Homing in on Housing: New, Innovative Fixes for Europe’s Urban Housing Affordability

Moderator Xavier Jongen, Europe managing director at Catella Residential Investment Management, opened the ULI Europe Conference 2022 session “Homing in on Affordability,” noting that unaffordable housing has been a global problem for more than a decade, and new solutions are needed because the idea of simply adding housing supply has failed to solve the problem.

To find new solutions, he said that it is important to not only understand what’s driving housing unaffordability but also consider the mismatch between who has the power to deal with the problem and who has the mandate to deal with the problem.

“I think the main driver of housing price increases has been monetary policy, interest rate policy, and obviously quantitative easing—introduction of new money into the system,” Jongen said. Suggesting that central banks may have the power to solve the problem, they are not trying to do it because they don’t have the mandate to do it. Rather, the political system—national and local governments, which are dependent on the quality and willingness of political parties to deal with the problem—has the mandate to ensure housing affordability, but the tools it has deployed so far have failed to solve the problem.

He suggested that the current housing crisis is healthy because “a crisis is a moment of transition between a period of stability and another period of stability,” and is needed to “push the reset button.”

Jongen called on Karen Shaw-Petrou, global CIO and board member at Germany-based PATRIZIA AG, a global asset investment management firm, and expert on capital markets regulation, to explain the reasons political systems and monetary policy and regulation have failed to provide attainable housing and equitable distribution of wealth overall.  Then the other two panelist had an opportunity to offer new and innovative solutions their organization’s are implementing to deal with the problem of housing affordability.

“For any community to be sustainable, it has to be affordable,” Shaw-Petrou said.” We’re seeing great divisions in society today, and there’s a huge role for the industry to play in tackling this, in providing solutions to affordability.”

Shaw-Petrou noted, that policy translation into other nations transmits through the housing market very differently than in the United States, the land of 30-year fixed-rate mortgages. As a result, the only way reducing U.S. interest rates translate to reduced cost of homes is by refinancing mortgages,. She said that a large body of literature on this topic indicates that refis have been inequitably distributed. Low-cost funding, however, does translate in multifamily housing, some of that through the GSEs (government-sponsored enterprises), but this market is subject to significant asset price distortions, which are in large part the result of monetary policy, Shaw-Petrou added.

She noted that the U.S. Central Bank, the Fed, has failed American families, 60 percent of which live paycheck-to-paycheck, because its inequitable monetary policies have caused them acute social harm by failing to equitably distribute the wealth. Shaw-Petrou said the Fed has flunked in all aspects of its statutory mandate to protect the general welfare, including maximum employment, when you consider labor participation; price stability in the last year and a half; and moderate, long-term interest rate criterion.

Shaw-Petrou’s solutions to housing affordability are more capital regulation and rewriting the economics of low-balance mortgages for lower-income families. She noted that analysis of the real cause of the Great Financial Crisis of 2008 was the significant early and severe delinquencies and then defaults in refinance, especially cash-out, refinance investor properties and second homes, not subprime mortgages. “The risk came from highly leveraged mortgage finance in the prime sector and investors that had a lot of second lien piggyback mortgages, a lot of cash at refinance, and house flipping,” she explained. “If you really look at the data, that’s where the risk was.”

She does not suggest using risk-based capital rules for credit allocation to drive banks to, for example, green types of financing. But with the amount of social and public welfare at stake in the housing issue, Shaw-Petrou said that looking analytically at risk and discarding stereotypes of lower-income homeownership would provide better risk-based capital rules that recognize risk-resilience and provide a new channel of financing for low -income homeownership.

Shaw-Petrou noted that new capital rules for Fannie Mae and Freddie Mac are aimed at differentiating risk-based capital by loan purpose. “I really do recommend this as something to think about because in most nations, lower-income families with a first home will, if they have the resources and opportunity, maintain their home and sustain that home,” she added.

Next, Nathalie Caillard, CEO of Ampere Gestion, a subsidiary of CDC Habitat—France’s largest multifamily landlord—that provides funding solutions for housing across all income spectrums, explained a model for funding workforce housing in dense urban markets using private institutional capital

She noted that the French Example illustrates an effective way to deliver affordable, intermediate housing at scale. The housing market framework for institutional investors was put in place eight years ago to increase institutional investment in urban intermediate rentals to meet the demand of middle-income families, which represents 75 percent of the French population, Caillard said. She noted that the program targets renters in dense urban markets like Paris, who earn too much to qualify for social housing, which is highly regulated, but not enough to afford free-market rents or to buy their own home.

This is a  public-private, mixed-income scheme that requires at least 25 percent of projects to be social housing and 30 percent intermediate housing, along-side free-market rentals. Funding can only be used for new or recently refurbished assets, which also must provide a certain level of energy efficiency to keep tenant energy costs minimal. Investors commit to maintain ownership for a maximum of 20 years but can start to gradually sell the asset after a 15-year holding period. Investors receive tax incentives to compensate them for the below-market rent.

Since the program began, private investors have invested €6 billion ($6.32 billion) in 15,269 intermediate housing units, which are occupied by more than 28,000 residents living in dense urban markets across France, Caillard said, and cited the social impact. Units, which are managed by CDC Habitat, rent for apartments, which average 60 sq. meters (645 sq ft), is €14,6 €/M2 per month,  just 24 percent of a tenant’s average income. The average age of occupants is 36 years, but half of them are under 30 years The rent discount represents an annual savings per household of €1,283 ($1,351) , she added noting that the tenant mix includes a significant number of civic and essential workers, like teachers, nurses and emergency professionals who otherwise couldn’t afford to live near where they work.

Caillard also said that the last tenant survey indicated strong satisfaction, as units are newly built and energy efficient building with limited-occupancy costs, located in the most dense location and close to public transit access.

She said that the key point of this model is to align interests of the public sector with private investors. “The beauty of this scheme in France is that’s a national scheme, so it is scalable and there is real consistency of regulation between different French cities. Secondly, we have a very clearly defined framework that provides investors good visibility of what could be the impact of their investment because they are targeting a very specific population with a well-defined rent cap in a well-defined location—the most demanding location,” Caillard added. Thirdly, she said that to attract private capital commitment in this type of asset long-term there needs to be a very stable regulatory framework and provide investors and exit strategy,” she said, noting that 20 years is considered a long holding period and any longer would make it difficult to attract institutional money.

Socher Edwards, secretary general of Brussels-based Housing Europe, discussed disparities in housing affordability in the various European nations, what her organization is doing to tackle the problem and what needs to happen to level the affordability playing field.  Housing Europe, the European Federation of Public, Cooperative & Social Housing, is a network of 46 national and regional federations that represent about 43,000 public, social and cooperative housing providers in 25 countries that manage 25 million homes.

Edwards stressed the importance of a reset, noting the mismatch of housing prices and residents’ incomes, particularly in capital cities. She said, for example, that  rent for a two-bedroom apartment in Lisbon is more than 100 percent of the average worker’s income. And Lisbon is not alone. There are very few capital cities where the average rent is less than 30 percent of people’s incomes, and in many cases it’s over 60 percent, Edwards added.

“in this situation, obviously everyone is losing, because the local economy is losing and the society is losing,” she continues, noting that COVID put housing at the center of concerns, because people spent a lot more time at home and are now expecting a lot more quality.

Edwards noted that that there is not just one solution to this problem, as every context requires different thinking. There are issues involving the European Central Bank’s fiscal and monetary policies and  specific schemes on affordable housing, she continued, but “in our reality, we’re talking about addressing homelessness, addressing aging, addressing Greening.”

Edwards suggested a switch” a switch in thinking. “Stop thinking about where can we put people who can’t access affordable housing? Where are we going to put them now, how do they want to live, and where do they want to live? We is to stop asking, what do we do about cities that aren’t affordable?  Rather she said, “We need to ask how can we make cities affordable?”

Edwards contends that a nonprofit housing provision in the housing system is the silver bullet on n which to build housing affordability and sustainability. “I think a critical mass of limited-profit housing will balance the market and provide a sort of a regulating effect on the market,” she stressed, noting that it has to be a minimum of 20 percent.

She came to this conclusion, following a U.N. study of the issue in which her organization collected all housing policies that successfully delivered housing since World War II and tried and tested them out.

Edwards noted relevancy of this issue to people’s lives and the importance to society at large.  Students are turning down a place in a university and people are turning down job opportunities because they can’t afford to live near where they work. She also pointed out that cities are having difficulty attracting a retaining essential workers, like teachers and nurses, because they can’t  afford to live near where they work.  Barcelona, for example, is currently struggling with problem because only 3 percent of the housing stock is affordable and is looking at social housing models in France and other member states to try to replicate them.

Edwards noted, however, the historically long road to creating a stable social-housing model in France, such as Livre, which is funded with private money from people’s savings that goes into a central fund for social housing.  “We are seeing very little replication of these type of ideas around Europe.”

She said that the U.N. study was in reaction to the oversimplified notion that building more housing will solve the problem, noting that obviously this needs to happen, but nonprofits’ core mission is providing affordable housing and they stick to it. Edwards noted that nonprofits also provide specialist services that aren’t available in other housing segments, including debt prevention, additional care, services for aging in place, and for dealing with antisocial behavior. And this is the only sector of the housing system where quality of housing is not allocated based on ability to pay.

She noted that a key to the sustainability of affordable housing is that surpluses are reinvested in the organizations and provide a long-term response. France requires 20 percent social housing in projects, which remain affordable in perpetuity.  Edwards said that this scheme is anti-cyclical, not dependent on market cycles, which gives it stability. The most successful and largest social housing sectors in Europe are actually financed through private finance, she adds, suggesting that it’s viewed as a stable, low-risk investment in a high-quality residential asset that is constantly upgraded without relying on public subsidies, she added.

Edwards also suggested that whatever form the critical mass of nonprofits takes it should give people a choice between renting and owning.  Edwards says, however, that ownership  in the affordable space has become  big issue because the central bank is subsidizing debt for people who are not able to pay their mortgages, which is leading to higher housing prices. “So we need to make sure that rentals remain a viable, affordable, quality option with security of tenure.”

Edwards said that there also is a need to balance schemes that end after 15 years with housing that housing that will remain affordable forever. She cited a recent a situation in some parts of Germany where a lot of this type of housing fell out of the agreement after 20 years, leaving cities with few options for people displaced.

She admits that the 20 percent social component is not really a silver bullet, but stressed that strong regulation is the base that supports reinvestment and, in the end, provides better quality and a better value for public money.  “What’s 100 percent sure is there’s a huge lack of investment in this sector. What’s also true is that the regulation has to be right,” Edwards adds, suggesting, for example, that ESG is important but cannot get in the way of increasing affordable housing stock.

In conclusion, Edwards noted that central governments and the European Union are now listening to the “public outcry” for housing affordability, as this was the first year since 2013 that, under the French presidency, the European Union held a meeting on housing affordability.

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