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The following is the Chapter 4 of the OECD assessment and recommendations, taken from the Economic Survey of Denmark 2006 published on 9 May 2006.
Contents
Housing policies need reform
Several reform measures have gradually liberalised the housing market but policies need further reform for two reasons: subsidies and tax expenditures are substantial and not well targeted, and excessive regulation on the rental market may impede labour-market mobility and encourage illegal side payments. Furthermore, supply should be made more responsive to demand in order to damp overshooting house prices. A wide-ranging reform is warranted, but gradual steps are also feasible and preferable to inaction.
Freeing up resources by reducing housing subsidies
In 2005, direct public subsidies for housing amounted to 1.1% of GDP, on top of which comes considerable indirect costs in the form of tax revenue foregone. That is much more than in neighbouring Sweden and also large compared to other OECD countries. These subsidies should be reduced, as housing availability is high by international comparison, and the distributional impact is not very well focused. Reform could proceed in a number of ways:
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Increase the real estate tax for owner-occupied housing to make it neutral vis-à-vis the tax value of interest deductibility, preferably in connection with a wider reform of capital income taxation.
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Phase out tax exemption for co-operatives.
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End the tax subsidies for pension funds' investments in newly constructed private rental housing, as well as the tax exemption for pension funds' return on property bought earlier.
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Replace the general subsidies for housing associations with targeted support for those who are referred by municipal social authorities or in other ways are in clear need of public housing support. Increase the role of municipalities in the allocation of dwellings. From an overall fiscal perspective, the National Housing Construction Fund should be integrated with the central government budget.
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Reconsider the size and targeting of personal housing allowances to reduce the high marginal effective tax rates implied by their withdrawal. Reform the scheme by linking it to appropriate rents in a region instead of actually paid rents.
Making the rental market more open and flexible
A well-functioning rental market is important because it allows people to make undistorted choices both concerning housing and asset structure. The distributional outcome of the current rent regulation in the older part of the private rental sector and in social housing is not well targeted and it reduces mobility with adverse effects for the labour market. Measures should focus on rent liberalisation, full cost pricing and liberalisation of co-operative share prices:
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Let rents in private rental housing be set freely on market terms by progressively scaling back rent regulation.
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Let tenants in social housing pay rents that better reflect differences in quality, location and demand.
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Remove price regulation for shares in housing co-operatives - as in Norway. Such a liberalisation generates capital gains, and the part that reflects identifiable public construction subsidies or urban renewal subsidies might be returned to the state and municipality.
Make supply more responsive to demand in owner-occupied housing
Currently, house prices are high relative to construction costs, making it attractive to build new dwellings. In most parts of the country where prices have been increasing, construction is growing rapidly. But this is happening to a lesser extent in the Copenhagen region. Quite some open farmland can be found within a 30-kilometre perimeter from the city centre, but a combination of tough zoning regulations, cumbersome administrative procedures and local reluctance means that the many smaller municipalities surrounding Copenhagen have not expanded fast enough to keep pace with increasing demand in the capital region as a whole. Municipalities could be given more room for borrowing to finance infrastructure, schools and similar facilities when new land plots are issued for housing. Mechanisms like road pricing could allow infrastructure investment to be more closely linked to where the demand is and help avoiding congestion problems.
How to obtain this publication
The Policy Brief (pdf format) can be downloaded. It contains the OECD assessment and recommendations, but not all of the charts included on the above pages.
The complete edition of the Economic Survey of Denmark 2006 is available from:
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SourceOECD for subscribing institutions and many libraries
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OLISnet, under "Publication Locator", for government officials with accounts (subscribe)
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Additional information
For further information please contact the Denmark Desk at the OECD Economics Department at webmaster@oecd.org . The OECD Secretariat's report was prepared by Jens Lundsgaard, Felix Hüfner and Espen Erlandsen under the supervision of Andreas Wörgötter.
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