. Housing investment can also have an additional positive impact in a neighborhood through a “demonstration effect,” showing the viability of residential projects in the area and thus enticing other investors. Finally, an increase in population stemming from new housing investment in a neighborhood can create a “population growth effect” that could be advantageous to the area. In particular, new homeowners “may contribute to neighborhood stability by remaining in their homes for longer. Plus, they may have stronger economic incentives to maintain their homes properly and to become active in neighbor organizations and political affairs.”

Earlier studies that examined the spillover effects of affordable housing have yielded mixed results. Two studies found that “newly developed public housing can have modest, positive impacts on neighboring property values,” while three others found “small negative effects, associated with certain types of federally-subsidized housing.” The authors note that even aside from any inconsistency in the results of these studies, they have data limitations that prevent them from identifying the direction of causality, namely, “whether subsidized sites are systematically located in weak/strong neighborhoods, or whether subsidized housing actually leads to neighborhood decline /improvement.”

More recent investigations have attempted to address the causality problem by using more geographically detailed data and adopting estimating models that “compare price changes of properties within a smaller area of newly developed housing to price changes citywide, while controlling for neighborhood (census tract) fixed effects.” While the authors acknowledge that this approach is an improvement, it would be preferable to make comparisons to price changes in the same neighborhood. Moreover, they note that previous studies did not explicitly incorporate varying distance from a project when assessing its overall impact, which might result in biased estimates of the true impacts. In other words, it is important to know whether and to what degree spillover benefits from housing investment decline with distance.

Methodology

The authors used a special administrative data set that contained comprehensive information on 293,786 sales of various types of residences in New York City between 1980 and 1999.2 They focused their analysis on estimating the external effects of 66,000 new, subsidized housing units (produced between 1987 and 2000) on the value of surrounding properties. These properties were part of New York City’s “Ten Year Plan” that eventually cost over $5 billion and resulted in the construction or rehabilitation of more than 182,000 units.

In order to address the shortcomings in previous studies, the authors employed an estimating approach in which the external benefits of subsidized housing are captured in the price appreciation of surrounding properties. They used a hedonic regression model with a difference- in-difference specification. Under this approach, “impacts are estimated as the difference between property values in the vicinity of housing investment before and after the completion of a new unit relative to price changes of comparable properties farther away, but still in the same neighborhood.” They also incorporated the impact of distance explicitly in the analysis. This allowed the authors to estimate the price gradient before and after the housing investment, thus capturing how the impact varies with distance from subsidized housing. Their estimating techniques also allowed them to assess the differential impact of investments of different sizes and with a varying mix of owner-occupied and multifamily units. In addition, they were able to investigate the difference in the effects of subsidized housing in lower- and higher-income communities. This particular inquiry, the authors indicate, has received little attention in the literature.

Findings and Implications

Perhaps the overriding theme of the authors’ analysis is that “the conventional wisdom that place-based housing subsidies hold no advantages over people-based housing subsidies needs to be reconsidered.” They found that New York City’s investment in the new housing that they studied produced significant external benefits to urban neighborhoods as encapsulated in the appreciation of prices of surrounding properties and that these benefits were sustainable. Furthermore, the authors were able to estimate the spillover effects between housing investments of 50 units versus 250 units as well as compare the impact of housing investments with a different mix of rental units in multifamily structures. They found that the magnitudes of the external effects tended to increase with project size and to decrease with a larger proportion of units in multifamily rental buildings. Consistent with conventional wisdom, the authors found that the external effects declined with distance from the sites of the housing investment.

The results of the authors’ investigation of whether the impacts varied with the income characteristic of the neighborhood were quite revealing. They found that the spillover effects were generally larger in the more distressed neighborhoods. However, their analysis showed that a single small project tends to produce larger spillover benefits in more affluent neighborhoods. Building a small new project in a relatively high-income neighborhood with little existing blight may effectively eliminate all of the blight in the surrounding area, implying a rather large impact. However, in the view of the authors, the same small project built in a low-income neighborhood amid many distressed properties would produce a smaller impact – a considerable amount of blight would remain that might discourage additional investment. But larger projects could generate a critical mass, making significant spillover benefits more likely.

There are several possible policy implications. One consideration is that property owners in the neighborhoods where city-subsidized new housing is constructed might realize a windfall gain in the value of their property. City coffers could then benefit from the additional tax revenues generated from the reassessment of the properties in the relevant neighborhoods.3 In fact, in New York City, the authors’ “cost-benefit estimates suggest that the gain in tax revenue generated in the 200-ft ring [of the study’s subsidized-housing sites] exceeded the subsidies provided by the city.”4 For planning purposes, the characteristics of a neighborhood might be examined with more of an eye toward the type of housing investment that would provide the greatest spillover. A general policy prescription would be that “a more effective deployment of housing investments can be achieved by directing larger projects towards more distressed communities.”5

  • 1 Amy Ellen Schwartz, Ingrid Gould Ellen, Ioan Voicu, and Michael H. Schill, “The External Effects of Place-Based Subsidized Housing,” Regional Science and Urban Economics, 36 (6), November 2006, pp. 679-707. According to the authors, “publicly-subsidized place-based housing investments represent government subsidies given directly to developers of affordable housing, usually in the form of below-market-interest-rate loans or property tax exemptions.” By comparison, people or tenant-based subsidies “are given to low-income families to help them pay for housing that they find in the private market.”
  • 2 Included in the data set are sales of apartment buildings, condominium apartments, and single-family homes.
  • 3 Of course, the resulting higher property values could lead to higher rents, a financial burden for some tenants.
  • 4 Indeed, the authors suggest that “the rise in property values in the vicinity of the new housing offers the prospect of using tax increment financing, or a similar policy instrument, to finance the subsidies required.”
  • 5 The authors hasten to add that caution should be exercised in generalizing the impacts found in New York City to other areas. Conditions in the local housing market and the economy will influence the resulting impact. However, given the enormous size of New York City, with its diverse neighborhoods and housing programs, the authors are encouraged that similar results might be found in other cities.

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