Brick by Brick

Building Better Housing Policies

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31 May 2021

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2. Promoting Housing Affordability

Abstract

House prices have risen faster than incomes in most OECD countries in recent decades, and housing costs are both the largest and fastest-growing household expense on average. The supply of affordable housing falls well short of demand: government investment in housing development has dropped by more than half since 2001, building new housing is costly, and demand for affordable housing is both growing and changing. Policy options are available to make housing more affordable.

Main policy lessons

Less than half of the OECD population, on average, reports that they are satisfied with the availability of good, affordable housing in their city or the area where they live. Affordability is a pressing challenge and central objective of housing policy in many OECD countries.

As house prices have increased in most countries since 2005, housing is, on average, the largest spending item in household budgets and its share has grown over time.
Many low-income households spend over 40% of their income on housing and are more likely to live in lower-quality dwellings.
Affordable housing shortages can contribute to homelessness, which, prior to the COVID-19 pandemic, had increased in a third of OECD countries in recent years.
Affordability gaps are more pronounced in job-rich urban areas, and many young people struggle to become homeowners.

The COVID‑19 pandemic has brought renewed urgency to address persistent housing affordability and quality gaps. Many households face sudden economic losses. A number of OECD governments introduced shelter-in-place orders in the spring of 2020 to manage the immediate crisis, which were then extended – and/or further targeted as the pandemic continued.

Several directions to make housing more affordable could be considered, including:

Invest in affordable and social housing to support an inclusive economic recovery; this would reverse a sustained decline in public investment in housing development, on average across the OECD since 2001.
Improve the targeting of public support for housing, whilst carefully managing the expected gains with the potential trade-offs of increased targeting. This could include, for instance, phasing out tax advantages that favour homeownership and which tend to benefit higher-income households.
Make the private rental market more affordable by removing supply bottlenecks, promoting tax neutrality between renting and owning, ensuring a better balance between landlord and tenant relations and using appropriately flexible rent stabilisation measures where relevant.

Housing affordability: Trends, drivers and policies

Assess housing affordability across different tenure and household types

1. Housing has become less affordable for many households in the OECD area, pushing the issue to the forefront of the policy debate. Less than half of the OECD population, on average, reports that they are satisfied with the availability of good, affordable housing in their city or the area where they live (OECD AHD indicator HC1.4). Over the past two decades, as housing prices have risen in most OECD countries, households are, on average, spending a large and increasing share of their budget on housing. Challenges differ across and within countries: affordability gaps are particularly pronounced in job-rich urban areas and among low-income households, renters in the private market, and youth. While low-income and other vulnerable households have long faced this challenge, an increasing share of the middle class also face affordability issues.

Housing is the biggest spending item in household budgets

Housing is, on average, the biggest expenditure of households in the OECD, and its share in household spending has risen over time. Housing represents the single-largest budget item in household spending across all income groups, ahead of food and clothing, transport, leisure, health and education (Figure 2.1, Panel A). Moreover, households are spending more on housing than they used to: on average across 20 OECD countries the share of housing spending in household budgets rose by nearly 5 percentage points between 2005 and 2015 (Figure 2.1, Panel B). The share of household spending also increased for other key consumption items, such as transport, health care and education, over this period but to a much lesser extent. Going back even further in time (1995-2015), albeit for a smaller subset of countries, consumption estimates suggest that the share of household spending on housing has increased even further (OECD, 2020[1]).

Figure 2.1. Housing crowds out other consumption expenditures

Panel A. Household budget share by consumption item, by income class, OECD average, 2016 or latest year available

Housing costs have steadily increased, especially for renters

One driver of increased household spending on housing is a rise in housing costs over the past two decades, especially for renters. On average, real house prices increased in 31 OECD countries between 2005 and 2019, with Colombia, Canada and Israel recording the largest increases (over 80%) (Figure 2.2, Panel A). Just seven OECD countries recorded a drop in real house prices over this period, most significantly in Greece, Italy and Spain. Meanwhile, rents increased in all but two OECD countries between 2005 and 2020, more than doubling in Turkey, Lithuania, Iceland Estonia and South Africa (Figure 2.2, Panel B). High and rising rents make it harder for tenants to save up for a down payment to purchase a home and make them more vulnerable in the event of economic shocks, such as that caused by the COVID‑19 pandemic.

Figure 2.2. House prices have increased over time in most OECD countries

Panel A. Real house price index, 2005 and 2019, 2015=100

Quality gaps exacerbate the housing affordability challenge, especially among low-income households

Across the OECD, many low-income households face both housing affordability and quality gaps. A large share of households in the bottom quintile of the income distribution are “overburdened” by housing costs, in that they spend more than 40% of their disposable income on rent or mortgage payments, maintenance and utilities (Figure 2.3, Panel A). The challenge is greater for renters: on average, around a third of low-income tenants in the private rental market are overburdened by housing costs, compared to around one-quarter of low-income homeowners with a mortgage (OECD, 2020[4]). Further, since 1995, households in the bottom of the income distribution have experienced the most significant rise in spending on housing on average across countries, relative to middle- and high-income households (OECD, 2020[1]). Rising rents and a high housing cost overburden can cause households to fall behind on their monthly rental payment and face eviction: while cross-country data are scarce (Chapter 9), at least 3 million formal eviction procedures were initiated in the rental market across 17 OECD countries for which data are available (OECD (2020[4]), indicator H3.3).

At the same time, low-income households are also more likely to live in poor quality dwellings. They may not be able to afford regular maintenance or improvements to their dwellings, while at the same time facing barriers to move to better-quality housing. In nearly all countries, households in the bottom quintile have a higher rate of overcrowding than those in the middle- or top-income quintile (Figure 2.3, Panel B). The COVID‑19 pandemic renewed concerns around overcrowding among policymakers, because overcrowded conditions make it more difficult for people to effectively self-isolate, putting people at greater risk of contracting and spreading infectious diseases (OECD, 2020[5]).

Figure 2.3. Low-income households face a dual housing affordability and quality challenge

Panel A. Share of population in the bottom quintile of the income distribution spending more than 40% of disposable income on mortgage and rent, by tenure, in percent, 2019 or latest year

Prior to the COVID-19 pandemic, homelessness was on the rise in a third of OECD countries

Rising housing costs is one of many factors that can lead to homelessness, which prior to the COVID-19 crisis affected at least 1.9 million people in the OECD. Pre-COVID data suggest that homelessness increased in a third of OECD countries over the past decade (Box 2.1). Homelessness estimates for 2020 are available for a few countries, but it is difficult to compare these data with previous years and across countries (see indicator HC3.1 in the OECD Affordable Housing Database). Nevertheless, official statistics likely underestimate the extent of homelessness. This is because people experience homelessness in different ways – from “sleeping rough,” staying in emergency shelters or doubling up with friends and family members – circumstances that may be more or less visible to public authorities and thus accounted for in official statistics. Moreover, some countries report an increasingly heterogeneous homeless population: while single men continue to be overrepresented among the homeless, the share of homeless youth, families with children, and seniors is growing in some countries for which data are available (OECD, 2020[6]). The COVID‑19 pandemic prompted many governments to introduce emergency support measures to provide shelter and other services to homeless populations (OECD, 2020[5]; OECD, 2020[7]). At the same time, there are concerns about a potential increase in homelessness among households who continue to face economic difficulties once temporary eviction and foreclosure bans are lifted.

Box 2.1. Homelessness in the OECD

Homelessness, the most extreme form of housing and social exclusion, has emerged as a pressing challenge across the OECD.

The drivers of homelessness are multiple and their interaction is complex, resulting from structural factors, institutional and systemic failures (e.g. housing instability among people transitioning out of institutional settings, such as foster care, the criminal justice system, the military or hospitals and mental health facilities), individual circumstances – or a combination of these. Among the different structural factors, research has identified a correlation between homelessness and rising housing costs; other studies have pointed to a link between homelessness levels and increasing rates of poverty and evictions.
People experience homelessness in different ways, reflecting the need for different types of support. A small but visible share of the homeless population experiences prolonged periods of homelessness, or may transition in and out of homelessness for several weeks, months or years (typically known as the “chronically homeless”). The largest share of the homeless population in most countries is “transitionally” or “temporarily” homeless, in that they are homeless for a short period before finding a more stable housing solution.
The composition of the homeless population has become increasingly heterogeneous in some countries. Traditionally, middle-aged single men have been more likely to be homeless. However, homelessness among youth, families with children, and seniors has increased in some countries for which data are available. Migrants also appear to make up a significant share of the homeless in some countries. Further, in Australia, Canada, New Zealand and the United States, Indigenous populations are overrepresented among the homeless.
Homelessness is, by its very nature, a difficult circumstance to assess, as homeless individuals may be more or less “invisible” to public authorities (they are not officially registered) and support institutions. As a result, there is scope to improve information flows and expand the policy toolbox to better understand the challenges and needs of different homeless populations.
To effectively tackle homelessness, governments should invest in homeless prevention and provide targeted support to meet the diverse needs of people who have become homeless. Evidence suggests that “Housing First” approaches, which provide immediate, permanent housing to the homeless, along with integrated service delivery, can be highly effective solutions for the chronically homeless. At the same time, emergency support, including rapid rehousing, can help the transitionally homeless.

The OECD Affordable Housing Database (indicators HC3.1 and HC3.2) and the OECD Policy Brief, “Better data and policies to fight homelessness in the OECD” document cross-national trends in homelessness and discuss the data and definitional constraints in measuring homelessness across countries.

1. There is no internationally agreed upon definition of homelessness, and countries do not define or count the homeless in the same way. There are also a number of challenges in the scope, frequency, consistency and methods of data collection that might affect measuring the full extent of homelessness.

Source: (OECD, 2020[6]).

National averages mask differences in affordability gaps across people and regions

Along with differences in affordability across countries, there are also considerable differences across population groups and regions within countries. For instance, on average, most young people aged 20-29, in the face of reduced opportunities in the housing market still live with their parents – with the share reaching over 70% of youth in Italy, the Slovak Republic, Greece, Slovenia, Spain and Portugal (OECD, 2020[1]). Indeed, it takes more than ten years of annual income to buy a house today, compared with less than 7 years a generation ago (OECD, 2019[2]). It is thus no surprise that young people are the most likely age group to report affordable housing as among their top three short-term concerns (OECD, 2019[8]). Empirical evidence further suggests that women are disproportionally more affected than men by high housing costs. In the US, for instance, a vast majority of the households benefitting from rental assistance or housing voucher programmes are headed by women (Quets, Duggan and Cooper, 2016[9]).

Meanwhile, housing affordability tends to be more challenging in job-rich urban areas relative to rural areas, with some countries recording large differences in house prices across cities and regions. For example, house prices have risen twice as much in inner London compared to the rest of the United Kingdom since 1995; similarly, over the same period, house prices in the Los Angeles metropolitan area increased twice as fast as those in the Chicago metropolitan area (OECD, 2020[10]). Moreover, across OECD countries, urban residents are, on average, about 10 percentage points less satisfied with the availability of quality affordable housing relative to rural residents (OECD AHD, Indicator HC1.4). National policies to make housing more affordable should thus take such demographic and regional differences into account.

Address the barriers to affordable housing

Demand for affordable housing fails to meet supply in many cases, which results from a range of factors that can vary across countries. First, on average across the OECD public investment in housing has been declining over the past two decades, while overall (public and private) investment has been uneven. Second, building housing is increasingly expensive; while there are differences across countries, some factors include land scarcity (especially in dynamic urban areas), overly restrictive land regulations and planning processes that make housing development more costly, as well as increasing construction costs, not least those related to energy efficiency and other environmental sustainability regulations. Third, demographic changes imply both growing and evolving demand for housing.

Governments are investing less in housing development

Over the past two decades, while combined public and private housing investment has been uneven across the OECD, public investment (public capital expenditure) in housing construction has dropped by more than one-half on average. Government spending on capital transfers and gross capital formation for housing development declined from around 0.17% of GDP in 2001 on average across the OECD to about 0.07% of GDP in 2018. In particular, direct public investment in dwellings has plummeted since the Global Financial Crisis, amounting to less than 0.01% of GDP in 2018. The volume of capital transfers (i.e. public transfers to organisations outside government), which makes up the bulk of public investment on housing, has fallen to a lesser extent. Nevertheless, at less than 0.1% of GDP on average since the Global Financial Crisis, overall public investment in dwellings is not high. By comparison, demand-side housing assistance, measured in terms of public expenditure on housing allowances, has risen slightly over the same period, from 0.26% of GDP in 2001 to 0.31% GDP in 2017 (Figure 2.4). Meanwhile, the share of social housing has declined in most OECD countries since 2010, further reducing the affordable housing supply for low-income households (OECD, 2020[11]).

Figure 2.4. Public investment in housing development has halved since 2001, while spending on housing allowances has risen slightly

Public capital transfers and public direct investment in housing development, and public spending on housing allowances and rent subsidies, OECD-25 average, as % GDP, 2001 to 2018

Building homes is increasingly expensive

Building new housing is a lengthy and costly process. An inelastic housing supply, resulting from a scarcity of developable land in urban areas or regulatory policies that make it harder and more costly to build, can make housing less affordable (Bétin and Ziemann, 2019[12]; Cavalleri, Cournède and Özsöğüt, 2019[13]). In particular, more stringent and decentralised land-use regulations can significantly reduce housing supply and drive up housing prices when demand increases (Bétin and Ziemann, 2019[12]; Cavalleri, Cournède and Özsöğüt, 2019[13]). Also, rising construction costs have also contributed to declining housing affordability in many countries, in part due to increasingly stringent energy efficiency and environmental sustainability regulations. In the OECD-EU area, construction costs for new residential buildings increased by over 70% between 2000 and 2019, of which labour costs alone increased by more than 110% (Eurostat, 2020[14]). Since the late 2000s, construction costs have continued to increase, but at a slower rate. In a country-wide effort to drive down construction costs, Germany, for instance, introduced a Construction Cost Reduction Commission, which resulted in over 70 recommendations for all levels of governments and the construction industry (OECD, 2020[15]).

Demand for affordable housing is growing and changing

Households are changing, which in turn affects the demand for housing. People across the OECD are living longer, and as a result, the share of single elderly households is rising. Also, marriage rates have been falling, whilst divorce rates have increased. These trends have many implications for housing demand. An ageing population and the trend towards smaller and more numerous households put further strain on housing markets where supply does not respond flexibly to evolving demand patterns. Single-person or single-parent households may find it increasingly difficult to find affordable homes in this context. An ageing population also calls for housing that is more accessible and in proximity to a range of essential services.

Urbanisation, which is projected to continue in the coming decades, changes the intensity and geography of housing demand, putting additional pressures on urban housing markets, where land and housing are already in scarce supply. As discussed in Chapter 1, housing markets respond differently to changing demand, depending to a large extent on the elasticity of housing supply. A more elastic housing supply enables a faster supply response to changes in demand; a higher supply elasticity is thus an indicator of greater economic efficiency and prevents undue increases in housing prices.

At the same time, even before the COVID-19 crisis, many households were facing housing insecurity. This has particularly been the case for households at the lower end of the income distribution. Since 1985, income has grown faster for high-income households than other social groups (OECD, 2019[16]). As a result, as house prices increase, lower-income families spend an increasing share of their budget on housing and struggle to save to buy a home or to cushion against an economic shock. Such households thus tend to be more vulnerable in a crisis. For example, in England (the United Kingdom), before the COVID‑19 pandemic, a third of low-income tenants living in social housing were overburdened by housing costs, leading to 64 664 rent arrear claims taken to court by social landlords in 2019 alone, coupled with 50 845 eviction orders (OECD, 2020[11]). The pandemic has already shown signs in some countries of deepening housing instability among vulnerable households, particularly low-income renters (Box 2.2).

Box 2.2. What does the COVID‑19 pandemic mean for housing affordability?

The COVID‑19 pandemic renewed concerns over persistent housing affordability and quality gaps among households and will likely continue to affect housing affordability and vulnerability over the medium to long term.

Several dimensions of housing vulnerability were evident at the outset of the crisis. The pandemic, along with the shelter-in-place orders implemented to manage the crisis, elevated health and safety risks among people living in poor quality, overcrowded housing or unsafe living conditions. In addition, some households that experienced sudden income losses faced heightened housing instability, struggling to pay monthly housing expenses without assistance. In response, many OECD countries introduced emergency housing support measures, of which temporary eviction bans and mortgage holidays were most common |see, for instance, OECD (2020[5]) and (OECD, 2021[17])].

While considerable uncertainty remains, the impacts of the COVID‑19 pandemic on housing outcomes will continue to be felt over the longer term. There are significant concerns over a potential surge in evictions and foreclosures once the temporary moratoria are lifted, and especially in countries where economic activity has not yet fully resumed. Preliminary evidence from the United Kingdom and the United States suggests that renters face heightened housing instability, as they are more likely than homeowners to work in the industries most affected by the pandemic (OECD, 2020[5]). For example, in February 2021, nearly one in five renters in the United States repoted having fallen behind on their rent payments – representing over 9 million people. Over 40% of these tenants in rent arrears reported that they were “very likely” or “somewhat likely” to have to leave their apartment in the next two months due to eviction; in comparison, around 17% of homeowners who were behind on their mortgage payments reported that they were likely to have to leave their home due to foreclosure in the next two months (United States Census Bureau, 2021[18]).

Extending temporary relief may be needed in some cases to support households that continue to struggle, and to avoid a sudden increase in evictions and homelessness. Research from the United States found that moratoria on evictions and utility disconnections, where introduced, have helped to reduce COVID-19 infections and deaths (Jowers et al., 2021[19]). Such measures should nonetheless be phased out once conditions improve. There may also be an increased demand for social and affordable housing. While the pandemic demonstrated the ability of many governments to rapidly secure shelter for the homeless, including in hotel rooms that had been closed to the public, there is a pressing need to develop long-term solutions to house the homeless.

Coming out of the crisis, countries may also look towards more innovative solutions. Portugal, for example, aims to incentivise short-term holiday rental owners, which were hard-hit by the crisis, to contribute available dwellings to the country’s longer-term affordable rental housing supply. Depending on whether broader shifts towards more regular teleworking materialise, demand may rise for public policies to facilitate the conversion of unused office and commercial spaces to residential uses.

Make housing more affordable

Governments could pursue several policy strategies to increase the affordable housing supply, though approaches will need to be tailored to the different challenges and policy settings across and within countries. First, governments could invest more in affordable and social housing. Second, more could be done to improve the targeting of public support for housing. Third, in many countries, there is scope to take measures that make private rentals more affordable.

Reinvigorate investment in affordable and social housing

In the wake of the COVID‑19 crisis, investment in affordable and social housing can be a key part of the solution as countries chart a path towards economic recovery (Box 2.3). Australia, Canada and France, among others, have announced major investments in affordable housing since the onset of the pandemic, including AUS 6 billion (about USD 4.6 billion) for the Australian state of Victoria’s “Big Housing Build”; CAD 1 billion (about USD 0.8 billion) for Canada’s “Rapid Housing Initiative”; and just under EUR 3 billion (about USD 3.4 billion) towards housing investments in France’s France Relance economic recovery plan (OECD, 2021). Meanwhile, the Dutch building sector – comprisng the 25 largest trade associations in the housing sector – signed an agreement in February 2021 to build 1 million homes by 2030. Such investments in social and affordable housing can also generate other benefits: helping to support jobs and SMEs in the building sector; underpinning residential mobility (Causa and Pichelmann, 2020[20]); and supporting efforts to prevent and reduce homelessness, particularly through ‘Housing First’ and integrated service delivery approaches (OECD, 2020[6]). At the same time, large-scale investment in renovations to social housing, which is a central element of the European Green Deal, can stimulate economic recovery, support environmental sustainability objectives and boost well-being among residents across the OECD and EU (OECD, 2020[11]). To deliver such investments, countries could consider developing revolving funds as part of a long-term funding strategy for housing, following the examples of Austria and Denmark, which operate through a mix of state-guaranteed and market loans (Box 2.4).

2. Investments in social and affordable housing should be part of broader efforts to build inclusive, socially mixed neighbourhoods, avoiding social and economic segregation. This means, on the one hand, bringing social and affordable housing into neighbourhoods that traditionally have not included such developments. It also means coordinated investments in existing neighbourhoods to improve infrastructure and opportunities related to edcuation, public transport, parks, culture and leisure (OECD, 2020[21]). Chile, France, Mexico and the United States have initiated largescale urban regeneration programmes, such as Chile’s Neighbourhood Improvement initiative (Recuperación de Barrios) and France’s New National Urban Renewal Programme (Nouveau Programme National de Renouvellement Urbain). Lessons from OECD countries suggest that resident consultation should be an integral feature of the regeneration process to ensure that resident views and needs are better taken into account.

Reducing administrative barriers to affordable housing construction can also help to expand supply. OECD estimates that land-use reforms could facilitate the post-COVID recovery of homebuilding, better align housing supply with changing demand, and make housing markets more affordable and efficient (Cournède, De Pace and Ziemann, 2020[22]). Strategies would vary across countries, depending on specific needs and institutional settings, as would the intensity of the effects of different reform scenarios depending on planning regimes in place, but could include facilitating metropolitan or regional land-use planning, streamlining the development permitting process, making it easier to redevelop brownfields, and reforming zoning regulations. In the United States, for instance, the city of Minneapolis (Minnesota) reformed local zoning regulations in 2019, essentially abolishing single-family zoning to allow for higher-density residential development to increase housing affordability.

Box 2.3. Social housing in the OECD

Representing close to 30 million dwellings and about 6% of the total housing stock in the OECD, social rental housing is an important dimension of social welfare policy and affordable housing provision. Social housing is defined as residential rental accommodation provided at sub-market prices and allocated according to specific rules (such as identified need or waiting lists), though definitions vary across countries.1

There are significant cross-national differences in the size, scope, type of provider and target population of social housing:

Size and evolution of the social housing stock: In most OECD countries, social housing typically makes up less than 10% of the total dwelling stock. However, in Austria, Denmark and the Netherlands, it represents a key “third sector” in the housing market, with over 20% of all housing (Figure 2.5). In all but six countries for which data are available, the relative size of the social housing stock has declined since 2010, partly due to a decline in public investment in housing as well as the sale of social dwellings to their tenants in some countries.
Types of providers: On average, regional and municipal authorities account for around half of social housing provision in the OECD; the remainder is divided among non-profit, limited-profit or co-operative housing associations (15%), national governments (14%), for-profit providers (11%) and others.

Eligibility criteria and targeting: The eligibility criteria to access social housing is another key difference among social housing systems, which can be broadly classified as universalist or targeted. Universalist systems, in which social housing is typically open to a broad cross-section of the population, are more common in countries with a larger social housing sector. However, social housing in most OECD countries has become more targeted over time. While increased targeting can help to allocate social housing to households in need, it can pose challenges to the economic sustainability of the sector and social mixing objectives, and may exacerbate the spatial concentration of poverty and disadvantage. In any case, explicit measures to promote social mixing in the sector have had mixed results. (For a discussion of lock-in effects that may have a bearing on labour mobility, see Chapter 6.)

Policy makers and social housing providers face a number of challenges and trade-offs to develop an environmentally and fiscally sustainable sector that provides quality, affordable housing to those who struggle to afford housing on the private market. The investment needs to upgrade a deteriorating social housing stock are steep in many countries, as are the costs of addressing segregation and “ghettoisation” of neighbourhoods with a high concentration of social housing. Nevertheless, these challenges have spurred major building revitalisation projects to improve the quality of dwellings and the surrounding neighbourhoods.

Investment in social housing – both to improve the quality and environmental sustainability of the existing stock, and to develop new, “green” social housing – is an essential part of an inclusive, green economic recovery.

Figure 2.5. The size of the social housing stock varies considerably across countries

Social rental dwellings, in % of the total housing stock

_____________

1. The sector may be referred to, inter alia, as social or subsidised housing (Australia, Canada, Germany and the United Kingdom), public housing (Australia, United States), council housing (United Kingdom) or general housing (Denmark).

Source: (OECD, 2020[11]).

Box 2.4. Supporting long-term investments in affordable and social housing through revolving funds: The experience of Austria and Denmark

In Austria, revolving funds support the development and maintenance of the social housing stock. Approximately 40% of a typical social housing project is financed through bank mortgage loans with a maturity of 25 years (1.5% interest rate), with the remainder financed with public loans (35-year maturity and 0.5-1.5% interest rate) and equity contributions from housing associations. Also, the social housing sector received generous public financial support in the beginning, and – like much of the housing sector – continues to benefit to some extent from public transfers, in addition to other financing sources. The Limited-Profit Housing Act sets out the governance principles for housing associations, including a limitation of nominal capital paid out to shareholders of 3.5%, a calculation of prices based on actual costs, a continuous reinvestment of capital and a regular audit of the efficient use of resources and compliance with the Act. Housing associations are exempt from corporation tax for their core activities. The business model of housing associations is based on cost-recovery and a continuous re-investment of any surpluses into new construction or renovation. This means that a housing association is legally required to charge the cost it takes to build and maintain a house. All calculations are performed at the building block level, which means that each building block has to be financially viable.

Denmark’s National Building Fund, created in 1967, is a key pillar of the national model to provide social and affordable housing and is largely implemented by housing associations. The National Building Fund is an independent institution outside the state budget. Funding is based on a share of tenants’ rents (amounting to 2.8% annually of the total acquisition cost of the property), in addition to housing associations’ contributions to mortgage loans (approximately 2% of the property acquisition cost). Payments are adjusted annually for the first 20 years after loan take-up, and then by a slightly lower rate until the 45th year, at which point rents are maintained at the reached nominal level. A share of tenants’ rent is used to pay off the housing agency’s mortgage loan for the first approximately 30 years, at which point the share is allocated to the state for another ten years. Once this period is over, the share is allocated to the National Building Fund.

Approximately one-third of the National Building Fund’s resources are used to support the construction of new social housing. In this way, each housing organisation contributes to and can borrow from the Fund, which supports a wide range of activities, including renovations of the existing housing stock as well as social and preventive measures in vulnerable areas, the development of social master plans that are co-financed with municipalities to support interventions related to security and well-being, crime prevention, education and employment, and parental support. The development of a fiscal master plan agreed with municipalities is the precondition to access support from the Fund. The number of housing developments that have paid back their mortgages is increasing, meaning that in the coming years the resources generated by the rents can be used to pay a larger part of physical and social modernisation programmes decided upon in the sector.

Source: Adapted from OECD (2020[15]).

Improve targeting of public support towards low-income households, with attention to potential trade-offs

Governments have at their disposal a mix of demand-side supports (e.g. housing allowances, subsidies for potential homebuyers) to decrease households’ housing costs, as well as supply-side interventions (e.g. subsidies and incentives to housing developers) to stimulate affordable housing construction. The majority of housing policies in OECD countries – and particularly housing taxation (OECD, 2021[23]) – tend to favour home ownership (Andrews and Caldera Sánchez, 2011[24]; Salvi del Pero et al., 2016[25]). Meanwhile, support for tenants in the private rental market is on average more piecemeal. There are many arguments in favour of public incentives to facilitate home ownership (e.g. in terms of wealth accumulation, child outcomes, social capital and social mobility (see (Andrews and Caldera Sánchez, 2011[24]). However, such support can also fail to reach households who most need support, such as low income and young households, impede mobility and crowd out other types of housing support (OECD, 2020[1]).

In a context of scarce public resources, policymakers could consider ways to improve the targeting of housing support to households in greatest need. In some countries, this could include potentially phasing out tax advantages that favour homeownership at higher income levels. Eliminating (or capping) mortgage interest rate deductibility or curtailing capital gains relief on owner-occupied housing can help make housing taxation more progressive (Causa, Woloszko and Leite, 2019[26]).Where the social housing stock is limited, it may be relevant to encourage tenants whose circumstances have improved to move to other forms of tenure, thereby making room for more economically vulnerable households. Different strategies exist, including the introduction of more regular means-testing throughout the duration of social housing tenancy, and not just at the time of entry. In addition to the practical and political challenges associated with the implementation of such measures, the negative consequences of reducing social mixing in social housing (including the potential to exacerbate the spatial concentration of vulnerable groups) should be carefully weighed against the expected gains (OECD, 2020[11]).

Make the private rental market more affordable

In many countries, governments could do more to make the private rental market more affordable to alleviate the difficulties of many low-income and vulnerable households to afford high and increasing rents. One strategy is to strike a better balance between landlords and tenants. This means, on the one hand, ensuring a secure investment for landlords and investors and, on the other, good-quality secure housing for tenants. In the case of tight rental markets, rent stabilisation measures could be one way to provide greater security to both landlords and tenants (OECD, 2020[1]). Unlike strict rent freezes, which impose a below-market rate maximum (or ceiling) on the rent, rent stabilisation measures limit the level of rent increases within (and sometimes between) tenancies. It would be important to weigh the expected benefits of such measures – which may be particularly felt by existing tenants in the short- to medium-term – against possible longer-term drawbacks, including a potential decline in the rental supply and difficulties for some future would-be tenants to rent dwellings. Nevertheless, preliminary evidence suggests that temporary protection for tenants introduced during the COVID-19 crisis, such as eviction moratoria, has been effective in reducing the spread of the disease and in keeping vulnerable households in their home (see, for example, (Jowers et al., 2021[19]) in the U.S. context). As conditions allow, such measures should be phased out gradually to limit adverse long-term effects (OECD, 2020[27]). Meanwhile, it will be important to anticipate strategies to accompany households that have accrued large housing arrears during the extended crisis period once temporary support is lifted, in order to avoid a wave of evictions and foreclosures.

References

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