Social housing policy in Vienna

Municipal and limited-profit housing providers ensure that dwellings constructed with the aid of housing subsidies will mostly remain tied to specific access restrictions of a social nature. As a consequence, the share of social housing in Vienna is continuously on the rise, since the access restrictions for subsidised dwellings do not lapse after 20 or 30 years. Thus, over the past 50 years, Vienna has been able to nearly double the number of dwellings with permanent access restrictions from about 210,000 in 1970 to around 400,000 today, in this way creating sustainable structures that are able to provide large population strata with affordable housing.

This long-term perspective clearly highlights the focus of the Vienna Model of social housing. A key aspect lies in the promotion of a housing market segment that functions outside market logic and where rent levels are not dependent on an expected return on investments. To be able to implement this kind of housing policy, two factors are crucially needed: The first are investors willing to forgo return on investment, such as municipal or limited-profit property developers; the second are properties that are developed for the construction of subsidised housing at affordable conditions and according to quality-driven tendering, such as the concept tendering procedure.

No return through rents.

Investors that voluntarily forgo return on their investment - i.e. municipal and limited-profit property developers - are essential for the efficiency of the Vienna Model of social housing. They safeguard that subsidies granted for housing construction will be actually used to enlarge the social housing stock and reduce rents and not to compensate revenue losses of profit-oriented investors.

The statutory net rent cap for social housing of currently € 4.97 per square metre (annually indexed) enables limited-profit property developers to repay all equity and outside funds invested over a maximum period of 40 years. With current total construction costs (excluding land costs) of € 2,100 per square metre, this corresponds to a rental return of approximately 2.75%. If, however, a return of 5.0% - which is already very low for profit-oriented property developers - is assumed in combination with identical total construction costs, this will result in a monthly net rent of € 9.0 per square metre.

ROI formula for real-estate investments:

Monthly net rent = Investment costs x (Interest rate / 100) / 12 
or
Rental ROI = (12 x monthly net rent / investment costs) x 100

While this calculation does not take account of land costs, the return calculated on the basis of construction costs alone shows that the rents of privately financed dwellings are not truly affordable under current framework conditions. As long as privately financed housing construction functions as a financial product and hence competes with other investment products, it will not be able to offer affordable rents. This is irrespective of how favourable the prices of land offered by the public sector are or whether construction costs can be reduced through deregulation.

As part of the services of general interest, limited-profit and municipal housing construction is by definition not an investment product but definitely able to refinance investments on the basis of affordable rents. This ensures that broad population strata will enjoy access to adequate housing without having to generate a return on investment for financial products by paying rent.

Limited-profit housing construction between state and market.

The Vienna Model of social housing therefore safeguards affordable rents by means of housing subsidies that take the form of long-term loans with low interest rates (1% interest rate, 40-year repayment period) and legally restricted return on investment. However, this does not mean that limited-profit property developers will sustain losses and require subsidies in order to survive and function. Rather, they are able, despite the statutory ROI cap of 3.5%, to generate revenue and accumulate capital. Since this “surplus equity”, as it is called, is earmarked for building rehabilitation, land purchases and the implementation of new projects, it is safeguarded that the limited-profit housing industry will be able to exert a strong influence on the housing market and serve the City of Vienna as a long-term partner in the implementation of its housing policy.

It is above all this form of co-operation between the public sector and private - but not commercially oriented - enterprises, i.e. what is often called the “third sector”, which makes the Vienna Model of social housing possible as well as efficient. The funds disbursed do not serve for the temporary compensation of revenue losses on the part of profit-oriented enterprises, but directly entail affordable rents, since the subsidies go primarily to enterprises of the limited-profit housing industry. Thus the housing subsidy scheme creates structures whose effects are lasting, because they decommodify the housing market to a degree and hence promote a housing market segment where rent setting is independent of market rules.

Housing for many.

As a result of the continuous further development of social housing and decades of co-operation between limited-profit housing associations and the City of Vienna, profit-oriented residential property developers in Vienna do not have the same importance as in other comparable European metropolises. This is obviously a consequence of the big share of social housing in the overall housing stock as well as of the comparatively high quality of these dwellings. Vienna’s social housing sector is no “discount housing” destined solely for low-income households; rather, income thresholds are designed to ensure that around 80% of all Viennese households are potentially eligible for social housing.

In Vienna, supplying broad strata of the population with affordable, high-quality flats is still regarded as a key service of general interest and hence is not left exclusively to the free market. The importance of this political objective is highlightedwith particular clarity by a comparison with other European metropolises, where rents are no longer affordable even for the established middle class. For in order to meet investors’ expectations regarding their return on investment, the net rents generated in the privately financed housing sector need to be at least twice as high as in non-profit-oriented housing.

For tenants, this means - at best - a monthly net rent of € 800 instead of € 400 for an average 80-sq m flat, which constitutes a considerable additional burden even for the established middle class. If one takes into account that these additional costs are not justified by better appointments and higher construction costs, but serve exclusively to finance the return on investment, it becomes evident   that the privately financed housing sector is the biggest bottom-to-top asset redistribution machine. Counteracting this redistribution is a declared goal of social housing in Vienna, since in particular middle-class tenants would otherwise be constrained to finance investors’ ROI with a substantial portion of their rents.

The economy is more than the real-estate industry.

At this point, a frequently cited counterargument maintains that economic development would be slowed down if social housing did not comprise only a small market segment targeted at the lowest-income population groups but rather addressed broad demographic strata. From the viewpoint of the real-estate industry, this is certainly true, since the housing sector does lose revenue due to lower rents in social housing. In particular, the established middle class would definitely be able, according to the line of argument put forward by the real-estate industry, to pay higher rents - and in this way finance investors’ ROI, although the real-estate industry is careful  not to state this openly.

However, in the minds of economists, whose focus is not only on the interests of the real-estate industry but rather on those of local, often small-scale enterprises, moderate rents certainly harbour economic opportunities. The disposable income of households living in municipal flats or in dwellings of the limited-profit sector increases to an extent equal to the difference between market rents and affordable rents in social housing and is usually spent on other goods and services. Thus the money remains in circulation instead of being tied up as financial assets.

The criticism levied by the real-estate industry against the broad target group orientation of social housing, too, must be viewed in this context. According to the real-estate industry, social housing should ideally be destined solely for the lowest-income strata, since this part of the population does not offer potential for financial profit anyway. Conversely, the middle class is a highly attractive client for the private housing sector because of its size and relative affluence. After all, the middle class is able - contrary to low-income population groups -  to afford rents in the free housing market, if it is willing to spend about half of the disposable income on this single item of the household budget. The strategy of the real-estate industry - citing the pretext of too broad target group orientation - of making social housing unattractive for the middle class becomes fully absurd when generous loans for flat purchases are demanded in order to enable precisely this middle class to accumulate more capital. In the current situation, this would most benefit the real-estate industry and enable it to correspondingly hike up its price expectations.

Target groups of social housing vs. a good social mix.

Target group orientation is a relevant issue; the Vienna Model of social housing comprises several criteria, in addition to income thresholds, to regulate access to social housing. They ensure that highly diverse population groups live together in Vienna’s social housing estates, from vulnerable groups to the established middle class. The conflict of objectives between giving preference to specific target groups and achieving a good social mix - which is always latent - is not resolved by excluding the middle class, but by setting quotas for low-in-come, vulnerable groups and individuals in distress.

Since 2019 for example, 50% of all flats in newly constructed projects must be designed as SMART flats. For this category, a one-time financing contribution of only € 60 per square metre must be paid; the monthly rent is € 7.5 per square metre. For half of these dwellings, for which the City of Vienna holds tenant allocation rights for the duration of the subsidy period, urgent housing need is an additional prerequisite. Such a need applies, for example, if the current flat is overcrowded or if children aged younger than 30 years want to move out of their parents’ flat. Moreover, almost all larger new construction projects built by limited-profit housing associations offer flats as well as units for communal and/or assisted forms of living in co-operation with social institutions; these dwellings are specifically reserved for the clients of these institutions. Wiener Wohnen, the agency administrating Vienna’s roughly 220,000 municipal flats, also allocates around 1,000 dwellings per year (equal to approximately 10% of all new tenancy contracts) to persons in distress or difficult life situations.

Despite this, the allocation of social housing is often the object of criticism.  While some take exception to the fact that persons who have been living in Vienna for a certain period are given preferential treatment due to the “Vienna bonus”, others believe that established middle-class households occupy affordable flats and thus put low-income households at a disadvantage. In some cases, adjustments can certainly be made - as they were in the past -, as long as certain constitutive principles of the social housing system are taken into account. The challenge lies in establishing allocation mechanisms that not only aim at the individual perspective, but have an eye on the system of solidarity that is social housing and its objectives as a whole. Supplying broad strata of the population with affordable, appropriate and secure housing should thus be the paramount goal.

Objectives and non-objectives of social housing.

Secure housing means above all stable and foreseeable housing arrangements, i.e. open-ended tenancy contracts, stable rents and, under certain conditions, also the right of succession of the tenant’s children and close relatives. As far as this is possible, tenants of social housing estates are not to be disadvantaged vis-à-vis freehold flat owners. The often-discussed rent surcharges for higher-income tenants - amounting to the difference between the capped social rent (cost rent) and market rent - would definitely constitute a sort of discrimination. While freehold flat owners have nothing to fear, even if they live in subsidised freehold flats, tenants are thus “threatened” with rent increases in the name of justice.

To ensure that higher-income groups will contribute adequately to the national or municipal budget, income or payroll tax is certainly a more efficient instrument than social housing. For the good luck of being (or not being) able to purchase a freehold flat in an urban neighbourhood is, at least in our time, less a question of earned income than of inheritance or gifted funds.

With respect to the location of social housing estates within a city, too, the necessity of providing municipal housing in upscale districts or historic urban centres is often questioned. But why should this not be so? Rent pricing in Vienna’s social housing estates works according to the cost-price principle; hence, rents in housing developments with capped social rents are the same across all Vienna if total construction costs are the same as well, no matter whether the flat in question is situated in the 1st (historic centre) or 23rd (suburban) municipal district. If therefore plots in favourable locations are already owned by the City of Vienna and need not be purchased at high prices, it is possible to build affordable housing also in central locations, such as - a current case in point - on the grounds of the former Sophienspital in the central 7th municipal district. Even if the City of Vienna loses short-term income in this way, it is the only method to attain the set goal of building or enlarging a decommodified housing-market segment.

The objectives and non-objectives described above highlight possibilities inherent in social housing as a system of solidarity as well as developments to avoid. Not all aspects of social justice can be successfully resolved through housing. Thus the targeted application of different socio-political instruments is essential in order to avoid the overburdening of individual instruments.

Social housing - a system of solidarity.

Vienna’s social housing system has evolved continuously over the past century and IBA_Vienna “New Social Housing” ties in with this tradition of continued development. The three major themes New Social Neighbourhoods, New Social Qualities and New Social Responsibility thus predefine strands of development, with the third aspect, New Social Responsibility, being the most important one for the present contribution.

If therefore social housing is regarded as a system of solidarity, it becomes apparent that it is organised according to principles similar to other systems of solidarity typical of the European welfare state. Responsibility for adequate housing is not passed on to the individual, but is a matter of public interest. Thus social housing accommodates elements like compulsory contributions, capital commitment, public control and implementation via both the private and the limited-profit sector, which also exist in similar guise in the solidarity-based healthcare system. It is therefore hardly surprising that the Vienna Model of social housing is considered efficient and crisis-resistant from a macroeconomic point of view. This is documented, for example, by the volume of housing benefits disbursed to individuals, which is low compared to other cities. Even during the financial and economic crisis of 2008, the limited-profit housing sector ensured a satisfactory employment level of the construction industry. Contrary to many other European countries, Austria was not affected by a significant slump in construction activities.

The pressure currently affecting the fundamental systems of solidarity of the European welfare state obviously also compromises social housing. From the perspective of the real-estate industry, the commodification of the currently decommodified limited-profit and municipal housing sector harbours immense potential for privatisation, deregulation of prices and ROI as well as skimming of profits. At the same time, civil-society initiatives are emerging in numerous European metropolises to demand the re-decommodification of formerly public housing stock or the decommodification of private housing stock.

In view of these framework conditions, IBA_Vienna should be successful, with the support of civil society and politics, in positioning the Vienna Model of social housing as a realistic alternative, and in particular as an alternative to the current concept of housing construction viewed primarily as a financial product - a concept that for many politicians still seems unavoidable and which basically is the biggest bottom-to-top asset redistribution machine.

Admittedly, this is an ambitious goal, but past IBAs, too, have supported and advanced paradigm shifts in urban planning. The chance of a paradigm shift to occur in the housing sector in coming years is higher than it has been for a long time; perhaps this is precisely the moment for IBA_Vienna to contribute and provide necessary impulses. There is still time until 2022 to develop communication strategies and formats necessary for this purpose and to build networks with key institutions and players.

References

STATcube - Statistische Datenbank von Statistik Austria (Accessed: November 2019)