Housing finance and affordable housing: #Housing2030

15/20/21

This week it was all about Budget 2022, but to take a break from all that I’m looking at a major new publication from UNECE, UN-habitat, and Housing Europe: #Housing2030: Effective policies for affordable housing in the UNECE region. Among the lead authors are my colleague here at UCD Prof. Michelle Norris. This is a huge report which covers a lot of ground. Here, in the first of two Newsletters looking at #Housing2030, I want to focus on the chapter that deals with finance (I might return to the equally interesting chapter on land in the future).

What’s most interesting about this chapter is that it takes a systemic approach to understanding the relationship between finance and housing systems, and situates different policies within this systemic approach. This is evident from the subtitle of the chapter ‘shaping investment pathways to deliver affordable housing’, which highlights the way in which financial flows (i.e. credit and equity for housing development and purchase) interact with housing via structural pathways.

The chapter starts by noting that ‘Housing is often expensive to produce and challenging to pay for because the costs of its construction or purchase must be paid for upfront, in a lump sum, prior to construction’. It is this aspect of housing that makes its financing particularly important, and sometimes challenging. The report notes that there are two sides to housing finance. On the one hand, funding for housing development ‘to cover capital investment and operating costs’ (e.g. bank lending to developers or public bodies lending to housing associations). On the other hand, housing finance that ‘allows these costs, especially high upfront capital costs, to be spread over time’ (e.g. mortgages).

It is also worth pointing out that housing is particularly suitable as a form of collateral, because it is something that people can’t live without and often have strong emotional attachment to (and therefore are very reluctant to give up); because it is easily recoverable in case of default (because it’s immobile and very hard to hide); and because its value tends not to deteriorate over time to the same extent as other commodities. For all these reasons, it is no surprise that housing and finance have a very long relationship and that housing systems and finance systems have developed in tandem.

In more recent times, the relationship between housing and finance has of course been of huge concern. As the report notes, this began with ‘Widespread deregulation of housing finance systems, the widespread use of new financial products like securitization of mortgages, and the growing inter-connectedness of national and international financial markets since the 1970s’ which ‘increased the flow of private finance into housing in most advanced economies’. The consequence of this was a global property bubble and the financial crisis of 2008. In response to the crisis, bank lending practices have changed significantly. First, international bank regulations have changed (the report cites the Basel III reforms) to require banks to maintain greater reserve capital, thereby reducing their leverage (and how much they can lend into the property sector). Second, in many countries mortgage lending has been regulated to limit households’ access to credit, such as Ireland’s macro-prudential rules which limit loan-to-value and loan-to-income ratios. The report also notes the private residential landlords are also limited in this regard in many countries (including Ireland) - this cohort was particularly important in pushing house prices up at the peak of the property bubble that burst into 2008 (as detailed in this piece of Irish research).

But the issues relating to the financialization of housing are far from solved. Mortgage market regulations are important and effective, but they have “distribution implications” in that they make access to housing more difficult for some households. In addition, there are more ways than just mortgages in which finance plays a key role in housing systems. The report cites, for example, monetary policies from central banks, including falling interest rates and quantitative easing.

The report also makes the very important point that:

“Non-bank finance, from private equity investors, pension funds, real estate investment trusts (REITs) and other private investment vehicles, has become an increasingly important source of private finance for housing in recent decades”.

In other words, the financial system has responded to the aftermath of the 2008 crash by developing new ways to penetrate the housing system, and as we know from Ireland, the focus here has been the PRS. Trying to regulate the financialization of housing solely via mortgage lending rules, the report argues, is a case of “fighting the last war”. We need to develop a new set of tools to deal with the situation we find ourselves in today.

The report looks at a series of different avenues through which governments can shape the relationship between finance and housing, directing it towards the provision of adequate affordable housing. The report looks at 12 different categories (some of which I will return to next week), but I want to focus on ‘interest rate subsidies, loan guarantees and loan insurance to reduce borrowing costs’. These are a great example of the different ways in which Government can shape the relationship between financial and housing systems.

Interest rate subsidies can relate to either the funding side (supply) or the household finance side (demand). On the demand side, the report notes that many countries continue to offer Mortgage Interest Tax Relief of some sort (including the US, Sweden, and Denmark). However, it also notes that such reliefs can be inequitable, as they tend to benefit wealthier households, and can also inflate demand and therefor prices:

“MITR benefits homeowners who generally have higher incomes than renters, and mostly benefits the highest-earning and highest borrowing-homeowners who pay the highest rate of tax. In addition, there is evidence that that the value of mortgage interest tax relief is capitalized into house prices and therefore contributes to house price inflation and housing market booms and busts.”

On the supply side, interest rate subsidies and loan guarantees are used by many governments to support social or cost rental housing. For example, in Denmark interest rate subsidies ensure that social/cost rental providers are always able to access affordable commercial finance, which in turn ensures the housing they provide can be affordable. In Austria, Government guarantees for the social housing sector reduce the risk associated with lending to the sector, thereby increasing the availability of private finance and reducing interest rates.

There are two things of particular interest here. First, Government can shape the allocation of finance towards the housing system, both in terms of the cost of finance and the volume. Second, this can be done in different ways with very different consequences. Mortgage interest subsidies channel finance towards the purchasing power of middle-income and well off households, thus inflating demand. Subsidized interest rates and loan guarantees for the social housing sector, in contrast, channel finance away from the private housing sector towards the non-market sector, and support high levels of affordable social or cost rental housing.

Challenging some of the articles of faith associated with the right of the political spectrum, the report argues that in ‘many respects housing finance systems are government creations – they could not exist without enabling legalization, government regulation, and implicit or explicit government guarantees’. As such, it makes no sense to talk about a financial system ‘free’ from Government intervention. Instead, ‘policymakers could instead shape financing systems to achieve economic and social policy priorities’. With regard to ideas on the left of the spectrum, which would have traditionally held that social housing should be entirely state financed, the report highlights the many ways in which private finance can be harnessed to enhance affordable housing.

Events

This Saturday a debate on city living will take place as part of the Open House festival, featuring new Housing Agency CEO Bob Jordan. Also this Saturday, there is a walking tour on dereliction in Dublin organized by Reclaim our Spaces and other groups. On the 21st of October the EVICT project’s monthly talk is with Prof. Miloon Kothari (Former UN Special Rapporteur on Adequate Housing). On the 22nd of October Cloughjordan are hosting an event looking at the role of community-led housing.

What I’m reading

Short term rentals have been one of the most controversial features of housing policy in recent years (as per Alan Kelly’s gaffe last week). Environment and Planning A has a new special issue looking at the subject. Another issues which has come to the fore over the last decade or so is evictions. In the US, this is mainly because of the foreclosure crisis. Mathew Desmond’s amazing book Evicted also brought a lot of scholarly attention to the topic. This new special issue of Housing Policy Debate looks specifically at evictions, mainly in a US context. Some new research on evictions in the Australian context was also published last week. And finally, my colleague Nessa Winston has a review article out on housing and sustainable development.