The future of cost rental (Part IV)

The Week in Housing 04/10/24

Over the last few week’s we’ve looked at the findings of our research on the Impact of Cost Rental Housing. It’s clear from the research that cost rental is meeting an unmet need within our housing system, and is providing secure long term homes to a cohort who badly need them. The evidence so far shows that rental homes, when done right, can provide a real alternative to homeownership. This week and next week I finish off the series with some reflections on the future of the sector. These ideas came about through my participation in Threshold’s recent conference, which focused on the potential of cost rental housing. I acted as rapporteur at that conference, and a lot of the below (and next week’s post too) was part of my input at the end of the conference. Note, the below analysis does not appear in the report and reflects my own views, rather than those of my co-authors.

The point of departure for Threshold’s recent Changing Our Housing System conference was the Housing Commission’s recommendation that social and cost rental housing be radically scaled up. Specifically, the Commission calls for social/cost rental to represent 20% of the housing stock (it’s about 9% today). To achieve this, non-market housing would of course need to form a very substantial proportion of new supply. In the research paper Threshold circulated ahead of the conference, they argue that cost rental is central to the future of the PRS, pointing out that the PRS needs to be seen as part of the wider housing system. The availability of a form of secure, below market, rental housing not only provides an alternative for PRS tenants, it can also exercise a positive influence on the PRS as a form of competition, e.g. through price dampening effects. From this perspective, Threshold position cost rental as the ‘lynchpin’ of the housing system change we need, and part of transitioning Ireland to a ‘unitary housing model’. It is also worth pointing out that in the Department of Housing’s recent review of the PRS (which I addressed here), they position cost rental as the key to addressing affordability issues in the PRS.

Of course the big challenge is scaling up the sector to ensure it can deliver on this potential. So far there are lots of promising signs, with cost rental already providing around 1,700 homes, a big increase over the past year (this time last year there were about 550 units). My big take away from Threshold’s conference, however, was that in order to successfully scale up cost rental, something which can only take place over the long term, the sector needs to be sustainable. Drawing on the insights I heard at Threshold’s conference, I develop in what follows a framework based on three lenses through which we might think about the future of cost rental: tenancy sustainability, fiscal/financial sustainability and political sustainability.

Tenancy sustainability

Tenancy sustainability refers to the resident’s experience and ensuring they have a long-term and secure home, and that they feel confident about their future housing. Of course, it encompasses security of tenure, where the sector is already very successful. But more importantly, it relates to affordability, which I looked in detail in an earlier post. Suffice to say that by the most robust measures, there are certainly between a quarter and a third of households who can be described as having an affordability challenge. Crucially, this does not include people who were deemed ineligible on affordability grounds in the first place, i.e. those people who earn above the social housing income limit (between €30,000 and €40,000 net income), but who are deemed to be unable to afford cost rental on the grounds that rents would exceed more than 35% of their disposable income (although there is some discretion on this).

There is also an issue around retirement as our research found that residents are already worried about how they pay their rent in retirement.

Financial and fiscal sustainability

Fiscal and financial sustainability refers to cost rental providers’ and Government’s ability to maintain and scale up supply. From a provider’s point of view (especially the AHBs), financial sustainability means having a predictable and, importantly, realistic rental revenue. In other words, cost rents really do have to meet costs, including unexpected costs and inflation in management and maintenance costs. From this perspective, the relatively high rents that are raising issues from the point of view of tenancy sustainability, are crucial from the point of view of financial sustainability. On the other hand, issues of affordability for tenants also pose a risk from the point of financial sustainability, because it places providers at greater rent arrears and vacancy risk, especially in the context of a future economic downturn (a point I return to below). There are also questions about the level of debt AHBs are taking on to fund both social and cost rental, which will obviously need to grow exponentially if cost rental is to be radically scaled up.

Fiscal sustainability is really about the extent to which the sector is reliant on direct and indirect government funding. We know that in other European countries cost rental is majority privately financed, and most experts in those countries would argue that the diversity of funding sources is crucial to the sector’s long term success. Access to private borrowing means it is easier for the state to continue to back new cost rental projects even when the fiscal position is deteriorating. Of course, bringing in private finance to the Irish model is extremely challenging, but it is important that in thinking about the future of the sector we recognize its current dependence on the largesse of central Government.

A second important feature of the Irish context is that we are an extremely volatile country in fiscal and economic terms, which represents a huge challenge for the sector. In recent times we have had a period of ultra-low interest rates followed by a period of abundant corporate tax receipts. This, in conjunction with the severity of the housing crisis, has lulled us all into a false sense of security that Government will always be keen to increase funding for non-market housing. This strikes me as very unlikely.

Political sustainability

All this is very closely connected with political sustainability. To sustain spending on cost rental housing through different political and fiscal cycles, there will need to be strong cross-party support for cost rental. At the Threshold conference, there was a political panel featuring elected representatives from most parties, and it was clear that there is currently strong cross-party support. But for capital spending on cost rental to be increasingly scaled up, that consensus needs to be very solid.

Rents are relevant here too. High rents in the sector do not bode well in terms of public support for cost rental, as it is hard to justify Government backing for a sector when we see some of the higher rents, such as the well-known City West LDA units. The sector needs to not just deliver affordable housing, but to be perceived by the public as providing affordable housing. But, and here we start to see how complex some of the tensions around scaling up cost rental are, the public will also want to see that the sector is not unduly subsidized. I.e. the subsidy regime needs to be perceived as fair. Consider that cost rental already features a high concentration of middle-income households and even some households in the top 20% and 10% of the income distribution. Voters may well have concerns about the level of subsidy to households who have no ‘housing need’ in the strict sense of the term, and many of whom are earning above average incomes. These issues will obviously come to the fore if the fiscal situation deteriorates. When it comes to cutting back on Government spending, it’s easy to see how cost rental could be first in line.

Cost rental residents themselves will also play a role in the political sustainability of the sector. Residents are not just passive recipients of housing policy, but active agents who can collectively shape policy. Already in our interviews, cost rental residents were raising issues such as whether they should have the option to buy their property. It’s easy to see how in time residents have the potential to collectively advocate for themselves, and because they will be geographically concentrated they are likely to be able to exercise influence over their political representatives.

Another aspect of the political sustainability of the sector relates to the general perception of cost rental among the public. Here it seems likely that Government and the sector will need to be able to tell a compelling story about the value of the sector which can be easily understood by the wider public. In the current crisis it seems the public will except any measure that supports increased supply of housing or purports to offer greater affordability, but in the long term their needs to be a general understanding of why we need a cost rental sector and why Government should allocate substantial resources towards the sector.

Tensions and complementarities

These three prisms of tenancy, financial/fiscal and political sustainability will all be important if the sector is to scale up and reach its full potential. It is also useful to think about the ‘tensions and complementarities’ between these different pillars. If we look at the affordability issue, for example, we can see clear complementarities between tenancy and financial sustainability. The more affordable cost rental is, the better for residents, obviously. But this also aids financial sustainability for providers because it reduces rent arrears and vacancy risk. Rent subsidies are a good example here: they enhance affordability for residents and also massively de-risk the whole sector by insulating it against declines in resident incomes arising, for example, from an economic downturn (which is why rent subsidies are a major part of every cost rental sector – see my recent piece in the Irish Examiner).

Making cost rental genuinely affordable can also support political sustainability, because of course it is much easier for the public to see the value of the sector, and to garner support of politicians, if it is perceived as delivering affordable homes.

But there are also tensions here. Lower rents may undermine financial sustainability of providers if those rents cannot realistically cover the costs of management and maintenance, or future renovation work required. Similarly, lower rents will generally mean a higher level of subsidy from Government is needed (whether that is in the form of loans, grants or ‘in kind’ subsidies like land and tax waivers), and therefore there can be a tension between tenancy sustainability and fiscal sustainability. This can also be a challenge from the point of view of political sustainability, as the greater the level of Government subsidy the more difficult it is likely to be to maintain support from voters who don’t directly benefit from cost rental, especially homeowners who of course make up the vast majority of the people who actually vote.

The potential for private finance is another good example. Diverse sources of finance can be good from a financial and fiscal sustainability perspective as they reduce provider reliance on Government subsidies. They can also enhance political sustainability, because of course it is much easier to sustain public support when for every €1 of Government money spent on the sector there is €9 of private money, as is the case in Denmark. But private finance can also, potentially, be a challenge from a tenancy sustainability point of view, for example if private financial institutions are able to exert influence over the sector to make it more commercially focused, and lose sight of its social mission. This has very clearly happened in the UK social and affordable rental sector.

Next week, I’ll finish this series by further developing the ‘tensions and complementarities’ involved in navigating the three inter-related forms of sustainability discussed above.

Events & news

I don’t think there are any new events to share. I don’t seem to be seeing as many at the moment, maybe due to the decline of Twitter, so if you are organising an event be sure to let me know.

What I’m reading

I somehow missed it when it was first published last year, but I’ve been reading with great interest this fantastic ESRI comparative research on housing affordability. I might write about it in a future post if time permits. An interesting new journal article reviewing the relationship between housing and class.