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For economic growth and stability: affordable housing wanted!

 CECODHAS HOUSING EUROPE

8 juin 2012, représentation de la Caisse des dépôts

What is CECODHAS - Housing Europe?

CECODHAS - Housing Europe is the federation of cooperative, public, social housing

… a network of national and regional housing providers federations gathering 4.500 public, voluntary housing organisations and 28.000 cooperatives housing.

Together the 43 members in 19 EU members States manage 25 million dwellings.

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EU policies and housing in a nutshell

Direct enablers : Structural Funds; period 2007-2013: 9 billion € potentially eligible for housing energy upgrade, and 4 billions for urban renewal and housing for marginalised community. Beginning of 2012, less then 2 billions had been invested. Next period: housing eligible for energy efficiency and for community development: more budget, under negotiation

Direct constraints: State aids rules: to receive public support social housing mission shall be clearly defined to answer market failures, Energy efficiency directive: under discussion at Parliament and Council an obligation to renovate a % of the public housing stock; EPBD: from 2018, all new housing supported by public budget to be nearly zero energy housing > specific costs with no clear financing scheme

Indirect constraints (or incentives?): EU economic governance: avoiding the next financial and economic crisis by monitoring national economic performances and European economic decisions. Public budget under control. Public and private debt, housing price increase as indicators to analyse how wealthy is the economy of a country (all these processes called 6 pack+2)

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European economic governance post crisis: 6 packEuropean economic governance post crisis: 6 pack

AND …. The European Stability mechanism ESM to raise funds on the capital market to finance loans of member States under strict fiscal

consolidation conditions

Plus a Euro pact plus: more economic coordination for Euro zone

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What imbalances are looked at ? Maastricht criteria ++++

External positions (e.g. current accounts, net international investment positions)

Competitiveness developments (e.g. REERs, ULCs)Export performance (e.g. export market shares)

Public debt Employment ( labour costs, raise in unemployment rate) Private sector indebtedness (e.g. credit, debt) Assets markets (e.g. housing price increase: not more than 6% a

year)

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The “preventive process” arm of the EIP

Alert mechanism

Economic reading of early warning

scoreboard indicators to

identify Member States with

potential risks

In-depth review

Analysis to distinguish between benign and harmful macroeconomic developments and to identify policy

options

No problem Procedure stops.

Imbalance exists

Commission/Council recommendations

under Article 121.2

Severe imbalance

Commission/Council recommendation

under Article 121.4

Policy response

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On macro-economic policies many interlinks

Public spending policies: housing benefit, pensions, unemployment benefit

Macro-prudential policies (Loan to Value Ratio, forex borrowing)

Taxation policy (mortgage interest rate deductibility)

Employment creation potential

Regulatory issues affecting supply (building permits)

So where does housing policies fit ?

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In its communication “ stability, growth and jobs”:

One proposal for the 29th EU council:

“Increasing the paid in capital of the European Investment Bank (EIB): in order to comply with sound banking practice the EIB needs an increase in its paid in capital if it is to maintain its current high level of annual lending activity around €65 billion a year. As the Commission has proposed, a €10 billion increase in paid in capital should be agreed by its Member State shareholders as part of a new EU growth initiative. This would substantially increase overall lending by up to €180 billion. The additional lending that such a capital increase would permit should be spread across the EU, including in the most vulnerable countries. It should be directed to helping the SME sector, including in areas such as energy efficiency and housing renovation which can generate much needed employment in the hard hit construction sector and help the EU meet its climate and energy goals.”

CSR 2012: 4 countries to reform their housing policies

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DK: “HEREBY RECOMMENDS that Denmark should take action within the period 2012-2013 to Consider further preventive measures to strengthen the stability of the housing market and financial system in the medium-term, including by taking account of the results of the on-going study by the Ministry of Business and Growth on the distribution of assets and liabilities across households and by reviewing the property value and municipal land value tax system. “

NL: HEREBY RECOMMENDS that the Netherlands should take action within the period 2012-2013

(…)Take steps to gradually reform the housing market, including by:

modifying the favourable tax treatment of home ownership, including by phasing out mortgage interest deductibility and/or through the system of imputed rents,

providing for a more market-oriented pricing mechanism in the rental market, and

for social housing, aligning rents with household income.

SW: HEREBY RECOMMENDS that Sweden should take action within the period 2012-2013“Take further preventive measures to strengthen the stability of the housing and mortgage market in the medium term, including by fostering prudent lending, reducing the debt bias in the financing of housing investments, and tackling constraints in housing supply and rent regulations”

UK: HEREBY RECOMMENDS that UK should take action within the period 2012-2013: “Address the destabilising impact of high and volatile house prices and high household debt by implementing a comprehensive housing reform programme to increase housing supply and alleviate problems of affordability and the need for state subsidy of housing. Pursue further reforms to the mortgage and rental markets, financial regulation and property taxation to prevent excessive volatility and distortions in the housing market.”

CSR 2012: 4 countries to reform their housing policies

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For which housing policy can contribute positively and be impacted by !

3% public deficit and max 60% of public debt: Fiscal consolidation programme including restriction on housing benefit and social protection policies (and tax policies to be less favourable to home-ownership)

Preventing financial and assets bubbles: housing price to be more stable, private debt to be sustainable

Economic priorities to be growth enhancing: supporting housing sector creates employment EU 2020 goals on fighting against poverty and climate change: great potential in the housing

sector

Every year: a report by each country on different process, and analyzed by other countries.No decision by any Parliament, neither debate on which policy to choose

So multiple processes and priorities for the EU

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How is structure the housing market Some common trends in EU Unaffordability for the most vulnerable Lack of supply Changes in housing benefit: putting affordability even further

Some common features of the needs to be addressed by Housing policies

Building new affordable places Enhance delivery of land at affordable price Rethink the financial incentives on housing supply Maximise the use of existing building stock

A short overlook to housing situation in EU countries Especially, impacts of the crisis

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Social rental housing in the EU27

Largest in NL, followed by AT and DK.

UK, FR, SW and FI also have a large social/public housing sector

On the contrary, no rental social housing in EL, very small share in CEE as well as PT, ES

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Trends in tenures: 20 years of targeting the most vulnerables

Home-ownership in European OECD countries (1980-2004)

Social housing in selected EU countries (1980-2008)

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20 years of demand side policies: Impact of housing costs

Housing costs = 22.5% disposable income (41% at risk of poverty)

Housing overburden = 10.1% (37% at risk of poverty)

Housing-related expenditure = 22.9 % of total household consumption expenditure

A third of European households facing disproportionate housing costs, and perception of worsening affordability

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Crisis and housing: reality checks

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“Visible” effects High level of mortgage debt

(from 32% in ’98 to 52.4% in 2010)

Increase in arrears (8.6% and 20%)

Energy poverty (52.08 million people)Mortgage indebtedness as % of GDP

Increase in arrears on:UtilitiesMortgage/rent

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How is the crisis impacting financing models?

Netherlands: HAs financially independent since 1993. Borrowing from banks, backed by 3 level security structure: Central Fund of Social Housing, Guarantee Fund for social housing, state guarantee as last resort.

problems in accessing credit to finance new construction. Some housing corporations are now trying to get money directly on the capital markets.; via bonds

As some of the major social housing organisation had a creative financial management (derivatives) the guarantee is at stake

sell dwellings as a way to cross-finance production of affordable rental housing also more difficult due to mortgage credit restrictions

Are going to a rent market level (adapt the level of rents to the households income) through a major housing policy reform: Housing 4.0

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How is the crisis impacting financing models?

England: three main funding sources: housing association’s reserves, government grants and private finance which consists of bank loans or funding rose on the capital markets. Also important housing benefits.

Current reform: - 63% of development budget (but more flexibility in fixing rents) + cuts in housing benefits

Strict lending conditions by banks

Decrease in income from sale of affordable housing and decrease in SH output by planning system

High prices and rents in private sector, restrictive lending environment + demographic trends = high demand

Social impact bonds: be paid as you perform for the community: social added value for the territory: emerging approach of social policy delivery, major interest from the EIB (as a way to use Structural Funds ESF-ERDF)

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To focus on four examples

« To measure and report the creation of value for a territory by a social housing company»

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Lessons from the crisis?

Housing market highly dysfunctional, private debt as important economic imbalance as public debt for economic stability

Financial market instability causes and consequences of housing price bubbles: what regulation that would be supporting social housing providers

For the moment only consensus on strict public finance’s consolidation without growth policies

Importance of intermediary/dedicated source of funding:

France: subsidies from state and local authorities but limited. 2.5% employers grants or loans. Main source Livret A (household saving book) and important tax incentives

Austria: public subsidies through grants and subsidized loans; commercial loans raised via special bonds by housing banks.

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Some common medium-term goals called the EU 2020 strategy

The 5 targets for the EU in 2020

1. Employment

75% of the 20-64 year-olds to be employed2. R&D

3% of the EU's GDP to be invested in R&D3. Climate change / energy

greenhouse gas emissions 20% (or even 30%, if the conditions are right) lower than 1990 20% of energy from renewables 20% increase in energy efficiency

4. Education

Reducing school drop-out rates below 10% at least 40% of 30-34–year-olds completing third level education

5. Poverty / social exclusion

at least 20 million fewer people in or at risk of poverty and social exclusion

Every year: a report by each country on it

And what about joint EU economic priorities ?

HOUSING EUROPE 28Julie Lawson, TU Delft

There remains a wide variety of funding strategies…

Ireland ‘Public grants model’

Centrally funded grants to approved providers for construction, statutory financial intermediary provide low interest loans for land acquisition, interest financed by central government, limited grants from local authorities.

UK ‘Debt equity’

Debt finance raised against grant equity (50%), future social rental income, secured by rising rents and a generous housing benefit as well as discounted land and development contributions under “section 106” provisions.

France ‘Savings scheme model’

Tax free household savings scheme (CDC) finances off market loans to HLM providers along side state and local subsidies, tax incentives and other loans. Land provided by local authorities and development contributions.

HOUSING EUROPE 29Julie Lawson, TU Delft

Yet mixed financing arrangements are more common…

Austria ‘Structured finance model’

Long term low interest public loans and grants, combined with commercial loans raised via HCC Bonds and developer/tenant equity sustains tightly regulated form of cost rent limited profit housing. Promotion supported by municipal land policy and land banking.

Switzerland

‘Co-operative finance model’

Commercial loans, loans from a bond issuing co-operative, revolving loans, and own equity and supported by municipal urban policy and land banking. A liberal rent policy allows landlords to raise rents to recover costs, including changing financing costs.

Netherlands

‘Revolving fund model’

Replaced direct loans and subsidies with guaranteed capital market loans and rent assistance. Dutch guarantee fund (WSW) and Central Fund (CFV) provide security and assist to reduce financing costs Associations are free to determine own investment strategy, asset base and surpluses intended to be used as a revolving fund to achieve social task.

Germany ‘Tax privileged model’

Federal public loan program has ceased. Tax system channels investment into affordable housing via for profit and limited profit companies, variable state schemes.

Sweden ‘Capital market model’

Corporate tax exempt Municipal housing companies have always been financed by capital market loans which were sometimes backed by municipal guarantees, grants as well the MOH own resources. In the past interest rates subsidies ere provided by the central government but these have ceased.

HOUSING EUROPE 30Julie Lawson , TU Delft

More ideas for financing mechanisms

Approaches

Revolving public loan programs financed by a capped percentage of taxation revenue.

Favourable household savings schemes channel investment towards social housing

Jointly funded revolving funds

Privileged bond financing mechanisms

Specialised financial intermediaries with appropriate expertise

Co-operative financial intermediaries

Government guarantee funds to reduce the cost of private lending

IllustrationsAustria’s intergovernmental agreements, Austria and Switzerland’s public revolving loans and provincial program design, housing is considered an integral part of economic policy and management. Public loans are used to stabilise housing markets and related industries and achieve appropriate housing outcomes.

France’s Livret A revised tax free savings circuit and the new role of private banks in channelling these (since November, 2008)

Swiss Government and sector revolving funds are allocated quarterly, competing on value for money, good design and innovation

Austria’s Tax privileged bonds for a defined investment and the role of government in ensuring their appropriate use

Austria’s special purpose housing banks and their competitive, specialist expertise in financing social housing

Switzerland’s bond issuing co-operative and state guarantee

Swiss membership guarantee, French state guarantee,\ Dutch WSW social housing guarantee and CFV central fund funded by both the public and housing sector