EU Economic Country Specific Recommendations and the Housing Trends. A presentation at the representation of the "Caisse des dépôts" in Brussels. 8 June 2012

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For economic growth and stability:
affordable housing wanted!
CECODHAS HOUSING EUROPE
8 juin 2012, représentation de la Caisse des dépôts

2. What is CECODHAS - Housing Europe?
CECODHAS - Housing Europe is the
federation of cooperative, public,
social housing
… a network of national and regional
housing providers federations
gathering 4.500 public, voluntary
housing organisations and 28.000
cooperatives housing.
Together the 43 members in 19 EU
members States manage 25 million
dwellings.

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EU policies and housing in a nutshell
 Direct enablers : Structural Funds; period 2007-2013: 9 billion €
potentially eligible for housing energy upgrade, and 4 billions for urban
renewal and housing for marginalised community. Beginning of 2012, less
then 2 billions had been invested. Next period: housing eligible for energy
efficiency and for community development: more budget, under negotiation
 Direct constraints: State aids rules: to receive public support social housing
mission shall be clearly defined to answer market failures, Energy efficiency
directive: under discussion at Parliament and Council an obligation to
renovate a % of the public housing stock; EPBD: from 2018, all new housing
supported by public budget to be nearly zero energy housing > specific costs
with no clear financing scheme
 Indirect constraints (or incentives?): EU economic governance: avoiding the
next financial and economic crisis by monitoring national economic
performances and European economic decisions. Public budget under control.
Public and private debt, housing price increase as indicators to analyse how
wealthy is the economy of a country (all these processes called 6 pack+2)

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European economic governance post crisis: 6 packEuropean economic governance post crisis: 6 pack
AND …. The European Stability mechanism ESM to raise funds on the
capital market to finance loans of member States under strict fiscal
consolidation conditions
Plus a Euro pact plus: more economic coordination for Euro zone

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What imbalances are looked at ? Maastricht
criteria ++++
 External positions (e.g. current accounts, net international
investment positions)
 Competitiveness developments (e.g. REERs, ULCs)Export
performance (e.g. export market shares)
 Public debt
 Employment ( labour costs, raise in unemployment rate)
 Private sector indebtedness (e.g. credit, debt)
 Assets markets (e.g. housing price increase: not more than 6% a
year)
External
imbalances
Internal
imbalances

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The “preventive process” arm of the EIP
Alert
mechanism
Economic reading
of early warning
scoreboard
indicators to
identify Member
States with
potential risks
In-depth review
Analysis to distinguish between
benign and harmful macroeconomic
developments and to identify policy
options
No problem
Procedure stops.
Imbalance exists
Commission/Council
recommendations
under Article 121.2
Severe imbalance
Commission/Council
recommendation
under Article 121.4
Policy response

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On macro-economic policies many interlinks
 Public spending policies: housing benefit, pensions, unemployment benefit
 Macro-prudential policies (Loan to Value Ratio, forex borrowing)
 Taxation policy (mortgage interest rate deductibility)
 Employment creation potential
 Regulatory issues affecting supply (building permits)
So where does housing policies fit ?

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In its communication “ stability, growth and jobs”:
One proposal for the 29th
EU council:
“Increasing the paid in capital of the European Investment Bank (EIB): in order to
comply with sound banking practice the EIB needs an increase in its paid in capital if it
is to maintain its current high level of annual lending activity around €65 billion a year.
As the Commission has proposed, a €10 billion increase in paid in capital should be
agreed by its Member State shareholders as part of a new EU growth initiative. This
would substantially increase overall lending by up to €180 billion. The additional
lending that such a capital increase would permit should be spread across the EU,
including in the most vulnerable countries. It should be directed to helping the SME
sector, including in areas such as energy efficiency and housing renovation which can
generate much needed employment in the hard hit construction sector and help the EU
meet its climate and energy goals.”
CSR 2012: 4 countries to reform their housing policies

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DK: “HEREBY RECOMMENDS that Denmark should take action within the period 2012-2013 to
Consider further preventive measures to strengthen the stability of the housing market and financial system
in the medium-term, including by taking account of the results of the on-going study by the Ministry of Business
and Growth on the distribution of assets and liabilities across households and by reviewing the property value and
municipal land value tax system. “
NL: HEREBY RECOMMENDS that the Netherlands should take action within the period 2012-2013
(…)Take steps to gradually reform the housing market, including by:
modifying the favourable tax treatment of home ownership, including by phasing out mortgage interest deductibility
and/or through the system of imputed rents,
providing for a more market-oriented pricing mechanism in the rental market, and
for social housing, aligning rents with household income.
SW: HEREBY RECOMMENDS that Sweden should take action within the period 2012-2013“Take further preventive
measures to strengthen the stability of the housing and mortgage market in the medium term, including by fostering
prudent lending, reducing the debt bias in the financing of housing investments, and tackling constraints in housing
supply and rent regulations”
UK: HEREBY RECOMMENDS that UK should take action within the period 2012-2013: “Address the destabilising impact
of high and volatile house prices and high household debt by implementing a comprehensive housing reform
programme to increase housing supply and alleviate problems of affordability and the need for state subsidy of housing.
Pursue further reforms to the mortgage and rental markets, financial regulation and property taxation to prevent
excessive volatility and distortions in the housing market.”
CSR 2012: 4 countries to reform their housing policies

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For which housing policy can contribute positively and be impacted by !
 3% public deficit and max 60% of public debt: Fiscal consolidation programme including
restriction on housing benefit and social protection policies (and tax policies to be less
favourable to home-ownership)
 Preventing financial and assets bubbles: housing price to be more stable, private debt to be
sustainable
 Economic priorities to be growth enhancing: supporting housing sector creates employment
 EU 2020 goals on fighting against poverty and climate change: great potential in the housing
sector
Every year: a report by each country on different process, and analyzed by
other countries.
No decision by any Parliament, neither debate on which policy to choose
So multiple processes and priorities for the EU

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 How is structure the housing market
 Some common trends in EU
 Unaffordability for the most vulnerable
 Lack of supply
 Changes in housing benefit: putting affordability even further
Some common features of the needs to be addressed by
Housing policies
 Building new affordable places
 Enhance delivery of land at affordable price
 Rethink the financial incentives on housing supply
 Maximise the use of existing building stock
A short overlook to housing situation in EU countries
Especially, impacts of the crisis

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Social rental housing in the EU27
 Largest in NL,
followed by AT
and DK.
 UK, FR, SW and
FI also have a
large
social/public
housing sector
 On the
contrary, no
rental social
housing in EL,
very small
share in CEE as
well as PT, ES

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Trends in tenures: 20 years of targeting the most
vulnerables
Home-ownership in European OECD
countries (1980-2004)
Social housing in selected
EU countries (1980-2008)

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20 years of demand side policies:
Impact of housing costs
 Housing costs = 22.5% disposable income (41% at risk of
poverty)
 Housing overburden = 10.1% (37% at risk of poverty)
 Housing-related expenditure = 22.9 % of total household
consumption expenditure
 A third of European households facing disproportionate
housing costs, and perception of worsening affordability

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Crisis and housing: reality checks

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“Visible” effects
 High level of mortgage debt
(from 32% in ’98 to 52.4% in 2010)
 Increase in arrears (8.6% and 20%)
 Energy poverty (52.08 million people)
Mortgage indebtedness as % of GDP
Increase in arrears on:
Utilities
Mortgage/rent

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How is the crisis impacting financing models?
Netherlands: HAs financially independent since 1993.
Borrowing from banks, backed by 3 level security structure:
Central Fund of Social Housing, Guarantee Fund for social housing,
state guarantee as last resort.
problems in accessing credit to finance new construction. Some housing
corporations are now trying to get money directly on the capital markets.;
via bonds
As some of the major social housing organisation had a creative financial
management (derivatives) the guarantee is at stake
sell dwellings as a way to cross-finance production of affordable rental
housing also more difficult due to mortgage credit restrictions
Are going to a rent market level (adapt the level of rents to the
households income) through a major housing policy reform: Housing 4.0

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How is the crisis impacting financing models?
England: three main funding sources: housing association’s
reserves, government grants and private finance which consists
of bank loans or funding rose on the capital markets. Also important
housing benefits.
Current reform: - 63% of development budget (but more flexibility in
fixing rents) + cuts in housing benefits
Strict lending conditions by banks
Decrease in income from sale of affordable housing and decrease in SH
output by planning system
High prices and rents in private sector, restrictive lending environment +
demographic trends = high demand
Social impact bonds: be paid as you perform for the community: social
added value for the territory: emerging approach of social policy delivery,
major interest from the EIB (as a way to use Structural Funds ESF-ERDF)

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To focus on four examples
« To measure and report the creation of value for a territory by a social housing company»

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Lessons from the crisis?
 Housing market highly dysfunctional, private debt as
important economic imbalance as public debt for
economic stability
 Financial market instability causes and consequences of housing price
bubbles: what regulation that would be supporting social housing
providers
 For the moment only consensus on strict public finance’s
consolidation without growth policies
Importance of intermediary/dedicated source of funding:
 France: subsidies from state and local authorities but limited. 2.5%
employers grants or loans. Main source Livret A (household saving
book) and important tax incentives
 Austria: public subsidies through grants and subsidized loans;
commercial loans raised via special bonds by housing banks.

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Some common medium-term goals called the EU 2020 strategy
The 5 targets for the EU in 2020
1. Employment
 75% of the 20-64 year-olds to be employed
2. R&D
 3% of the EU's GDP to be invested in R&D
3. Climate change / energy
 greenhouse gas emissions 20% (or even 30%, if the conditions are right) lower than 1990
 20% of energy from renewables
 20% increase in energy efficiency
4. Education
 Reducing school drop-out rates below 10%
 at least 40% of 30-34–year-olds completing third level education
5. Poverty / social exclusion
 at least 20 million fewer people in or at risk of poverty and social exclusion
Every year: a report by each country on it
And what about joint EU economic priorities ?

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Julie Lawson, TU Delft
There remains a wide variety of
funding strategies…
Ireland ‘Public
grants model’
Centrally funded grants to approved providers for
construction, statutory financial intermediary provide low
interest loans for land acquisition, interest financed by
central government, limited grants from local authorities.
UK ‘Debt equity’ Debt finance raised against grant equity (50%), future
social rental income, secured by rising rents and a
generous housing benefit as well as discounted land and
development contributions under “section 106” provisions.
France ‘Savings
scheme
model’
Tax free household savings scheme (CDC) finances off
market loans to HLM providers along side state and local
subsidies, tax incentives and other loans. Land provided
by local authorities and development contributions.

29. HOUSING EUROPE
29Julie Lawson, TU Delft
Yet mixed financing arrangements are more
common…
Austria ‘Structured
finance model’
Long term low interest public loans and grants, combined with commercial
loans raised via HCC Bonds and developer/tenant equity sustains tightly
regulated form of cost rent limited profit housing. Promotion supported by
municipal land policy and land banking.
Switzerland ‘Co-operative
finance model’
Commercial loans, loans from a bond issuing co-operative, revolving loans,
and own equity and supported by municipal urban policy and land banking. A
liberal rent policy allows landlords to raise rents to recover costs, including
changing financing costs.
Netherlands ‘Revolving fund
model’
Replaced direct loans and subsidies with guaranteed capital market loans
and rent assistance. Dutch guarantee fund (WSW) and Central Fund (CFV)
provide security and assist to reduce financing costs Associations are free to
determine own investment strategy, asset base and surpluses intended to be
used as a revolving fund to achieve social task.
Germany ‘Tax privileged
model’
Federal public loan program has ceased. Tax system channels investment
into affordable housing via for profit and limited profit companies, variable
state schemes.
Sweden ‘Capital market
model’
Corporate tax exempt Municipal housing companies have always been
financed by capital market loans which were sometimes backed by municipal
guarantees, grants as well the MOH own resources. In the past interest rates
subsidies ere provided by the central government but these have ceased.

30. HOUSING EUROPE
30Julie Lawson , TU Delft
More ideas for financing mechanisms
Approaches
Revolving public loan programs financed
by a capped percentage of taxation
revenue.
Favourable household savings schemes
channel investment towards social
housing
Jointly funded revolving funds
Privileged bond financing mechanisms
Specialised financial intermediaries with
appropriate expertise
Co-operative financial intermediaries
Government guarantee funds to reduce
the cost of private lending
Illustrations
Austria’s intergovernmental agreements,
Austria and Switzerland’s public revolving loans and
provincial program design, housing is considered an integral
part of economic policy and management. Public loans are
used to stabilise housing markets and related industries and
achieve appropriate housing outcomes.
France’s Livret A revised tax free savings circuit and the new
role of private banks in channelling these (since November,
2008)
Swiss Government and sector revolving funds are allocated
quarterly, competing on value for money, good design and
innovation
Austria’s Tax privileged bonds for a defined investment and
the role of government in ensuring their appropriate use
Austria’s special purpose housing banks and their
competitive, specialist expertise in financing social housing
Switzerland’s bond issuing co-operative and state guarantee
Swiss membership guarantee, French state guarantee,
Dutch WSW social housing guarantee and CFV central fund
funded by both the public and housing sector