Housing occupies a central part of life. Its quality directly influences personal health and well-being. Its location shapes education, leisure and work possibilities. Its costs absorb a large share of household income. Its environmental performance determines a fair amount of local and global emissions of greenhouse gases. Its financing helps many buy a home and has implications for macroeconomic stability and resilience.

The COVID-19 pandemic and its aftermath have brought new dimensions to the fore, including not least greater recourse to remote work -- facilitated by digitalisation -- and the associated shifts in housing demand. The sharp rise in fossil fuel prices since the onset of Russia’s war of aggression against Ukraine has put additional pressure on household budgets and highlighted the importance of improving energy efficiency in housing.

At the same time, rising awareness about the need to cut greenhouse gas emissions in line with agreed commitments has underlined the critical role of housing in the success of efforts to reach net-zero emissions by mid-century. Moreover, inflation is pushing up construction costs as well as prompting interest rate increases, thereby ending a period of exceptionally low mortgage costs.

Building on the findings of Brick by Brick: Building Better Housing Policies, this new volume expands the Housing Policy Toolkit1 to make housing markets more efficient, more inclusive and more sustainable amid new challenges. Most of the policy tools identified in Brick by Brick remain appropriate to address these new challenges, but new ones have been added.

A number of policy options can be considered by governments, bearing in mind likely synergies and trade-offs among the three dimensions – efficiency, affordability and sustainability – that have guided the analysis:

• Governments have deployed measures to deal with the negative consequences of the increase in energy prices on vulnerable households and firms. They have introduced targeted means-tested income-based support programmes, energy price caps and other price-based interventions. The design of these support measures needs to strike a balance between social protection in the short term and the attainment of longer-term sustainability objectives. The blurring of energy price signals should be avoided to underpin needed changes in investment patterns, energy use and behaviour in support of the transition to a low-carbon economy. Cost-effectiveness in the use of scarce budgetary resources also calls for well-targeted measures that benefit the truly needy.

• The foundation stone of decarbonisation strategies is to ensure consistent carbon pricing across sources, sectors and over time, accompanied by adequate compensation measures to avoid adverse social effects. Carbon pricing – including properly calibrated taxes on fossil fuels used in homes or emission trading – offers an effective and cost-efficient way of creating carbon-saving incentives. It also prevents the "rebound effect" that can erode the efficacy of other policies: for instance, without carbon pricing, regulations or subsidies for energy performance improvements can see their effect partly or even fully offset by greater use. Importantly, the pricing of direct emissions from homes has to go hand-in-hand with the effective pricing of carbon emissions from power generation to ensure appropriate incentives for energy savings, efficiency investment and greater use of decarbonised energy sources.

• However, effective pricing is not enough to decarbonise the housing sector, given the split incentives in landlord-tenant relations and a lack of knowledge among households about the energy performance of their homes. A policy mix combining appropriately designed energy performance certification for new and existing dwellings and renovation mandates, subsidies for energy retrofitting and possibilities to share energy-bill savings between tenants and landlords can help to overcome these obstacles.

• Advances in housing finance are also vital to decarbonising housing. Appropriate energy performance certification frameworks provide a basis for lenders to better recognise the credit quality attached to energy-efficient homes, reduce funding and lending costs and create markets for products that finance retrofit loans.

• In addition to providing support for decarbonisation, effective housing finance can enhance the resilience of financial markets. This is particularly important as monetary conditions evolve away from historically low borrowing costs. Better absorption of, and resilience to, shocks should result from the efforts made since the Global Financial Crisis to build buffers, including on the borrower side by capping loan amounts relative to house values and debt-service-payments relative to income, and on the lender side by requiring more capital against mortgage loans, better consolidating and monitoring off-balance-sheet housing exposures and deploying counter-cyclical capital buffers.

• The rise of non-bank lenders in housing finance over the last decade requires appropriate monitoring and assessments of systemic implications for the financial sector. Prudential regulations could be further strengthened, including by applying to non-bank lenders a risk-based approach in line with the banking regulatory framework.

• The widespread deployment of high-speed internet and advances in remote conferencing technology have enabled many to work from home, a trend that has accelerated since the COVID-19 pandemic and broadened the range of locational choices. The resulting shift in housing demand – from expensive areas in the city centre towards comparatively more affordable remote areas offering more spacious homes and better access to green space – calls for policies that facilitate supply adjustments. They include land use and zoning regulation changes to unlock land for development, redevelopment or densification in areas in greater demand. Tax policies can also support these shifts by focusing on recurring annual taxes rather than transaction-based levies. Central to this new geography of housing demand is continued investment in digital connectivity and the provision of public services, including performant transport infrastructure.

• Improvements in the environmental quality of urban areas due to increases in the provision of amenities have often led to higher house prices, with adverse consequences for low-income households, especially renters. The provision of social and affordable housing can mitigate these effects. Public investments and compensatory measures can be partly funded with tools, including land value taxes, impact fees and charges on building rights, that capture the increase in land value originating in the environmental improvement.