How can we solve Europe’s housing crisis? Across the EU, house prices have been growing faster than incomes, making it more difficult for young people in particular to get their foot on the first rung of the housing ladder. Housing has now become the highest expenditure for most Europeans, and the NGO Housing Europe argues that the rate of housing construction is too low to meet growing demand in the future, suggesting that housing scarcity is a structural problem and will only get worse over time.
What do our readers think? We got a comment sent in from Andrea, who thinks it should be an “easy” decision for policymakers to build more social housing. So why are governments seemingly so reluctant?
To get a response, we put Andrea’s comment to Ryan Bourne, R. Evan Scharf Chair for the Public Understanding of Economics at the Cato Institute, a libertarian, pro-free market think tank based in the United States. What would he say?
Well, I totally accept the argument that, given relative shortage of housing availability in particular areas, one can perceive that the housing need could be met through government investment in the housing stock, or incentivising private development in the housing stock in some way. However, it’s not inherently clear to me that there are market failures in housing that need correcting, and therefore we shouldn’t start with our central expectation that private housebuilders should not be able to meet demand.
I would argue the main reason that private housebuilding doesn’t meet demand in particular areas is usually because of stringent land-use planning laws and zoning rules, which restrict development in areas that people want to live. Therefore, subsequently, to correct for that people misinterpret the lack of development as a market failure and therefore demand that governments build more social homes.
The problem in reaching reflexively for social housing as a solution to these shortages is that in doing so one assumes that all housing is created equal. But we know from past experience in countries like the UK and France that big social housing projects in particular areas can have some major downsides as well, in that they can trap people in areas of relative poverty, and they can lower labour mobility because by giving people either subsidised or cheaper social housing you create a disincentive to then move out of the housing if you get a better job opportunity or want to downsize.
So, I think the reason that many governments are reluctant to invest in social housing is because although it can be one means of trying to meet pent-up demand in particular areas and areas of shortage, it’s not costless from an economic perspective. And I think people recognise that social housing can bring with it a big misallocation of where people choose to reside, and that can have some negative consequences in relation to poverty traps and the efficient functioning of a dynamic housing market.
For another perspective, we also put the same comment to Chiara Rizzica, a project manager with the pro-social housing Italian non-profit Fondazione Housing Sociale. How would she respond to Andrea?
Looking at the bigger picture, Andrea is absolutely right. I have been getting through certain figures released by a very consistent report that is made every two years by an organisation at a European level that you may have heard about: Housing Europe. They publish every two years a report that is titled ‘The State of Housing in the EU.’ Looking at the figures, your reader is right. There is a decreasing role of states and governments in funding public housing. This is a trend in Europe, it’s not such a big novelty.
Reasons are quite well-known and diverse, from each country to the other. Of course it depends on the fact that what we have been calling ‘welfare state policies’ have been, in the last decade, replaced by diverse approach policies that are more oriented on liberal schemes and approaches. Meanwhile there is the impact of the financial crisis in 2008.So this, in the housing sector, means that public funding towards capital spent on housing development has been decreasing. For example, if in 2009 in the European average we can say almost 53% was the impact of housing allowance, now it is has increased up to 75%. That means that governments are spending less in housing, in providing housing.
This does not mean there are no other options because in many countries, in many European countries, there is a strong support by policymakers, by key actors in the market, by key actors in the policy arena in trying to develop and establish new schemes that are mostly based on partnerships, on strategic alliances between the public sector and the private key actors. For example, in Italy, we are now working on such kinds of schemes in which the partnership between the public sector and private actor is one of the key elements.So what I would say to Andrea is that it’s true that governments and states are reluctant, but it’s also true that there is a new era, or a new season, of research, of efforts by housing providers or also by policymakers in trying to develop new schemes, oriented on social rental housing provisions.
Next up, we had a comment from Juan, who is very critical of what he calls “too much government meddling in the free market”. Doesn’t social housing crowd out private investment and innovation?
How would Ryan Bourne from the Cato Institute respond?
Potentially, social housing can crowd out other housing, in terms of development. But, equally, in certain areas, particularly in the UK as an example, council house development has been hampered by exactly the same land-use, planning, and regulatory requirements that the private sector has faced as well, which leads to that broader shortage that we’ve talked about. But I think where the questioner is right is in saying that one manifestation of this policy-induced problem, this relative scarcity of housing, is then the demand for politicians to do something more to make housing more affordable. And that can lead to very, very negative consequences.
Some politicians, as a result of housing being expensive, reach for rent controls, which can lead to relative shortages of renting stock and severe misallocation of resources. We’ve seen that in certain cities like Stockholm in Sweden, for example. Others reach for demand-side measures, to try and solve what’s inherently a supply-side problem. So, in the UK the government has in essence subsidised first-time buyers through schemes such as help-to-buy.
Now, that can help certain individuals and families by making it more affordable to buy property, but in a tightly supply-constrained market, the overwhelming effect of those kinds of measures is to further inflate prices, which means that families that don’t enjoy or qualify for the benefits of the scheme then face more expensive housing as a result. So, I’d certainly agree that policymakers overmeddle in the housing market, and it’s a market that’s so important that one mistake can then lead to demands for more and more interventions, that combined all have the impact of driving up house prices and, subsequently, rents. Which is I think the main reason why you’re now seeing more European politicians openly discussing what I’d consider very damaging policies, such as rent controls, or a huge expansion of social housing, or further subsidies for first-time buyers.
Finally, what would Chiara Rizzica from Fondazione Housing Sociale say?
I would like to use the opportunity of this question to tell a little bit more about our research in Italy, because in this kind of ‘in-between offer’ between public and private initiatives, we have been working hard. We are an organisation, Fondazione Housing Sociale, a non-profit actor in the market of social housing. Our model and schemes are based on the idea that there should be an ethical financial scheme to fund more social rent housing. There should be new affordable housing products, each promoted and supported by local actors to advance the public interest.
These kind of actors might be local councils, but also non-profit actors from the private sector like banking foundations, housing providers, co-operatives, housing associations, social enterprises, etc. There is a big new area now that is social enterprises or social innovation enterprises – that is, actors aimed at reaching social impact in their projects. Social housing is initially one of the schemes where innovation the largest. For example, now there is an important sum available in Italy, almost 2 billion EUR available to generate local ethical funds that can fund new social and affordable housing in Italy.
This is very important because this model is based on synergy of innovative elements. It’s not just the financial strategy, but it’s also the efforts of partnership between public and private actors, between trying to find out which is the best collaborative governance model that can be established in a new housing settlement. There is, what we can call, this kind of renaissance of collective. That is also a new shift in social and cultural values that is, of course, produced by the reactions to impact of the global financial crisis, but it’s also a shift in the cultural values of, especially, young people. So what we have been seeing is that throughout Europe, studies, but also experience from professionals – as we are, we are not academics, we are sort of practitioners, experts in social housing – is that there is a switch from the demand of houses to the demand of housing services. That also includes collaboration people who are living there, but also the co-production of local services to improve the wellbeing of local communities.
The idea, for example, in our project is to help finance to establish what we call a high level of trust in collaboration in running and managing services, communal areas, community spaces, which are, in a way, the heart of every project. In our project there is always a provision of three communal spaces where communities can plan and establish their own activity and co-produce, help themselves in co-producing new services.
So what I can find is that, of course, the debate has always been very focused on the two extremes of ‘public’ and ‘private’ initiatives. But in the middle, in between, there is space enough for a new effort towards social innovation. I find that the more that is connected to collaborative housing, within the framework of social and affordable housing, are now the most interesting part of this kind of innovation. So I can share, in a way, the bad feelings towards what can be seen as the ‘meddling’ of the public in the free market, but on the other odd I’m quite confident and enthusiastic about the fact that there is an ‘in-between’ space that is very fertile and where we are experimenting new practices and new projects.
Should governments invest more in social housing? Or does government interference in the housing market just lead to more problems? Let us know your thoughts and comments in the form below and we’ll take them to policymakers and experts for their reactions!