Matching the social housing business model with a sustainable long-term financing system. This is the 5th part of our Manifesto to "Better Homes for a better Europe". We invite you to join our open discussion on Twitter using #HousingEP14
The situation in brief:
Not only has the crisis affected our sector negatively. There is an absolute inadequacy of adapted financial products on offer, especially in terms of duration. This is a major problem.
We need long-term finance for home-ownership with fair and affordable contractual conditions, for the development of new and adequate and affordable housing and for the refurbishment of the current stock. This is an absolute prerequisite for stable housing markets and thus for stable economies in Member States and Europe as a whole.
The sustainability of investing in adequate and affordable housing, cannot be ignored by bank and fund managers. Our business model is based on incomes constituted by social rents that are very stable and linked to inflation. This makes our return on investment very predictable.Read More
We need a system where we can access the same funds and financial schemes as the commercial real estate sector, but where the risks are calculated according to actual risk. This will attract private financing as well as underpin and strengthen the public financing where this is part of the financial scheme for adequate and affordable housing. As a result, highly productive PPP-models with societal added value could be put in place, which would also incentivize the right long-term public investments.
An example from Denmark
In Denmark, social housing is mainly financed on normal market terms through the Danish mortgage bond system, with local public financing covering the rest.
At the same time, the announced banking regulatory proposals for the next years carry substantial implications for banking and specifically mortgage regulation. Basel III in particular, introduces two new liquidity ratios and an increase in the minimum capital requirement of 1%.
Many assessments concluded that this will lead to an increase in bank lending spreads as banks will pass on the rise in bank funding costs, due to higher capital requirements, to their customers. To meet the capital requirements effective in 2015 (4.5% for the common equity ratio, 6% for the Tier 1 capital ratio), banks are estimated to increase their lending spreads on average by about 15 basis points. The capital requirements effective as of 2019 (7% for the common equity ratio, 8.5% for the Tier 1 capital ratio) could increase bank lending spreads by about 50 basis points. As part of the new requirements, large exposures limits will be introduced, which will protect banks from large losses resulting from the sudden default of a single counterparty.
Covered bonds (such as the Danish housing mortgage bonds mentioned above) could fall under the new requirements, which, by requiring more collateral, would deter investors from holding bonds covered by a wide variety of housing loans.
What is needed
In this context we appreciate the various instruments proposed by the Commission over the last months to incentivize investments in social and long-term activities – such as the European Social Entrepreneurship Funds (EuSEF), the European Long-Term Investment Fund (ELTIF) and the statements of the Social Investment Package.
However, we find it very important to stress that these clever initiatives will not fulfil their potential to channel mainstream finance into investment with high societal added value as long as the risk attached to investing in adequate and affordable housing is considered equivalent to the one involved in commercial real estate activities.