How Government Policies Influence the Housing Market

1 September 2025

When it comes to real estate, government policies play a massive role in shaping the housing market. From tax incentives to interest rates and zoning laws, these regulations have a direct impact on home prices, supply, and demand. Whether you’re a homebuyer, investor, or real estate professional, understanding how government policies influence housing can help you make informed decisions.

In this article, we'll break down various ways government policies affect the housing market and explain how they influence affordability, supply, and overall market dynamics.

1. Interest Rates and Mortgage Policies

One of the biggest ways the government affects the housing market is by influencing interest rates. The Federal Reserve (or other central banks in different countries) sets the base interest rate, which trickles down to mortgage rates.

How Interest Rates Affect Housing

- Low Interest Rates → Higher Demand: When interest rates are low, borrowing becomes cheaper. Homebuyers can afford larger loans, which increases demand for homes. More demand means higher home prices.
- High Interest Rates → Lower Demand: When interest rates rise, mortgage payments get more expensive. This discourages buyers, lowers demand, and can slow down home price growth—or even cause prices to drop.

A prime example is what happened in 2020-2021. Interest rates hit record lows, mortgage approvals skyrocketed, and home prices surged. But as rates climbed in 2022-2023, the market cooled off.

2. Tax Policies and Incentives

The government uses the tax system to encourage or discourage real estate investments. Here are a few ways tax policies influence the housing market:

Mortgage Interest Deduction

In some countries, homeowners can deduct mortgage interest from their taxable income. This policy makes homeownership more appealing, driving up demand.

Property Taxes

High property taxes can make owning a home more expensive, discouraging buyers and potentially reducing home values. On the flip side, low property taxes can attract buyers and boost property sales.

Capital Gains Tax

If you sell a home for more than you paid for it, the government may tax your profit (capital gains tax). Some countries offer exemptions or reduced rates for primary residences, encouraging homeownership. However, high capital gains taxes on rental or investment properties can discourage real estate speculation.

3. Housing Supply and Zoning Regulations

Another way government policies influence the housing market is through regulations that control housing supply.

Zoning Laws

Local governments set zoning laws that determine what kind of properties can be built in different areas. If zoning laws are too restrictive (like limiting the number of apartments in a city), housing supply stays low, which pushes prices higher.

Building Permits and Regulations

Governments control building permits, environmental regulations, and safety codes. While these rules are necessary for public safety, excessive red tape can delay projects and reduce the availability of new housing.

Affordable Housing Programs

Some governments introduce policies to encourage affordable housing construction. These include subsidies, tax credits for developers, or requirements that a percentage of new developments be set aside for low-income buyers.

4. Rent Control and Tenant Protections

For renters, government policies can have a major impact on affordability.

Rent Control

Some cities impose rent control policies that limit how much landlords can increase rent each year. While this helps renters by stabilizing housing costs, it can discourage landlords from maintaining properties or investing in new rental units, leading to shortages.

Eviction Protections

Laws that prevent landlords from evicting tenants too easily can provide security for renters. However, strict eviction laws may discourage property owners from renting out their homes.

5. Government-Backed Loan Programs

Governments often offer special loan programs to help certain groups buy homes.

First-Time Homebuyer Programs

Many countries have programs that assist first-time buyers through low-interest loans, down payment assistance, or tax credits. This increases homeownership rates but can also drive up demand and prices.

Veteran and Low-Income Loan Programs

Some governments offer special mortgage terms for veterans, low-income families, or rural homeowners. These programs make homeownership accessible but can also lead to higher home prices due to increased demand.

6. Pandemic and Crisis Response Policies

During economic downturns or crises, governments introduce policies to stabilize the housing market.

Eviction Moratoriums

During COVID-19, many governments temporarily banned evictions to prevent homelessness. While this protected struggling renters, it put financial pressure on landlords who relied on rental income.

Stimulus Packages

Governments sometimes provide direct financial aid to homeowners and renters during economic downturns. While this helps people afford housing, it can also contribute to inflation and rising home prices.

Forbearance Programs

In times of crisis, mortgage forbearance programs allow struggling homeowners to pause or reduce their mortgage payments temporarily. While this helped many avoid foreclosure during COVID-19, it may have also contributed to an overheated housing market.

7. Infrastructure and Public Investment

Lastly, government investments in roads, transit, schools, and other infrastructure can greatly influence home values.

- New Highways or Public Transit: If the government builds a new metro line or highway connecting a suburban area to the city, home prices in that area often rise as demand increases.
- School Funding: Better schools attract families, boosting demand and property values in surrounding areas.
- Urban Development Projects: Large-scale projects like parks, business districts, or tech hubs can drive up nearby housing demand.

Final Thoughts

Government policies shape every aspect of the housing market. From interest rates and tax incentives to zoning laws and rent control, these regulations impact home prices, supply, and demand.

While policies are meant to stabilize or improve the housing market, they can sometimes have unintended consequences—like creating housing shortages or driving up prices. Whether you're a buyer, seller, investor, or renter, keeping an eye on government policies can help you navigate the market more effectively.

At the end of the day, real estate isn’t just about buying or selling property—it's also about understanding the bigger picture of how policies shape the market.