Behavioural economics and the housing market

The Ministry of the Interior and Kingdom Relations has commissioned SEO Amsterdam Economics to do a theoretical exploration of the possibility that the use of insights from behavioural economics can improve housing policy. The study focused on five themes:

Classic (economic) policy theory assumes that people make rational choices, maximize their own wealth, act independently when doing so, and base their choices on all relevant information that is available. The government needs to intervene only when there are clear information problems (information asymmetry), when there is insufficient competition, possibly due to economies of scale (market power), or when decisions of one individual also have positive and/or negative effects on others (external effects). In addition, the government can intervene to distribute wealth amongst citizens in a different manner (redistribution). This theory leaves little room for the idea that the government can make a decision because it knows better what is good for the individual in question (paternalism). However, behavioural economics show that these assumptions do not properly reflect reality. People are not looking for all of the information, process it only to a limited extent, or insufficiently realize what this information means for their future. In addition, they often act based on certain preferences that are not defined by a limited concept of self-interest. Finally, people also find it difficult to take action: they will start eating healthy tomorrow.

Housing market policy can be improved by making better use of information on people’s actual behaviour. This information can enrich and improve the decision on whether and how the government shall intervene. Further research and/or policy experiments seem to be promising in particular for the themes of energy savings and living with care. It is hard for people to properly assess the usefulness of investments in support of energy savings or in preparation of their (possible) need for care, or they delay making decisions on these issues. With regard to price developments and cashing in on surplus value, behavioural economics also provide useful insights. When it comes to a skewed income-to-rent ratio, behavioural economics seem to be useful in particular for policy support. The basis of effective policy against a skewed income-to-rent ratio lies in decreasing the difference in rental costs between social housing and the market for people who rent below their means and/or stimulating people to move by legal means.