ISSN 2330-717X

Affordable Rental Housing: Making It Part Of Europe’s Recovery – Speech

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Introductory remarks for the European Parliament Committee on Employment and Social Affairs

Good afternoon. Thank you very much for the opportunity to speak at today’s Committee meeting and discuss the findings of a new IMF report on affordable rental housing in Europe.

Our report shows that pressure on affordable rental housing is one dimension of a worrying trend to higher inequality. With data for advanced European economies from the mid-2000s to 2018, we find that many renters, particularly low-income renters, did not sufficiently benefit from disposable income gains to compensate for rising rental costs. This stands in contrast to the typical homeowner who could lower her housing costs relative to her household income in an environment of low-interest rates.

The key driver behind rising rental costs and falling rental affordability were the unevenly distributed gains from economic expansion. But our study also finds that certain structural changes in Europe played a role. In particular, the shift to greater urbanization, the transformation toward high-skilled employment in services, and a higher incidence of tourism have also increased affordability pressures for renters, especially lower-income households.

The pandemic is likely to make matters worse for renters. Many people who rent work more frequently in contact-intensive industries, generally have lower access to telework or were in the early stages of their careers with less secure jobs. Making up income losses will likely take longer, especially for those who need to transition into new sectors.

Let me provide some key numbers on the difficult situation for low-income renters and then lay out some policy options that could become an integral part of the set of policies in the recovery from the coronavirus crisis.

  • A typical young family used nearly one-third of their earnings for rent.
  • For a low-income household, which is a household with income in the lowest 20 percent of the income distribution, the share of income needed for rent was even higher, at 40 percent. This number—40 percent—is generally the threshold for a household to be considered overburdened by rent payments.
  • It is jarring that in nearly three-quarters of the countries analyzed, about half or more of the low-income renters were overburdened in 2018.
  • And in some major cities, rental price surges have been particularly harsh. During 2013-18, rental prices surged between 20 and 55 percent in real terms, for example, in Dublin, Madrid, Copenhagen, Stockholm, and the City of Luxembourg. And in Lisbon rents more than doubled during that period.
  • Consequently, more than 50 percent of low-income renters who live in cities were overburdened in the majority of the countries.

Is there a way out to arrest and reverse these disparities during the recovery? Yes, there is.  Let me turn to policy options.

In general, effective policies have to include efforts that enhance long-term income opportunities for low-income households and the young, so that they benefit from the structural transformation of the economy. Policy examples include upgrades to education, re- and upskilling, more effective active labor market policies, and mobility support for those changing jobs and locations.

The most powerful immediate policy tool to address rental affordability and provide support is to raise the levels and coverage of portable housing allowances.

Governments also need to look at initiatives that increase the supply of affordable housing more permanently and thereby alleviate demand pressures. In particular, we see a role for more public investment in social housing, especially where the stock is low. Social housing varies considerably across countries, ranging from less than 3 percent of the total housing stock in Portugal to over 35 percent in the Netherlands. The Next Generation EU package provides an opportunity for such investments. More housing investment can create jobs, increase the stock of affordable rental housing, and can facilitate job mobility. The Portuguese national recovery and resilience plan is a good example in targeting the creation and rehabilitation of affordable rental housing for low-income families and students.

Other policy options to raise the stock of rental housing include financial incentives, for example, by taxing vacant properties and shifting some housing subsidies that favor high-income homeowners toward private investment in rental housing development.

At the same time, we caution against the increased use of rent controls. While rent controls do serve a role in balancing the power between landlords and renters and provide some degree of certainty on rental costs, they only tend to protect current renters and are associated with lower housing supply.

Let me conclude by noting that one of the biggest social and economic risks for Europe is a further deepening of inequality coming out of the pandemic. Therefore, we urge governments to continue their efforts for more inclusion. And this needs to include measures that make rental markets more affordable, especially for low-income households and the young.

Thank you.

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