Affordable housing: what's the right price?
Vienna's cost rental as an alternative affordable housing system
Last month I travelled to Vienna to attend a conference. I also had the privilege of spending a few days looking at the city’s social housing, guided by Beatrix Stambuk-Torres from The Urban Commons (thank you Bea!).
While I was there the ABC published its investigation into Australia’s affordable housing system—an increasingly marketized and financialised system with rents often just slightly below market rates and only for a limited time period.
As Hanie Khosravi, Kristian Ruming and I discuss in a recent paper, this rent model reflects a growing dependence on private capital, including private property developers, commercial lenders and institutional investors. (The paper is part of Hanie’s PhD thesis—look out for future publications from her project).
Affordable housing, the ABC declares, is not really affordable, because rents are more than 30% of household income.1 This is an increasingly common criticism. Two rent models are debated: income-based rents versus discounted market rents. Housing advovates call for more income-based rents while developers and investors insist on the need for market-based rents.
However, these aren’t the only models for affordable housing. A large part of Vienna’s social housing system charges cost rents, with tenants’ monthly repayments reflecting the cost of developing, managing and maintaining their homes.
Australian researchers have written a fair amount already about Vienna’s social housing system, led by the brilliant Julie Lawson. In my view, one of the key lessons is that it offers a long-term alternative to homeownership rather than just a short-term alternative to private rental. This is the direction in which Australia’s affordable housing needs to move.
Snapshot of the Vienna model
Vienna has been described as a “renter’s utopia” where half the population lives in social housing. It isn’t, however, a simple upscaling of the system we have in Australia, with highly targeted allocations and rents fixed at 25-30% of income.
About half of Vienna’s social housing is owned and run by the city, with rents regulated to around AU$11 per square metre and indexed annually. This includes the famous Red Vienna projects like Karl Marx Hof as well numerous post-WWII developments, proudly displaying signs that read ‘City of Vienna Municipal Housing Estate’.
Since the 1970s, however, new social housing has increasingly come from Limited Profit Housing Associations. LPHAs make up around 40% of all social housing in the city, with new supply supported by a public land bank and inclusionary zoning policies that mandate two-thirds social housing in large developments.
Regulated by a national law, LPHAs build and manage housing where rents reflect development and operating costs. Cost rents encourage cost discipline: rents need to cover loan repayments and ongoing management and maintenance. New projects must also include a minimum proportion of ‘SMART’ units, with more efficient floorplates and thus lower rents (but otherwise identical in quality). Rents are adjusted downwards when the initial debt is repaid, meaning homes become cheaper with age2 (though rising maintenance and management are passed on in rents).
LPHAs are strictly regulated. Profits are capped at 3.5% of any equity they invest, with additional surpluses reinvested into new housing. Ownership must remain within the limited-profit sector even if a company is purchased or dissolved. Salaries and other business activities are also limited.
Yet LPHAs can also access a range of incentives, including corporate tax exemptions and low interest public loans. The latter are conditional on household income caps, energy efficiency standards, and base rents (i.e. rents after loan repayment) of around AU$8 per square metre, further ensuring cost control.
This rent model mirrors homeownership in that costs fall over time, helping older households avoid cost burden in retirement. Lifelong, inheritable leases and no means testing after the point of application also mirror homeownership in terms of security of tenure. This is how it offers a genuine alternative to owner occupation.
Lessons for Australia
Australia’s affordable housing system should move in this direction. Lifelong secure tenancies instead of short fixed-term agreements; regulated cost rents instead of discounted market rents; eligibility checked only on application rather than annually reviewed; permanently outside the market rather than sold after 15 years.
There are, however, some practical and political challenging in the Australian context. For one, high land, construction and finance costs would make it difficult to contain rents. Without additional subsidies it too could be criticised as unaffordable, yet if too heavily subsidised it could be criticised for not targeting people most in need.3
Vienna itself has faced some of these problems, with rising costs impeding land acquisition and leading some LPHAs to reject public loans in order to bypass rent and income conditions. Part of the City’s response has been to reinvest in municipal housing.
A permanent, cost rent affordable housing sector in Australia would also need to grow in tandem with conventional public (or social) housing, with governments subsidising the gap between income-based and cost rents for low-income households. Alternatively, higher income support payments could help low-income households cover social housing rents.
Finally, there’s no escaping that it would take a long time to create a sector that offered an alternative to homeownership at a meaningful scale. This is not a reason not to do it. Rather, it means we need to think about more strictly regulating, even socialising, parts of the existing private housing stock—particularly the private rental sector. This is the topic I’ll be exploring in my next and several subsequent posts.
Thank you to Beatrix Stambuk-Torres from the Urban Commons; if you’re planning to visit Vienna I encourage you to get in touch with her. Her guide to Vienna’s housing system, which I’ve used for a large part of this article, will be available in the future via the City of Vienna; I’ll post an update when it is.
Thanks also to Felicitas Konecny, Max Schranz and Roman Zeller for showing us around and sharing their knowledge!
This rule of thumb itself is problematic, as I’ll discuss in a future post.
This makes it different to a pooled cost rental model in which costs are averaged across an entire portfolio and rents reflect these averaged costs (another topic for a future post).
Michael Byrne, Cian O’Callaghan and colleagues have written about the challenges as well as benefits of introducing a new cost rental sector in Ireland, many of which apply here.