Cost rental housing and the affordability challenge: lessons from Europe
The Week in Housing 25/02/22
We will see the cost rental sector finding its feet here in Ireland over the next year, and no doubt there will be plenty of debate and even controversy around it. In the near future I hope to write a series of issues of the Week in Housing making the case for the importance of building a political consensus around cost rental housing, across parties and indeed across society. Specifically, I want to argue that a focus on the alleged ‘unaffordability’ of rents in the sector, an issue which has already been prominent in commentary on cost rental housing in Ireland, is misguided and even dangerous.
This week and next week, however, I want to look at a recent report from Housing Europe, commissioned by the Housing Agency, which looks at cost rental housing in three European countries: Denmark, Austria and Finland. The mechanics of cost rental housing are already well understood here in Ireland, so I won’t rehearse the basics. Instead, I want to hone in on the financing arrangements in each country (this week) and the nature of rent setting (next week). I will also look at the strengths and challenges of cost rental with regard to low-income households, which will surely be where much of the focus is here in Ireland.
Let’s start with Austria, where cost rental housing represents around 24% of housing stock. Housing Europe’s report presents the financing arrangements as follows:
30-40%: A low-interest (currently 1% fixed rate) public loan from the regional government, usually in the form of a bullet loan.
30-40%: A commercial bank loan, 25-30 year term, current interest rates are around 1-1.5%. Specific housing banks raise capital through bond issue.
10-20%: Equity of the Limited Profit Housing Association (LPHA).
5-10%: Tenant equity contribution. Deposit paid by tenant which is reimbursed at the end of tenancy, with a 1% depreciation per year of residency.
The Austrian model is based on a very broad mix of financing which makes it robust and resilient. Public loans are repaid by LPHAs to Government, and these repayments are then used to finance new cost rental housing. Very low interest rates from Government and private sector loans are crucial. Private sector interest rates are so low because the sector is viewed as extremely safe and there have been virtually no bankruptcies of LPHAs in the sector’s 100 year history. In addition, there is very a robust system of auditing which ensures LPHAs act in a prudent manner.
Denmark
Cost rental housing in Denmark today represents 20% of the housing stock, having grown from 14% in the ‘80s. As the report argues, this makes Denmark a fairly unique example of a country which has been able to significantly expand its non-market housing during the era of neoliberalization/financialization. Denmark’s cost rental sector is also notable for its ‘tenant democracy’, which emerged form radical tenant mobilization in the 1970s. Each cost rental housing estate is effectively governed by the residents, as they elect the board of management, which in turn takes part in decision making at the level of the relevant housing association.
The Danish model is quite different from the Austrian as far as financing goes. The report breaks it down as follows:
86-90%: Loan from a mortgage institution. Lending is currently primarily based on a 30-year mortgage loan. State interest rate subsidies are given to aid with the payment of these loans, reducing the costs for both providers (repayments) and tenants (rents). The state also guarantees the bonds behind the mortgage loans used to finance social housing, further reducing costs.
8-12%: Municipal loans. The municipality pays a portion of the cost up front in the form of an interest-free, 50-year loan.
2%: Tenant equity. Paid by the tenant upon taking up residence, and repaid to the tenant at the end of their tenancy.
Finland
Finish housing providers are generally owned by municipalities. Cost rental also only makes up 11% of housing stock, so is significantly smaller than Danish and Austrian sectors. The report breaks down the financing arrangements as follows:
95%: Private financial institutions. Lending from commercial banks/financial institutions. Loans are guaranteed by the state, reducing risk for lenders (and hence interest rates). If the interest rate on borrowing exceeds 1.7%, the state housing agency will also provide a subsidy to reduce repayment costs.
5%: Housing provider equity, from their own funds.
Additional: ‘start-up grant’. In many urban areas, agreements have been reached between the state and the relevant urban authorities in a given area. Areas covered these agreements can apply for a so-called ‘start-up grant’, which provides €3,000–€10,000 per new social dwelling built. Bonus grants are also available for meeting certain extra criteria, such as using more sustainable forms of construction, for example, using materials such as responsibly sourced wood.
The challenge of financing cost rental housing
As we have seen, financing arrangements are similar but there is significant variation across the three countries discussed in the report. Notably, equity is an important aspect of each model. In particular, as the cost of land becomes increasingly challenging, equity has taken on a greater role as it is one of the most direct ways to reduce costs, and therefore maintain affordable rents. Equity can come from two forces, either the Housing Association’s own equity or via a tenant contribution in the form of a deposit. In order for Housing Associations to build up equity, they need to have some model of recycling revenue, for example by using surplus revenue from older housing to finance new development. Tenant equity is more controversial as it requires households to have savings, which obviously presents a challenge for lower-income households. In Austria, for example, the tenant equity or deposit is a relatively new feature, and is cited by more critical commentators in Austria as one of the reasons the cost rental sector is becoming more difficult to access for low income households, and indeed as an example of the partial neoliberalization of the sector. On the other hand, a low-interest rate public loan is available to support households making this payment, and the contribution of the tenant deposit brings down overall financing costs and hence final rents.
Ultimately, the benefits of incorporating deposits from tenants are reaped by the tenants themselves, as any cost reductions inevitably translate into lower rents in the cost rent model (one of its great advantages).
Austria stands out from the other two models in that there is a much greater role for both equity and, most importantly, for public loans. The Austrian LPHA sector is robust and long standing and therefor is in a position to deploy substantial equity. The provision of a higher proportion of public financing is a political choice. This provision, and the associated low interest rate, ensures a lower cost of financing and therefore also plays an important role in keeping rents reasonably low. It is also notable that both Denmark and Finland, which typically use more than 90% private financing, use state interest rate subsidies to control borrowing costs (and therefore rents). That said, the key point is that a greater proportion of public financing and lower interest rates associated with public financing are two of the most direct ways in which policy makers can lower costs and therefore rent levels under the cost rental model. It is unsurprising, therefore, that rents in Austria are significantly lower than in either Finland or Denmark.
I suspect that the greater availability of public finance in the Austrian case can ultimately be explained by the very strong, cross-party political consensus that exists around cost rental housing.
Next week we’ll look at the other side of financing cost rental housing: setting rents.
Events
On the 22nd of March a really interesting event for renters in Northern Ireland, a DIY renters’ manifesto workshop. Throughout March and April the UCD Centre for Irish Towns is hosting a series of workshops on issues affecting towns. UCD’ Equality Studies Centre has a new website, find out about future events and watch recordings of past events here. Don’t forget, if you are organizing any housing related events, let me know and I will be sure to include them here. Finally, both parts of the seminar on institutional landlords in the North American context I organised in December are now available to watch online. Part I is here and Part II is here.
What I’m reading
An interesting new article on the interaction of housing and the Covid-19 pandemic, published in Urban and Policy Research. Irish Institutional Property have a new report on the fifteen minute city in the Irish context. Finally, the latest issue of Housing Studies is just out and it’s a special issue looking at practices of ‘home making’ among people experiencing homelessness.