Housing as economic stimulus

ONE MIGHT SAY IT WAS HOUSING THAT brought the US economy down—and much of the world economy with it. It was, after all, the bubble created by the infamous subprime housing loans that led to the financial meltdown, tracing in turn to the US government’s laudable policy of making housing accessible to all American families.

But it is equally correct to say that until the “bust” happened, housing helped fuel the economic boom enjoyed by the Americans for one of the longest periods of sustained economic growth the United States had seen in recent history.

Housing, after all, can be one of the most effective ways of stimulating consumption and production activity in the other sectors of the economy. The stimulus occurs because of the “multiplier effect” that marks any spending done in the economy, whether by private spenders (that is households or firms) or by the government.

Multiplier drivers

I have already explained in this column how that multiplier process works (“Spending our way out of crisis,” NFL 12-15-08). It comes from the way new spending (say by government) becomes income for those who produced/sold the goods and services bought with the original spending.

These new incomes turn into another round of spending, subject to some saving by the income receivers, that again turns into incomes for others, triggering more new spending—and the process repeats itself ad infinitum. As such, the total additional income resulting from any new spending would be several times the size (i.e., a multiple) of the original amount spent.

How much the original spending is actually multiplied depends on how much is saved at each round of the income-spending cycle, how much of the spending goes to domestically produced goods and services (as against imports) and how easily the spending permeates the rest of the economy.

If the money was spent, for example, to buy a new presidential jet from Boeing or election automation equipment made in the United States, then it’s Americans’ incomes that would be multiplied, not that of Filipinos.

Potent stimulus

Government would do well to invest in low-cost housing because apart from directly responding to a basic need of its citizens, especially the poorer ones, it would also have a powerful multiplier effect on the rest of the economy, for at least three reasons.
First, low-cost housing is a labor-intensive investment, requiring large numbers of construction workers and thereby creating many more jobs than a more capital-intensive investment would. This way, the money is likely to circulate more among lower-income and lower-saving individuals, thereby keeping more money moving around in the spending-income cycle—hence boosting the multiplier effect.

Second, low-cost housing would have much lower import content than alternative government expenditures (say, broadband equipment or hybrid seeds from China), thus keeping the money circulating here at home. Apart from the higher multiplier effect of keeping the money in the domestic economy, it would also generate more tax revenues from domestic transactions.

Third, housing construction has a lot of allied domestic economic activities, ensuring that the money spent on housing will permeate widely in the economy and create broader benefits for the people.

Missing the boat

It is against this backdrop that I was shocked to discover how pitifully little our government has been spending on housing relative to our Asian neighbors. I recently had to assemble for a research study a table on comparative public expenditures on housing, from data compiled by the Asian Development Bank.

For the period 2000-2007, Singapore topped my list, with public housing expenditures amounting to 2.1 percent of its GDP. Indonesia had 1 percent, Thailand had 0.74 percent, Malaysia had 0.38 percent and Bangladesh had 0.35 percent. The same database showed the Philippines having—brace yourself—0.09 percent of GDP spent on public housing! Even if the ADB figures erred by 100 percent, we would still be far at the end of the pack.

The implication from all this is that we have not been taking advantage of the potentially strong stimulus effect of public housing investments as much as our Asian neighbors have in recent years. As seen above, this should help achieve more broad-based economic growth, direly needed now in light of our recent perverse experience of rising poverty incidence accompanying record economic growth.

In a recent assessment on the Medium Term Philippine Development Plan
(MTPDP) 2005-2010 housing targets, the John J. Carroll Institute on Church and Social Issues (JJCICSI) observed that government targets amount to a mere one-third of Filipinos’ actual housing needs.

The assumption is that the rest would be picked up by the private sector. But this assumption is rather unrealistic, given that the bulk of the housing backlog is in the low-income groups for whom decent housing would be otherwise inaccessible unless subsidized.

JJCICSI’s recommendation was thus quite logical: Our government simply needs to dramatically jack up its budget allocation for low-cost housing. It will not only be a great stimulus for broad-based growth; it will also uplift a lot of Filipino lives. –Cielito Habito, Philippine Daily Inquirer

Comments welcome at chabito@ateneo.edu.