Enable Market to Supply Affordable Housing? Evidence from the Mandatory Inclusionary Housing Policy in Germany

Using a unique dataset on real estate development projects and the mandatory share of price-reduced housing (set-aside) across German municipalities, we explore the impact of housing policy design on housing supply. By using both the instrumented variable approach and several difference-in-difference models, we find that the construction of residential units declines when an obligatory set-aside is present. Adverse effects become more pronounced when the ratio is set too high, particularly in municipalities with a high demand for residential housing and limited land supply. Additionally, we provide evidence that mandatory set-aside increases market-rate housing prices. Policymakers should be aware of the risk of failing to fulfil their social welfare goal, as we find a remarkable gap between actual and expected social housing supply, a noticeable deadweight loss, and evidence for misallocation.     «

Using a unique dataset on real estate development projects and the mandatory share of price-reduced housing (set-aside) across German municipalities, we explore the impact of housing policy design on housing supply. By using both the instrumented variable approach and several difference-in-difference models, we find that the construction of residential units declines when an obligatory set-aside is present. Adverse effects become more pronounced when the ratio is set too high, particularly in mu...     »