Starting with observations on present housing provision levels and probable future trends in housing demand in various West European countries, the paper discusses the basic aims of housing policy.
It describes the great variety of housing policy measures applied to determine rents in the so-called "social rental sector" referring to the various promoters of "social housing" in these countries.
A method for determining the economic efficiency of subsidised public loans is then discussed.
The paper finally presents some suggestions towards a housing policy based on a combination of real-interest-free public housing loans, of public housing operated at true cost and of a housing benefit system for the rental and the owner-occupied sector which takes these true costs as reference rents.
The housing market and housing policy are not related to each other in a clear cause and effect pattern. Rather, in a flow of constant interaction and mutual feed-back, housing policy partly reflects the prevailing housing market situation, and the housing market is in turn at least influenced - if not determined - by housing policy.
No country in the European Union completely side-steps housing as a policy area but some governments assume a more laissez-faire attitude and some are more interventionist.
In recent years, the housing situation in West European countries has markedly improved. Most countries have attained a level of approximately 400 primary residences per 1.000 inhabitants which is equal to an average household size of 2.5 persons.
It should be noted, though, that differences in this ratio do not per se imply any need for housing policy activity: Luxembourg shows a far lower figure of occupied dwellings per 1.000 inhabitants than Sweden although it enjoys a higher standard of living. The figure for former East Germany was even higher than that of the former FRG.
However, average values say very little about possible problem areas. Only a closer look at the distribution of individual values may reveal deficiencies - frequently at the lower end of the income spread.
How can these possible deficiencies be defined and measured ?
A definition based on objective or "absolute" needs like protection against harsh climate or strangers, or the provision of privacy or storage capacity, becomes relative in a cross-country comparison as these aspects may be perceived quite differently in various climatic zones, cultures, traditions etc.
Therefore, it seems more sensible to view housing deficiencies in terms of a relative standard of housing consumption, i.e. whether certain groups of households diverge too far from the average or reference level. Of course, the choice of this reference level is an issue in itself: should the regional, national or some supra-national average standard be taken as a yardstick ? This question is still unanswered and is reflected in the ongoing discussion on whether housing should be made an independent political topic by the European Union.
The current general structure of the housing stock in several countries is shown in figure 1. It is the result of housing market and housing policy developments in the past.
However, housing policy not only aims at existing deficits: because of the invariably slow reaction of the housing market it is also directed at expected future developments. Many studies try to forecast future housing need and housing demand by making a number of plausible assumptions. As perfect as the theoretical models employed may be, such assumptions will always remain open to subsequent falsification.
Demographic development seems to be the most reliable trend, as life expectancy values do not change too abruptly. One may take it for granted that a present baby boom will show up as increased housing demand 25 to 35 years later. However, birth rates and procreation patterns sometimes do change rather quickly. Especially if migration is taken into account one's vision of the future may easily become blurred. Rather divergent demographic projections by various institutions are proof of this difficulty.
For example, in general and for the next 20 years or so, the total population in Austria, Belgium and Denmark will probably remain quite stable, while it will increase in France and grow less strongly in the Netherlands and the United Kingdom, whereas Germany will most likely experience a population decline.
Regarding tenure, the trend towards owner-occupation will probably continue in most countries, although perhaps at a slower pace, especially in countries which have already achieved a high proportion of home ownership.
Additional demand for housing is regularly forecast because of the trend towards ever smaller households which require more dwellings even for a stable population. This trend, however, is not a one-way development. It rather reflects economic progress allowing more and more (young) people to live independently, albeit at considerably higher cost. An economic slowdown might well reverse this situation. This has already become apparent in some countries (e.g. Italy) where the periods of parent-child cohabitation have been extended again.
As a consequence, it seems more sensible to keep surveying actual housing situations at regular intervals and to continuously detect and monitor housing policy problem areas. On the basis of the insights thus gained specific measures should be taken to make the housing market more efficient and to provide flexible and well-targeted instruments of market intervention.
Modern West European housing policy dating back to the last century started from the observation that a considerable proportion of the population could not - under the prevailing capitalist conditions - secure an acceptable level of housing consumption.
The primary aim of housing policy therefore was to make dwellings more affordable by reducing their production costs. This was achieved by providing cheap land and/or finance for housing construction.
The development of urban land for housing and the construction of the dwellings themselves have a variety of effects which are generally considered beneficial: increased industrial activity, higher employment, tax revenues.
In recent years, when housing demand was reasonably well met in many West European countries, these aims began to be presented as valid housing policy targets by themselves. Both politicians responsible for employment policies and entrepreneurs eager to maintain their output have pointed to and keep stressing the attractiveness of lower unemployment rates and higher tax revenue through sustained or even increased housing production.
The third group of housing policy aims might be considered political in the widest sense. They include creating a positive image for governments officially dedicated to the improvement of their citizens' housing situation, and rallying support for political parties and pressure groups wanting to demonstrate their successful intervention in favour of their electorate's unfulfilled housing needs.
Functionaries both inside and outside of government enjoy exercising their discretionary power when assigning scarce public resources to particular groups. This clientele relationship may prove mutually rewarding and may even pave the way for corruptionist tendencies.
On a more down-to-earth level it is, of course, in the interest of all those involved in the process of housing production and operation (planners, surveyors, architects, lenders, builders, managers, administrators, etc.) that this process continues, assuring their social position and income.
The "aims" of this third category are usually not publicly proclaimed. Nevertheless, they are a powerful motivation for pressure groups. When looking for a rational definition of housing policy, these tertiary aims should be recognised to be self-interested and should be treated as such.
The above-mentioned secondary aims seem attractive at a first glance, but housing production cannot be continued beyond demand. Even public support for covering the housing need of households insufficiently able to provide for themselves must be, by definition, limited. Taxpayers who in the last analysis are the only source of public means spent on housing will not go along with unlimited production of dwellings if everybody is already reasonably well housed. Of course, the definition of need can be gradually extended, as has repeatedly been done in the past. But this can only happen in accordance with a particular society's general economic development .
Therefore, the production of housing as an aim per se becomes a caricature if we imagine thousands of workers busily building new dwellings which nobody really needs or is willing to pay for and perhaps destroying them the next day as even demolition contributes to the statistical wealth of nations. Not to mention the abuse of resources in the process.
The doubtlessly beneficial economic effects of housing production must rather be considered a "fringe benefit" which should not become a substitute for proper housing policy goals.
Therefore, reviewing these different aims it seems quite obvious that from a neutral point of view there can only be one lastingly valid aim of housing policy: the endeavour to improve the housing situation of households which would otherwise, left to the mercy of an unregulated housing market, have to put up with an undesirably low housing consumption level.
In search for solutions to the housing problems of specific population groups, housing researchers and politicians have developed and refined a whole gamut of instruments. They concern diverse areas of action and vary in their degree of straightforwardness.
Among these areas we find the following:
· housing stock operation
· fiscal instruments
· transfer payments.
Although all of these areas invite extensive discussion, only some aspects of financing and transfers can be treated in this paper.
The gap mentioned in the heading of this paper refers to the difference or ratio between market expenditure on housing and available income or capital. Market prices for housing, either in the form of purchasing prices or periodic rents, are perceived as being out of (proper) proportion with the ability of many households to pay for them.
Therefore, housing policy seeks to provide instruments enabling these households to achieve an adequate level of housing consumption which they would not attain under market conditions.
The instruments bridging this gap between market cost and disposable income, i.e. bringing adequate dwellings into the reach of lower-income households, come in the form of supply-side and demand-side varieties. Supply-side instruments intend to lower the price or rent, demand-side measures try to strengthen the purchasing power of the individual household. The two varieties may also appear in combination and even in the form of a whole series of interlocking housing policy measures (see below).
In the rental sector, long-term capital is provided by the owner and/or a credit institution, while the tenant is only faced with the rent stipulated in his or her contract. Being a periodic payment, the rent must be covered out of periodic income.
This clear-cut situation is sometimes blurred in the so-called social rental sector, when tenants are compelled to pay a "cost rent" which is based on current capital cost. This may sound attractive at a first glance, as profit elements in these "cost rents" are apparently excluded. However, this situation opens up the possibility of future profits to be made by limited-profit housing providers (see below).
As household expenditure includes a great variety of other items besides housing, the question arises what share of a household's total net income can reasonably be assigned to housing expenditure without creating undue stress for lower-income households also trying to meet their other needs.
In housing literature related to rent affordability and housing benefit, a ceiling for the ratio of housing expenditure to net income is usually advocated. However, as can readily be seen, at very low incomes other essential expenditures for food, clothing, etc., cannot be cut any further and affordable housing expenditure thus decreases to zero. Therefore, housing benefit tables usually determine thresholds according to household size below which the full rent is covered by benefit payments.
As the acquisition of a dwelling intended for owner-occupation implies a transfer of ownership, this represents a once-only (singular) event. Upon payment of the price, the title to the dwelling changes hands. However, the average price for a dwelling (be it in the form of a single-family home or of a condominium flat in a multi-family building) is several times the average yearly household income. Therefore, buyers are usually not in a position to pay the full price at once and - as a rule - require the major share of the price to be financed by a credit institution.
This conversion of a once-only payment into yearly instalments likens the acquisition of owner-occupied housing to the rental scheme mentioned before: apart from the required down-payment, the annuities must again be weighed against current income, so that the expenditure-to-income ratio does not exceed a reasonable limit.
The picture is further complicated by the effects of varying interest rates and loan terms which influence the amounts of annuities over and above the original purchasing price.
We shall now examine some forms of supply- and demand-side rent subsidies employed in the public and limited-profit rental sector in several West European countries.
As the provincial governments are responsible for the design and administration of subsidised housing promotion, a great variety of subsidisation models have been developed over the years. In addition, these are subject to frequent modifications.
As a general trait, capital costs are reduced considerably by interest-subsidised public loans, by grants, by interest-free repayable annual subsidies, by interest subsidies towards capital market loans, etc. As there are nine federal provinces, there are in all 27 different subsidised financing schemes for owner-occupied single-family homes, for condominiums and for rental flats. Subsidy schemes for rental flats are generally more generous than for other tenures.
The annuities for capital market loans, for public loans and for interest on limited-profit promoters' equity as well as lease payments for the land in the case of leaseholds (plus a few imputed cost elements) add up to a so-called "cost rent". (As a speciality, Vienna does not charge any lease for the land occupied by local authority rental housing.)
These cost rents vary from province to province and do not correspond to any particular income stratum. In 1995, initial rents ranged between ATS 45 and 118 per sqm and month, operating and heating charges not included.
Households unable to afford this "cost rent" receive housing benefit (Wohnbeihilfe) according to household size and income which covers the difference between cost rent and an individually determined "reasonable rent".
There is, however, no housing benefit available in the private rented sector.
The share of the limited-profit sector in Belgium is quite small (6 %) compared to the private rented sector (27 %) and is dwarfed by the owner-occupied sector making up 67 % of the housing stock. Since the regionalisation of housing policy in Belgium, which started in the 1980s, the regional governments have been deciding how rents for housing provided by housing associations are to be determined.
Taking Flanders as an example, rents for housing association rental dwellings are determined according to household income and are only indirectly linked to production costs.
In a first step the so-called "basic rent" is established for each estate which varies between 3 % and 8 % of the updated historical cost. The actual rent (sociale huurprijs) is then computed by applying a correction factor based on a reference household income which is close to the median income.
Therefore: social rent = basic rent x taxable household income / reference income.
Household size is accounted for by deductions for children reducing the taxable income.
Although housing associations have to operate with balanced budgets, the total rent paid does not always completely cover operating expenses. In such cases, the regional government has to provide additional operation subsidies.
With the exception of minor subsidies to households moving from an unsanitary to a standard dwelling there is still no general housing benefit system in Flanders. Some sectors active in housing policy are, though, discussing its introduction.
For the time being, the role of a general housing benefit system is accomplished by the above mentioned rent adjustment system.
Rents in the well developed Danish limited-profit sector which is open to the general public are based on historical cost per estate but differentiated according to individual user value. The total rent per estate has to cover all operating costs (balanceleje). As financing currently relies on bonds at market prices, no public interest subsidy is involved. However, there is a capital subsidy by local authorities providing 9 % of cost for general dwellings and 13 % for dwellings to be occupied by the elderly.
The more important subsidies come in the form of housing benefit which again distinguishes between a general system (boligsikring) and a more generous variety for the elderly (boligydelse).
As a speciality, Danish housing association tenants nominate the majority of estate board members and decide themselves on quotas for maintenance funds etc.
Within the important "social housing" sector (sector HLM) rents are determined on the basis of historical financing costs of each individual housing estate. Therefore, there is no cross-subsidisation. However, rents have to respect minimum and maximum values according to floor area which are published by the government specifically for each region every year.
Up to 20 % of the production costs are subsidised by government grants and financing costs are supported by subsidised public loans (prêt locatif aidé / PLA) administered by the Caisse des Dépôts et Consignations which in turn receives state subsidies to compensate for interest losses.
At household level, the housing benefit system (aide personnalisée au logement / APL) is well established and offers transfer payments according to household size and income. The income ceiling for APL beneficiaries is normally around 2,5 SMIC (the official minimum salary).
In Germany, subsidised housing is not restricted to specific types of promoters. Subsidies are offered if the promoter agrees to charge not more than the legally determined "social rents". This obligation ceases after the subsidies are discontinued. If public loans are repaid prematurely, an additional grace period of eight years applies.
Promoters have to apply the cost-rent principle on the basis of a finance mix of public and capital market loans combined with own equity. The resulting rent level is then lowered by - usually degressive - annual subsidies to a so-called "social rent" level (Bewilligungsmiete). The specific design of these subsidies is left to the provinces (Länder) which provide additional funds at least matching those of the federal government.
In addition to the "social rents" described above, Germany has been operating a comprehensive housing benefit system (Wohngeld), applicable both to owner-occupiers and to tenants of the subsidised and of the private sector. Maximum rents taken into account are regionally differentiated. Benefit payments depend on household size and income.
Only for rental housing provided by limited-profit housing associations were social rents to be applied indefinitely. However, in 1990 the long-standing legal basis for German limited-profit housing associations was abolished and it became possible to operate the previously regulated housing stock at market conditions. At the same time, the limited-profit associations and companies lost their previous tax privileges. Previous limited-profit entities wanting to continue charging cost rents (notably communal housing companies) were at liberty to do so.
Since the 1980s, the allocation of funds for "social rental dwellings" has been the responsibility of the German Länder. Exceptionally, during 1990-1993, the federal government reassumed its previous practice of direct subsidisation of rental housing as a reaction to the massive influx of immigrants after German reunification.
In the case of the Netherlands we shall look at a rent system no longer in force which, however, offers some additional insights into the complexity of this matter. The system described below was applied until 1988. In the following year, supply-side subsidies were abolished.
Promoters of social housing (local authorities and housing associations) used to be offered public loans that covered almost the entire production cost. These loans involved hardly any subsidy as they were awarded at slightly below-market refinancing cost. As inflation was running high in the mid-1970s, the Dynamic Cost Rent System was designed, allowing lower initial cost rents. The initial cost rents were to increase by predetermined coefficients calculated to cover total production cost over a 50-year lifespan of the respective dwelling. The resulting cost rent was further reduced by operating subsidies which lowered rents charged to tenants to the level of so-called "social rents", i.e. to the supposed affordability level of median-income households. These operating subsidies increased by the same coefficients. In the end this system became unworkable and was replaced at heavy losses.
Individual households with below-median income were additionally supported by the housing benefit system (individuele huursubsidie / IHS) which is still in force and which has become the foremost housing policy instrument in the Netherlands, benefiting some 900.000 households (or 14 % of the total).
British "social housing" is provided by two promoters: local authorities and housing associations. Local authorities (and New Town authorities) were the sole providers for many years and reached an impressive share of almost one-third of total housing stock in 1979. However, many local authority tenants made use of their Right to Buy introduced by the Thatcher government in 1980. Overall, some 1.5 m local authority dwellings were sold since then, reducing the share of local authority housing to the current 20 % of stock.
On the other hand, housing associations had never played a very conspicuous role in the past; they were encouraged during the Thatcher period, especially by grants awarded by the Housing Corporation and its Scottish equivalent, Scottish Homes.
Before 1972, local authorities were free to set rents for their housing estates as long as no profit was obtained. Then the conservatives stipulated that so-called "fair rents" should be charged with rent rebates for low-income households. This rule was revoked by Labour in 1975.
Local authority rent revenues were consistently lower than operating costs, sometimes covering only half of them.
At present, local authority rents are guided by national rent averages determined annually by the Department of the Environment and specified as supposedly reasonable "local contribution". This is complemented by a Housing Revenue Account / HRA subsidy up to operation cost level. Consequently, rents have increased strongly. Previously common cross-subsidisation by local rate payers is now impeded by the "ring-fencing" of the HRA. Since 1996, local reference rents in the private rented sector have been taken as guideline in establishing the "local contribution".
Somewhat differently, until 1989, rents in the housing association sector, which had enjoyed very substantial Housing Association Grants / HAGs of up to 90 % of cost, were determined as "fair rents" by a rent officer. Since 1990, housing associations have been required to set rents at a level supposedly "affordable for low-income households". This rather ambiguous concept commonly implies a 20 % rent-to-income ratio as ceiling. At the same time, HAGs (later Social Housing Grants / SHGs) were cut to about 55 % of cost, forcing housing associations to obtain more capital market finance.
The tenants of both the limited-profit and the private rental sector are additionally supported by the housing benefit system which has consistently gained importance during the past few decades. Currently, the great majority of tenants receive housing benefit covering 85-90 % of rent on average.
The above short glimpses at rent determination in various countries may have produced more confusion than clarity. Therefore, figure 2 intends to provide a synopsis of the various possibilities of rent subsidisation applied in the past and at present.
Column 1 represents production costs (100 %) consisting of land, construction and related costs. As long-term financing is theoretically required for the entire production cost, the present value of financing cost is added on top. This present value, of course, varies with the respective loan terms and interest rates but may roughly be estimated to amount to 60 % for a 25-year loan at 5 % real interest. In addition, an investor's/promoter's profit will accrue if production is undertaken at market conditions. (Of course, also the land owner, lender, architect/engineer and builder each try to obtain a profit. These profits are, though, not indicated separately.)
Column 2 shows various forms of subsidy (interest subsidy, below-refinancing-cost loans, grants and cheap or even free land provision) which may reduce the corresponding shares of the original total.
Column 3 shows the result of this public market intervention.
Column 4 is then further shortened by housing benefit payments according to household income. The final net rent is represented by its shaded area.
On the far right, the various concepts of rent levels can be observed:
It might be called "no-financing-charge rent" (see section 10).
Within the limited-profit system the compounded value of all subsidies covers the gap between cost rent and actual rent.
However, there is an important difference in covering the gap between the cost rent and social rent levels on the one hand and between cost rent and actual rent on the other hand: the former is usually not means-tested, whereas the latter is income-dependent. Therefore, large amounts of subsidies go to better-off households not needing such support.
In order to discuss which subsidy system offers most advantages, one needs a measure determining the economic efficiency of subsidised (public) loans.
The most promising approach to defining a relevant yardstick seems to be a cost-benefit comparison (see figure 3). In the case of public subsidised loans or grants, cost can be defined as the real loss of public capital, and benefit as the reduction of real financing cost for the borrower compared with unsubsidised market conditions. In the left-hand graph of figure 3 full financing at market conditions is indicated with production cost (100 %) at the left and the present value of financing cost at the right.
The right-hand graph illustrates a typical case of subsidised financing. The borrower might provide some equity thus eliminating the corresponding share of interest. A certain share of cost is still financed by a capital market loan at market interest and the remaining share is now provided by a subsidised loan. Depending on the respective credit conditions, the latter may entail not only a reduction of interest but also the loss of a fraction of the public capital lent.
Therefore, net cost or net subsidy is represented by the central white area in the lowest band. The benefit to the borrower consists of both this same area and of interest reduction at the right.
As a consequence, grants towards capital cost always achieve an elimination of interest, but as their amount is never repaid, it fully appears as cost to the public sector. On the other hand, public loans will lose part of their capital or produce a profit depending on whether the interest rate applied is below or above the inflation rate.
This leads us to the conclusion that the most efficient form of public financing support is a loan bearing no real interest, i.e. a loan whose annuities are linked to the consumer price index. In this way, public capital is protected from inflationary erosion and gradually becomes available for renewed investment. After the build-up period of such a revolving fund no more fresh money would be required.
Speaking of so-called "social rental housing" it seems useful to differentiate among various types of promoters possibly involved in providing this kind of housing, and to try and weigh their respective incentives to engage in this sector.
Basically, we can distinguish public, limited-profit and private investors in rental housing.
(a) Limited-profit associations are more closely in touch with the interests of their members who have a say in their administration. Often, such associations try to provide common services in addition to housing. However, when they grow to a size which cannot be controlled well by direct democracy, the members tend to become aloof and to react only when their individual interests are affected.
(b) Limited-profit companies are a more diverse group:
Public sector companies act as instruments of public housing policy and are controlled by state, regional or local authorities.
Voluntary sector companies are similar to former charitable institutions and are as a rule not profit oriented. They may be established by churches, trade unions etc.
In some countries private sector limited-profit companies have been encouraged by public policy to operate in the "social rental sector" in order to increase output more rapidly. Many such companies were established by large enterprises, by banks, insurance companies etc. They show a tendency to seek indirect or long-term profits: enterprises acting paternalistically by providing housing for their workers reduce pressure for higher salaries, while banks establish valuable links with credit clients. Insurance companies as typical long-term investors may hope to accumulate small permitted profits or to obtain larger profits in the future if limited-profit operating regulations become less strict or are even abolished.
· Finally, private promoters may act voluntarily like non-profit oriented providers of rental housing without entering the limited-profit sector, but this is a rather rare phenomenon. In any case, they would not be legally obliged to maintain their assumed non-profit attitude.
The typical private landlord is profit oriented and tries to obtain market rents. As such he may still provide relatively low-cost dwellings which are taken up by low-income households. However, as he or she expects to see attractive returns, the standard of such dwellings will correspondingly be low and their size quite small.
Apart from the economic aspects of housing for lower-income households discussed above, some points referring to social structure should also be considered.
Estates of so-called "social housing" have repeatedly and in many different countries suffered from stigmatisation and social exclusion.
High-density and high-rise estates on less attractive sites with insufficient infrastructure make better-off tenants move out. This leads to higher vacancy rates and to a process of residualisation when finally only the least favoured households accept these dwellings.
The area becomes a "bad address" with severe consequences on the labour market. Banks turn down applications for credit, social contacts become restricted. A downward spiral of decreasing self-esteem induces abandonment and vandalism, insecurity and sometimes petty crime.
The remedies repeatedly recommended and applied include upgrading through reinvestment, additional social infrastructure, better administrative control, more tenant involvement and - last but not least - preservation of an adequate social mix.
Maintaining a social mix of individuals or households belonging to different social strata helps to avoid serious trouble, as more stable households exert a beneficial behavioural influence on their surroundings.
Therefore, and also because they are perceived as better risks, medium and higher-income households are preferred by their "social" landlords even if they admittedly "take away" a dwelling from a potential tenant in need. These better-off households agree to play their role as long as their housing expenditure remains much lower than it would be on the free housing market. At the same time, they are favoured by subsidies which are an additional burden for public budgets.
The question then is how to combine the positive effect of an adequate social mix without incurring too high public costs, and how to avoid the formation of apparently cheap social housing ghettos just for the poor which are known to produce very high social follow-up costs.
From an economic point of view, the difference between owner-occupied and rental dwellings is that the production costs of the former are repaid during the term of the (mortgage) loan and the latter over the entire usable lifetime of the dwelling, at least if cost rent is considered.
Figure 4 presents a comparison between various tenures assuming that the (mortgage) loan term is 25 years, the usable lifetime of the dwelling 50 years, the inflation rate 3 % and the mortgage interest rate 8 % p.a.
The real values of nominally constant loan annuities are shown as curve (a). Compound inflation rates gradually reduce the initial high value of the annuity which abruptly drops to zero when the loan is repaid. The total value of all annuities is about 163 % of the original capital, i.e. the real financing cost is about 63 %.
As a first modification and in order to reduce the initial annuities, the lifetime of the loan is lengthened to 50 years as indicated by curve (b). The real total value of all annuities now increases to 210 % including a total financing cost of 110 % of capital.
If investment capital were to be amortised by cost rent then this rent would normally be indexed. Curve (c) indicates these constant real rent values. The present value of all rent payments is now 268 % of invested capital i.e. the financing cost is 168 % of capital.
Finally, we consider the case of a rental dwelling operated by a limited-profit company assuming that 30 % of the production cost has been covered by a non-repayable grant provided by the state. The resulting rent is then indicated by curve (d) initially at 70 % of the amount of curve (a) since only 70 % of cost must be financed through the capital market. However, in several countries rent continues to be charged at the same (nominal) level even after the capital market loan has been completely repaid, thereby creating a surplus which benefits either the limited-profit company or a special nation-wide institution. This illogical combination of tenants repaying loans as if they were owner-occupiers leads to overpayment of the capital expenditure, in this case 77 % of invested net capital over and above real interest. (For curves (f) and (g) see below.)
While a competitive housing market offers efficiency on the supply side, wide income spreads would leave the lowest-income households in an unsatisfying situation of relatively low standard, precariousness and/or excessive expenditure.
The gap between the market cost of an adequate dwelling and the reasonably disposable income can be narrowed by lower production costs (more competition, higher densities, lower standards) as well as by a reduction of financing cost. While lower standards may soon reach a limit as needs are defined in relation to average housing consumption, long-term financing offers considerable opportunities for bridging the gap. Still remaining income deficits require income transfers.
The three housing policy instruments described below could form the basis of a well-balanced and comprehensive system. It offers economic efficiency and tenure neutrality while assuring social support to the degree desired and backed by society.
Once-in-a-lifetime public mortgage loans should be offered to anybody wanting to acquire an owner-occupied home. Their amount should be limited according to prevailing production costs and to reasonable need of the applying household. Their term should be 25 years or roughly one generation. Annuities would be a constant 4 % in real terms. No real interest would be charged except a small administration charge.
Buyers could combine this loan with own equity and capital market loans at will. They could purchase a new home from any promoter on the market or a used dwelling from the existing housing stock.
In order to avoid a divergence of interests between landlords and tenants as much as possible, public loans for the provision of rental dwellings should be awarded to local authorities only. Keeping cost rents as low as possible their loan term should be 50 years and annuities therefore 2 % in real terms (see curve (f) in figure 4). However, in order to compensate for the ageing of the dwellings higher annual rents might be charged initially and lower rents towards the end of their lifetime. The effects of this are shown by curve (g).
Refinancing for these loans would initially be obtained from the state budget but with the provision that all repayments, which are constant in real terms, are to be returned to the housing loan fund thereby building up a revolving fund that would not require any future replenishment.
An additional source of funds could be a state-guarantee-backed pension fund which would receive deposits by individuals wanting to put aside complementary savings for their retirement protected against inflation and other risks and not subject to taxation.
Local authorities should assure and maintain a sufficient stock of subsidy-free public rental housing making it possible to satisfy housing needs not covered by the private housing market. It should be open to all incomes but with a preference for lower-income applicants.
As rents for identical dwellings would be the same for all tenants, real housing cost would be apparent even for low-income households. At the same time, better-off households would not benefit from permanent subsidies but enjoy below-market rents and still be welcome to stay.
As low-income households would find even the reduced "no-financing-charge" housing expenditure in this system unaffordably high, they should be entitled to housing benefit according to their income. Poverty traps would be avoided by proper design of the housing benefit formula.
Housing benefit should be available also for owner-occupiers and for tenants in the private rental sector but only on equal terms i.e. corresponding to household size and to the reference housing expenditure in the public rental stock.
These housing benefit payments would, of course, be lower than if market rents were taken as reference values.
Donner, Ch. 1990 WOHNEN ... und was es kostet
Donner, Ch. 1995 Das Ende der Wohnbauförderung
Donner, Ch. ongoing Housing policies in the European Union