Is Social and Affordable Housing in Jeopardy? Christine Whitehead Emeritus Professor in Housing Economics London School of Economics AREUEA International Conference Alicante, Spain 6 th – 8 th July 2016

Why Social or Affordable Housing? Different Objectives Fundamentally an urban issue? Efficiency reasons: housing a private good in sense that most benefits go to the owner or occupier BUT poor housing generates negative, mainly locational, externalities; adequate quality, well located accessible housing supports well operating labour markets, health, education and a productive workforce; helps overcome inefficiencies in land assembly, construction and regeneration, in investment and financing markets and in relative power in housing relationships; Mechanism for redistribution– market housing large proportion of income – easier to redistribute in kind than cash; Mechanism for ensuring minimum standard of living, given wide variations in housing costs; But fundamentally is housing a merit good – society wants and is prepared to pay for minimum standards higher than those that individuals would choose given income distribution? ‘Wobbly’ pillar of the welfare state and source of social cohesion.

Why Social and Affordable Housing ? Different Approaches Regulation – but regulation generates higher costs and impacts on supply incentives - so requires support; Subsidy - to suppliers to expand supply and reduce costs to consumer or to consumers to purchase higher standards; Direct provision – to overcome market failures; to provide housing as part of social wage and a mixed economy; to strengthen political support; Practicalities - what is feasible; what can be resourced; what is politically acceptable.

What is Social and Affordable Housing? Terminology Terminology has changed over the decades and has become increasingly broadly based. What happened to the traditional terminology of public housing? Seen as increasingly seen as toxic? Social housing – wider range of providers, mainly of rental housing; Affordable housing – wider range of support, sources of funds and tenure; still supply based or including income related benefits? Distinguish from market affordability – dependant on relative responsiveness of supply and demand and income inequality.

Example: Additional Affordable Housing in England

Social and Affordable Housing in Europe Different Definitions Ownership – public or non-profit: the usual definition at national level because of data availability. Subsidy – direct public subsidy either capital or revenue; either national or regional/local. But nowadays many different approaches including internal cross subsidy; land; developers etc. Rents/prices below market and therefore the need for administrative allocation. Non-market allocation principles. Other – eg financing support, equity loans and partial ownership

Social Housing in Europe Different Approaches over Time Historically a charity or employer provided rental housing sector; State subsidies from late nineteenth century following mass rural/urban migration and associated with the introduction of regulations to achieve higher standards; Post-1945 mass, state provided, rental housing development across Northern and Eastern Europe to meet numerical shortfalls and sometimes for ideological reasons; Aimed at lower income working households rather than the poorest; In Southern Europe a different model, involving family funding and self-build owner-occupation.

Always supply? Always rental? In most of Europe traditionally supply side subsidies and rental tenure. Partly simply history: nineteenth century housing standards raised; lack of affordability; no data on which to base demand side subsidies. Result government support to supply side, enabling pricing and allocation rules and the potential to (try to) ensure financial responsibility. Nowadays demand side subsidies and many different tenure forms available – including in particular partial ownership. But social housing in much of Europe still distinguished by below market rents and allocation plus social management. Compare Europe with the rest of the world – where support mainly in the form of owner-occupation and subsidies to consumers? Fundamental weakness: those excluded.

Financing Social Housing Post war model mainly state finance and subsidy, usually through interest rate reductions. Often some local contribution and often on state owned land; By 1970s and 1980s numerical shortfalls mainly overcome and macro economic problems (including rapid inflation and EU pressure) led to increasing emphasis on reducing public expenditure and the use of capital subsidies; Introduction of income related subsidies (allowing higher rents) in the 1970s and financial market deregulation, together with increasingly valuable unencumbered capital assets, opened up opportunities for new methods of financing social housing through the private sector; Continuing downward pressure on public expenditure, resulting in innovative models based on available assets and private borrowing.

Private Finance for Social Housing Private debt finance initially came mainly from retail banks. Conditions necessary included strong asset base; a predictable rental stream; and powers to raise rents/sell assets to cover unexpected costs; Usually involved continued subsidy (often in the form of an upfront capital grant) to maintain rents at affordable levels; Some form of continuing guarantee of income stream to lender – (eg direct financial guarantees; certainty of continued housing allowances).

Alternative Approaches to Subsidy Land and inclusionary zoning: - UK model of local negotiation based on identified need and planning permission - Zoning models with density bonuses eg Australia - Tariff models - France; Germany; Spain where proportion of land or housing must be used for affordable units All of these - and other similar approaches imply that land prices are reduced to enable social and affordable housing to be provided. Affordable home ownership - shared ownership/partial equity/rent to mortgage – part subsidy and part finance.

In summary: funding social and affordable housing Reductions in supply side subsidies. Plus shifts towards other sources of subsidy and guarantees; Higher rents, wider range of products, including low cost home ownership Greater targeting of income related subsidies; Regeneration including densification/mixed use redevelopments to cross subsidise social housing; Strong capital base allows borrowing at relatively low interest rates; Use of bonds, complex financial instruments, sales to tenants, other suppliers and private equity; Use of household’s own resources especially with shallow subsidy affordable housing; Especially post GFC, lower levels of social housing investment and greater emphasis on multiple sources of funding/subsidy.

Current Trends in Social Provision Size of the social rented sector declining in some European countries – but not as fast as had been predicted; Changing attributes of social tenants – more vulnerable, more ethnic minorities, more migrants; Increasing emphasis on regeneration of post-war estates, which are now of poor quality and expensive to maintain and improve; Continuing shift from supply side to income related subsidies.

Tenure of dwellings Country Social rented housing as % of housing stock Change in last decade Netherlands32-4 Scotland24-6 Austria24+1 Denmark19+1 Sweden**(not defined as social) 18-3 England18-2 France16 Ireland9+1 Czech Republic8-0 Germany5-3 Hungary3 Spain2+1

Social housing = affordable housing? Social v private rents CountryHow social rents are set Social rents close to private Austria Cost-based Denmark Cost-based at estate level Germany Varies with building period and funding Sweden Set by negotiation Social rents 50-66% of private rents France Central government sets—cost-related Netherlands Points system—’utility value’ Scotland Historic cost-based England Were based on local incomes and dwelling price; for new lets now up to 80% of market Social rents < 50% of private rents Ireland A percentage of tenant incomes Spain Cost-based

The increasing importance of income- related housing subsidies Private tenants: all 10 countries in our study Social tenants: all countries except Ireland and Spain Owner-occupiers (some): most countries Eligibility: household income, household size, housing size and rent Amount: Some countries cover up to the full rent; others require households to make a modest minimum payment or pay a proportion of the rent Rent ceiling usually applies

Demographics ‘ Hollowing-out’ but also ‘generation rent ’ The young and the old (pensioners) Single parents - and large families? The unemployed or non participant Low incomes—median incomes of social tenants 50-70% of national median incomes. Migrants and ethnic minorities often overrepresented But Growing need for shallow subsidy housing for those somewhat further up the scale Intermediate rent and low cost/equity share homeownership Private renting as social housing ‘ Hollowing-out’ but also ‘generation rent ’ The young and the old (pensioners) Single parents - and large families? The unemployed or non participant Low incomes—median incomes of social tenants 50-70% of national median incomes. Migrants and ethnic minorities often overrepresented But Growing need for shallow subsidy housing for those somewhat further up the scale Intermediate rent and low cost/equity share homeownership making some contribution; Private renting as social housing.

The Impact of European Union rules EU competition law: ‘State Aids’ Cases brought by private landlords against social landlords in Sweden, Netherlands Ruling that housing in receipt of state subsidies must go mainly to low- income households Affected countries have restructured social housing systems to bring them into compliance

Netherlands Housing associations financially independent Capitalisation of subsidy meant HAs very well off European Union rules have forced them to ‘fence off’ subsidised units Housing associations also provide market housing And private rents set as social up to 700 euros per month Generally no stigma about living in social housing But considerable concern that HAs have become too powerful Taxation of landlord taxation to reduce their strength - and help fund government

Netherlands (note bicycles)

France HLM housing provided by locally based housing associations with close relationships with municipalities; Most of population eligible for some type of social housing: three levels, with three income ceilings; Incentives to allocate to tenants with capacity to pay; But urban social housing heavily concentrated in ‘banlieues’ – resulting in concentrations of poverty and exclusion; Recent law requires that 20% of housing stock in each municipality be social - although much of additional provision concentrated in lower demand areas

France New construction in St Jean de Luz

Spain Small amount of social rented housing provided by municipalities; But culture of home ownership; Most social housing in the form of subsidised owner-occupied units; Generous income ceilings and no restriction on re-sale means subsidy leaks away; Support into home-ownership through financial institutions especially in mid 2000s – resulting in major problems of eviction; A regionally based social housing requirement in new developments.

Spain Owner-occupied social housing in outskirts of Madrid

UK About 60% of social housing owned by housing associations, the rest by local authorities ‘Right to Buy’ for council tenants instituted in now to be extended to housing association tenants; Intermediate home ownership since 1980; Shifts towards increased targeting – higher rents and incentives to move to owner- occupation; Some recycling of subsidy via sales and re- investment; Increasing role for the private rented sector

South London The Brandon Estate, Kennington First towers over 15 storeys to be built by London County Council

Looking towards a different model? Historically social housing in North Western Europe broadly based and often for those who could afford other choices; Now it often houses mainly those in most need—who may not be in work; Affordability for these groups can require deep subsidy - either income related or in terms of rents; Yet there is another increasingly large group who also need some help (affordable housing) - which is currently extremely limited in terms of supply; The contribution made by social housing depends partly on the size of the sector, and whether it is growing or declining - compare Netherlands and UK; But also on how other sectors operate – issues around crowding out?

Trends in financing into the future Reduced availability of government financial subsidy → m ore reliance on private debt finance (especially Netherlands, UK); One alternative to financial subsidy: governments supply cheap/free land; Or use established capital base ( Sweden and Netherlands make positive contributions to government; UK moving in that direction); And household contributions. Some providers or systems have large historic reserves (e.g. Denmark) Increasing role of Private Equity for ownership (e.g. Germany; UK) Future: is there a role for institutional investors in new development?

European Social Housing: the Challenges Declining population in some regions/countries; Worsening income distribution in most countries; Increasing problems of residualisation – tenure and /or spatial; Increasing need for regeneration investment in post war social housing; Increasing pressure to cut public budgets; Increasing issues of affordability among lower income employed households; Increasing emphasis on private renting and financing methods for shallow subsidy provision; BUT social rented housing appears quite robust and remains a good and sustainable model in many countries

Social and Affordable Housing: a Continuing Role? As accommodating those who have few options or as one of many providers? Capital base available outside Eastern Europe Social providers looking for other sources of income/subsidy to provide affordable housing; But also looking to diversify into other activities – market/intermediate – short term and shallow subsidy; Surprisingly resilient in terms of changing proportion of the stock; Why not – someone has to do it; Increasing pressures around the emphasis on accommodating homeless and multiple need households as compared to earlier traditional role of supporting lower income employed households; Resulting in multiple approaches against a backdrop of increasing problems of affordability in the market place and pressures on welfare costs; Social and affordable provision – a cost effective housing policy?