Question

Can you propose a policy that would induce the market to supply more rental housing units?

Short answer

A potential policy to induce the supply of more rental housing units is to implement a tax credit program for developers who construct rental housing units. This policy would provide financial incentives by reducing construction costs and encouraging developers to build more rental units. Components of this policy could include a percentage-based tax credit on construction costs, additional incentives for designated high-demand areas, a time limitation for the credit, and eligibility based on affordability. This policy should result in increased availability of affordable rental housing units in the market.

Step-by-step solution

Understanding the Factors Affecting Housing Supply

To design a policy that would induce the market to supply more rental housing units, we must first understand the factors that influence the housing supply. Some of these factors include: 1. Construction costs: High construction costs can dissuade developers from building new rental housing units. 2. Government policies and regulations: Strict building regulations and zoning laws can limit the construction of rental housing units. 3. Land availability: Limited land availability can make it difficult for developers to find suitable locations for new rental housing units. 4. Market demand: Low demand for rental housing units can discourage developers from constructing new units.

Identifying a Targeted Area for Intervention

To create an effective policy, we should focus on one or more factors highlighted in Step 1, in a way that positively influences the supply of rental housing units. For this exercise, let's target reducing construction costs and incentivizing developers to construct more rental units.

Proposing a Policy

A possible policy that could increase the supply of rental housing units is to implement a tax credit program for developers who construct rental housing units. This program would provide financial incentives to developers, reducing their construction costs and encouraging them to supply more rental housing units in the market. The policy could include the following components: 1. A percentage-based tax credit on the construction costs of new rental housing units, up to a certain cap. 2. Additional incentives for developers who build rental housing units in designated areas with high demand for affordable housing. 3. The tax credit program could be limited to a specific time period, with the aim of encouraging developers to act quickly and meet market demands. 4. Eligibility for the tax credit could be based on the affordability of the rental units constructed, incentivizing developers to focus on providing housing that is affordable to a broader range of income levels.

Assessing the Policy's Potential Impact

This policy should lead to an increase in the supply of rental housing units by reducing construction costs and incentivizing developers to focus on rental housing. Lower construction costs make it more financially viable for developers to construct new units, thereby increasing the housing supply. The tax credit's targeted affordability component will help ensure that the new supply is accessible to a wider range of incomes, ultimately increasing the market availability of affordable rental housing units.