Social rental housing is a significant share of the total housing stock across many European cities. The OECD data puts the share at 8% for the EU as a whole, 34% for the Netherlands, 24% for Austria, 16% for the UK, 14% for France, and 3% for Germany.
Paris, under its Socialist mayor, Anne Hidalgo, is making efforts to buy land and expand its social housing stock to 40% of primary residences by 2035. About 30% will go to people with no or very low incomes, and 10% for those on middle incomes. And it’s a radical plan.
To get there, the city government led by Socialist mayor Anne Hidalgo is expanding its arsenal of interventionist tools that it casts as the only way to correct market failings, especially those wrought by short-term tourist rentals and vacant apartments. Paris is also doing more “pre-emption deals” in which it blocks a planned real estate transaction to instead buy the building itself to convert into social housing. Under its new land use plan, the city has labelled some 800 buildings, one-third offices, as candidates for expropriation. Developers must also include a significantly higher proportion of social housing — half in cities deemed in “hyper-deficit” — in all new-builds. Even office owners are now required to add social housing units when they build or do major renovations…
In Paris, the lack of buildable space, prohibitions on building height, and historical protection rules make it difficult for any developer to build new housing. Private companies and institutional investors have largely been scared off by rent controls, poor yields and rental bans that are slowly being phased in on homes with poor energy efficiency. For these reasons, converting existing structures like offices, car parks and government-owned buildings into new housing has been a welcome solution. Paris is also putting pressure on rich areas, such as the 6th, 7th and 16th arrondissements where the proportion of state-subsided housing ranges from 2 to 7 per cent, compared with 42 per cent in the poorer 19th and 20th arrondissements…Paris has recently set an annual housing budget of around €800mn a year, nearly double that of five years ago, and four times the amount budgeted by the central government.
Sample this illustrative example of how these efforts work.
The car park conversion on rue Nollet in the 17th arrondissement is one of about 40 such projects the city has undertaken, which also dovetails with its efforts to reduce cars in Paris. The city paid for more than a third of the €12.3mn cost with the rest coming from 40- to 50-year-long state-backed loans, without which the conversion would not be economically viable. The agency that built and will operate the building under contract for the state expects a roughly 40-year payback time, far longer than commercial developers would accept.
Paris is part of the French government’s efforts to promote social housing,
In 2000, the government enacted a law, known as the SRU, which required many cities and towns to reach 20 to 25 per cent social housing by 2025. The criteria were set to spare very small towns, but some mayors still think they are too rigid. In addition to billions of euros in government subsidies, the pivotal player has been the Caisse des Depots, a state-owned financial institution, that provides roughly two-thirds of the funding to build. The money for these long-term guaranteed loans comes from the popular regulated savings account called the Livret A, in which most French citizens invest.
European countries have traditionally pursued policies that favoured the development of social housing units.
Places like the Netherlands and Austria, which have century-old systems that have relied on government-owned developments and non-profit housing associations, have also intervened more in the market than places like the UK or Germany where a bigger role is given to commercial developers… In the UK, after a wave of postwar construction, much of the council housing stock was sold off to the residents in “right to buy” schemes starting in the 1980s. The country now largely relies on a requirement for developers to add affordable units in new-builds, with a typical request in London of a minimum of 35 per cent. But developers can also do less by instead building public facilities like parks or municipal pools…
Vienna and Amsterdam are among the cities that have gone the furthest to reaching over 40 per cent of social housing. From the outset, they avoided a key pitfall: they built homes in city centres instead of on the periphery, thus avoiding the gradual development of poverty traps and high crime areas. European cities that built social housing on the outskirts became plagued with problems. Paris was especially bad. Over time, the banlieues, or suburbs, became home to new migrant communities and gradually lost their original mix of residents from different socio-economic classes. It has left those living there with poor transport links and sub-par schools and public services, leading to the periodic explosions of social unrest. “It was wrong to focus social housing on the edges of cities since it led to segregation and disconnection for the people who live there,” says Tadashi Matsumoto, the head of sustainable urban development at the OECD. He believes housing policies should not just be city-based, but co-ordinated with nearby suburban communities where there is more space.
But social housing comes with its own set of problems.
But while increasing social housing in cities can help more people on modest incomes find a place to live, there are also downsides when private developers are constrained and the private rental market shrinks, says van Bortel, the Delft academic. In Amsterdam, where three-quarters of rentals are social housing or subject to strict rent controls, the rest of the private market has become very expensive as owners cannot raise rents elsewhere… those who are lucky enough to get subsidised Parisian apartments become loath to leave — only 6 per cent of apartments in the social housing stock change residents each year. The city does not force residents to move even if their incomes increase or if their family size changes.
A few observations:
1. It’s interesting that the cities in rich countries solve their affordable housing problems by constructing social housing, whereas developing countries tend to pursue market-based policies on affordable housing.
There is no concept of public-supported rental housing in India, and all subsidised housing stock would be a tiny proportion of all urban housing stock. Even in slums, housing supply is market-driven. This is unlikely to change given the fiscal constraints facing governments.
2. Given the scarcity of land in urban areas and the absence of high-rise public housing, the weaker section public housing programs (like the IAY and PMAY) are largely confined to smaller towns and in the far-flung suburbs in the case of the larger cities, where there’s land available to construct single or low-rise units. Even in the largest cities, these low-rise (3-4 floors) colonies are geographically distant (from the city) and socially and economically cut off from it. They have become the Indian version of Parisian banlieues.
3. In the absence of social housing, there are limits to what can be done to make housing affordable, especially given the already massive and further widening housing affordability gap in the large cities. Other policy concessions like credit subvention schemes (like the CLSS) or planning mandates (like 5-10% affordable housing mandates in large developments), only bridge the gap by a small amount to benefit the Indian middle class. None of these concessions can bridge the gap sufficiently to meet the requirements of even the lower middle-class, much less the poor. This reality must be acknowledged.
4. In this backdrop, with public housing likely to play a marginal role for the foreseeable future, the only meaningful way to address the problem of affordable housing in Indian cities, especially for the lower-income group of urban immigrants (where household income is less than, say, Rs 20,000), is to bring all policy levers together.
This would entail making public land available at subsidised rates, increasing the buildable area within the land, and lowering the cost of construction. Given the limited extent of public lands available, the first lever would be limited. However, supply can be augmented by using planning mandates on earmarking land for affordable housing. I’ll blog on this separately. The second lever can significantly offset the land cost by multiplying the extent of buildable area within the available land.
Reducing the construction cost would require significantly lowering land registration and planning permission fees, GST, subsidising the cost of capital, and expediting all approvals and permissions for all affordable housing construction. This could be supplemented with some property tax concessions for, say, five years. A proposal for a scheme along these lines for state governments is discussed here. The revenue loss from these concessions should be counted against the subsidy that should have been required for social housing.
5. Finally, like the European cities, there’s a need to focus on rental housing in urban areas. The Government of India came up with an Affordable Rental Housing Policy in 2015 and the Affordable Rental Housing Complexes (ARHC) scheme in 2020. Both need prioritised attention. However, it may not be advisable to leave the catalysis of the market in affordable rental housing to the private sector alone. State governments may have to play a direct role in derisking them by having State Housing Boards and public entities develop, lease, and manage such properties. The Government of India could incentivise with interest subvention and even some direct subsidy for capex. Once derisked, this can become a high-volume real estate segment, one that genuinely serves the Bottom of the Pyramid market.