Causes and Consequences of the Housing Affordability Crisis

Abstract

This Ph.D. dissertation contributes by shedding new light on three topics that significantly impact housing in urban areas, using fine-grained data.

Chapter 2 studies how Airbnb affects a city's housing market. For that, we apply several regression-based approaches that exploit the timing and geography of the entry of Airbnb in Barcelona to estimate the effects of this platform on housing markets. We use high-quality microdata on both rents and prices and combine these data with information on the location of Airbnb activity within the city.

The results show that Airbnb activity in Barcelona has increased both rents and housing prices, with larger effects for prices than for rents. Results indicate that, for a neighborhood with the average Airbnb activity in the city, rents have increased by 1.9\%, while transaction prices have increased by 4.6\% and posted prices by 3.7\%. However, in the most touristy parts of the city, the effects of Airbnb are substantially higher. In neighborhoods in the top decile of the Airbnb activity distribution, rents are estimated to increase by as much as 7\%. In contrast, increases in transaction and posted prices are as high as 17\% and 14\%, respectively.

Chapter 3 estimates the long-term effects of an increase in the unemployment rate at graduation time on housing tenure and affordability. I exploit the unemployment rate at the time of college graduation as an exogenous income shock to the individual, for a large sample of college graduates since 1960 across Europe. This strategy has been explored extensively for career outcomes, but so far, not for housing tenure and affordability. These two outcomes are essential, as they are key determinants of an individual's welfare.

The results show that a one percentage point rise in the unemployment rate at the time of graduation leads to a 1.5 percentage point increase in the probability of living with parents one year after graduation. Additionally, it decreases the probability of renting by 1.02 percentage point and of home-ownership by 0.45 percentage point. Worse initial labor market conditions translate into worse affordability ratios for homeowners and renters due to lower household income and stable rents or prices. Effects are persistent over time and are still present ten years after graduation.

I develop an overlapping generations model to link income shocks to younger cohorts to housing tenure and affordability changes. This model provides several predictions. Mainly, that rigidity on the rental market is largely responsible for whether the labor market's welfare shock is absorbed or amplified by the housing market. This rigidity will result from an outside option for landlords, a feature widely documented in the literature. In particular, if rental markets are rigid, an income shock to young agents will create a shift away from renting and ownership in favor of the parental home. Additionally, this shock worsens affordability for both renters and owners, as their income drops while housing costs do not. This scenario leads to significant welfare losses for young cohorts, while older agents become relatively wealthier and are better off.

I find that housing aid policies such as the \textit{Aide Personnalisée au Logement} (APL) in France can help mitigate the income shock by enabling young agents to afford to rent. However, these policies only improve young agents' welfare when implemented in rigid rental markets, pointing towards the importance of identifying the correct conditions for applying these policies.

Chapter 4 studies the dynamics of land development in Spanish municipalities having experienced a flood over the last 30 years. For that, we use changes in surface, distance to flood zones and water bodies, and elevation of new development compared to the year before a flood event. Our empirical strategy relies on the assumption that conditional on municipality and year fixed-effects, the timing and the extent of a flood is as good as random. We also study the impact of floods on several other economic indicators, including employment and migration patterns.

Our main results indicate that, on average, experiencing a flood does not affect new development. Development takes place at a pace similar to that of the year previous to the flood. Additionally, we find that new construction does not take place farther away from the flood zones nor on higher ground. When analyzing development's final use, we find that residential buildings are being built at the same rate as before the flood. A flood event does not significantly affect other key economic variables, such as unemployment or migration.

Nonetheless, municipalities with low development levels in the decade before the flood experience a housing boom after the event. New development increases permanently by 25\% compared to the year previous to the flood for these cities. Cities having experienced high levels of development before the flood experience a 27\% permanent drop in new construction compared to before the event.

Finally, we study an EU directive mandating EU member states to identify flood-prone areas, named ARPSIs. In the Spanish case, this directive identified areas that were not previously considered dangerous. Still, it was not accompanied by any regulation designed to restrict future development. We compare areas that were newly declared as potentially hazardous to areas close to water bodies but were not affected by the policy. Overall, signaling areas as potentially high-risk does not deter development from taking place near such areas.

We can draw three main lessons from this research in terms of policy design. First, home-sharing platforms can increase housing prices in cities like Barcelona, particularly in the most touristy neighborhoods. This points towards the potential effects that regulating these platforms' activities can have on housing affordability. Second, the success of policies directed to improving housing affordability and accessibility for young people can depend heavily on the rental market conditions. In particular, even when policies are targeted towards the young and least well-off population, benefits can still be captured by wealthier and older landlords, leaving the targeted population worse off. Third, signaling certain areas as potentially dangerous is not enough to deter development from taking place near such areas. In particular, if restrictions are not enforced after signaling areas as high-risk, it can lead to overdeveloping close to these zones, exposing more construction to potential flood risks.