Article from A&B issue 05|2023
How to finance affordable housing?
Year after year, more and more housing is being built in Poland, while at the same time it is less and less affordable for the middle-income section of society. There is a lack of balance in the structure of housing construction and greater involvement of municipalities in active housing policy. Local governments have quite a bit of leverage in improving housing affordability. There are more and more municipalities that choose to prioritize housing improvement measures. However, we are still talking about dozens of such cases, which, with 2477 municipalities, is a small scale. Nonetheless, among the cities that decide to take such a step, there is usually a shift away from the model in which municipalities focus on measures narrowed to support the poorest. This is a significant shift, as the thinking that local housing policy is limited to helping the poorest has been entrenched for decades. Proactive municipalities are deciding to expand their housing offerings to a greater extent to middle-income earners—those who have incomes that allow them, without ruining their household budgets, to cover rents at 3-5 percent of the value of the replacement rate per square meter of PUM. So we're not talking about rates on the order of 1.2 percent of the value of the replacement rate per square meter of PUM, which on average operate in the municipal stock, but much higher. However, these are still rental rates below market prices, which in cities are usually higher than 6 percent of this value, and in the largest are more than 9-10 percent.
Increasing the municipality's involvement in the development of affordable housing can be a driving wheel for improving the quality of life in the city and a key to fighting for residents in the context of demographic problems, which most cities outside the metropolitan impact areas are facing.
It should be emphasized that after the implementation of a number of legal changes in 2017-2022, municipalities have a rich array of tools that enable them to take steps that have a real impact on the local housing market. Cities with an active investment policy in the field of housing try to maximize the use of external sources of funding available through government programs or EU funds. For the purposes of the „Cities as Housing Investors” report, which will soon appear in the pages of OPM IRMiR, we conducted extensive research covering 85 percent of cities with more than 5,000 residents. They show that in 2017-2021, 40 percent of cities used available sources of external financing for housing investment. In the 2022-2024 outlook, however, 70 percent already plan to seek such funds.
In 2017-2021, cities most often used subsidies from the Surcharge Fund. This applied to 80 percent of the surveyed cities. In second place was a system of preferential loan financing for social rental housing (22 percent). To a lesser extent, local authorities pointed to the Government Housing Development Fund and European funds under regional operational programs. Looking ahead to 2022-2024, the biggest change is a significant increase in interest in applying for funds for renovation and modernization measures from the Thermomodernization and Renovation Fund.
Kamil Nowak—
Housing and social policy expert at the Urban Policy Observatory of the Institute for Urban and Regional Development, geographer. Graduate of the Jagiellonian University and the University of Gdansk. Author of a distinguished doctoral dissertation on housing accessibility in Polish cities. Author and co-author of numerous publications on housing policy, urban planning and revitalization. Member of the Expert Team for the Strategy of Social Inclusion at the Chancellery of the Prime Minister.
photo: private archives
Housing investments, even with the use of external funding sources, require participation in part of the costs, but in many cases the burden on the municipal budget is significantly less than just a few years ago. Currently, under the most popular source of funding, which is non-refundable housing support from the Surcharge Fund, a municipality can obtain up to 80 percent of the cost of a project (and even 90 percent in the case of historic buildings). However, there are some hooks here. If a municipality opts for 80 percent support, it must comply with rent restrictions that are linked to the amount of support. In this case, the rent cannot be higher than 2.5 percent of the replacement value per square meter of PUM.
In the report, we identified that the efficiency of social housing is relatively higher in those cities where the responsibility for the implementation of housing tasks does not lie directly with municipalities, but is delegated to municipal companies, especially social housing societies (TBS) or now social housing initiatives (SIM). TBS (SIM) can create both resources within the framework of social rental housing and benefit from preferential loans, but can also be responsible for the construction of housing with a municipal function and be a typical commercial investor. This creates broad opportunities to influence the local housing market. As of the end of September 2022, TBS or SIM was present in 40 percent of cities with more than 5,000 residents. In many smaller cities, especially outside metropolitan areas, there is a shortage of new development projects, so the offer of TBS or SIM can be an indication to commercial investors that a particular market is worth taking an interest in.
It is also possible to provide market financing in the form of various types of debt models, such as loans and bonds, or to reach for public-private partnership models. A special type of such structures gaining popularity is financing that is neutral to the indicators of Article 243 of the Public Finance Act. The legal and financial solutions used have a limited impact on the current ability of the municipality to incur liabilities. Such solutions have been used, for example, in Zory (as part of the „With the Future in Zory” program) or Ostrów Wielkopolski (as part of the "Ostrów Friendly Systematic Program").
However, the biggest problem remains the scale of the measures taken. If we look at the effects of construction carried out by municipalities and social housing associations (or now SIM), it turns out that they are marginal. Between 2017 and 2021, according to the Central Statistical Office (CSO), housing in the social sector accounted for 1.5 percent of all new housing in Poland, most of which was built in just thirty-five municipalities. The scale of these investments is usually too low to noticeably affect the housing situation in a municipality. Instead, statistics indicating the privatization of municipal housing are impressive. In Poland, in 2020, there were 806.7 thousand apartments in municipal resources. This is 80 thousand less than in 2015 and more than a million less than at the beginning of the political transition period. The process of selling apartments, which in addition usually took place with high discounts, although it has slowed down recently, is still common.
Last but not least, improving housing affordability is not only the direct involvement of municipalities in the construction of housing, but also the creation of friendly conditions for the development of housing through active real estate management. It's creating planning documents in conjunction with a housing development strategy (Stalowa Wola, among others, has recently decided to do this). It's also taking care of the supply of developed land. The municipality should be an active player in the real estate market if it wants to fight for residents. In the overall balance of profits and losses in the long run, the investment in developing the land, stimulating the transformation of ownership of fragmented plots of land by initiating consolidations and secondary urban division, and many other activities need not be a throwing away of money, but an investment that will pay off thanks to the fact that residents on a massive scale will not move out to neighboring municipalities. By the way, we will all pay less for the cost of spatial chaos, which according to PAN calculations costs 80 billion zlotys a year.
Kamil Nowak
Housing and social policy expert at the Urban Policy Observatory of the Institute for Urban and Regional Development, geographer.
