Employment and Social Developments in Europe (ESDE) 2024

4. Impact of housing policies on poverty reduction and upward social convergence

Access to social housing or housing assistance of good quality for those in need is enshrined in Principle 19 of the European Pillar of Social Rights and is a relevant determinant of people’s labour market outcomes.A number of social policies can complement and further support social investment. These include, for example, social protection and housing policies. Access to affordable and adequate housing is crucial for reducing poverty and social exclusion. It also broadens people’s ability to access opportunities in education and the labour market, and positively influences people’s physical and mental health. In its 2018 report, the High-Level Task Force on Investing in Social Infrastructure in Europe underlined the importance of investment in housing – particularly affordable housing – for promoting upward social convergence in the EU. Similarly to housing policies, social protection can also act as enabler for effective social investment. A focus on the role of social protection is provided in Box 3.7.

House prices, together with the available stock of housing and mortgage rates, affect the affordability of housing for prospective homeowners and tenants. Easier access to mortgages, including via low interest rates, usually increases demand for houses which can subsequently drive-up house prices. These reflect the value of real estate transactions, including second homes, holiday homes and dwellings used for investment, and thus have a limited direct impact on monthly housing costs for tenants in the short term. ⁽¹⁹⁵⁾However, by reducing the affordability of homeownership, higher house prices make renting more appealing, increasing demand for rentals and hence contributing to higher rents. Higher house prices and interest rates can also be taken into account by landlords when setting rents for new lease contracts, contributing to higher rents over time thus increasing housing costs for tenants.

Housing prices and rents have increased considerably over the last decade.After the substantial increase recorded between 2014 and 2022 (51.8%), house prices started to moderate in 2023 (-0.3%), due to weakening borrowing capacity following the increases in interest rates. However, rents continued their upward trend (+11.3% since 2014, and +3% in 2023), resulting in higher housing costs for tenants (Chart 3.14)

Housing policies can help to reduce the share of housing costs in household disposable income.⁽¹⁹⁶⁾The share of housing costs in household disposable income decreased from 22.4% in 2014 to 18.5% in 2020. While still below 2014 levels, the share of housing costs increased again to 19.7% on average in the EU by 2023 (Chart 3.14) ⁽¹⁹⁷⁾ This was likely driven by the increase in housing costs, mostly due to higher electricity and gas prices, as well as increases in rents and interest rates of mortgages. Member States with the highest shares of housing costs in household disposable income exhibited stronger reductions over this period. ⁽¹⁹⁸⁾

Housing policies can help improve housing affordability. At national level, housing policies can include the provision of social housing, housing allowances, tax deduction for housing costs, and utility subsidies, as well as rent regulation or subsidies for improving energy efficiency. ⁽¹⁹⁹⁾ These policies often target specific population groups (e.g. low-income households, tenants vs homeowners) and can have other objectives, such as improving the quality of housing or increasing homeownership. Some housing policies, in particular housing allowances, need to be targeted to help contain the fiscal cost and ensure they are not translated into higher housing or rental prices. The impact of housing policies on housing cost reduction depends on many factors. These include their generosity, coverage and take-up, regulatory environment, stock of housing supply and requirements for renovation, as well as employment, environmental, urban and spatial policies. The analysis below examines how two housing policies, - housing allowances and social housing - contribute to poverty reduction. These two policies have been selected on the grounds of data availability. Housing allowances are intended to compensate for housing costs based on a means-test and can be granted to both tenants and owner-occupiers. ⁽²⁰⁰⁾As a proxy for social housing, this report uses social rent subsidies for tenants, thereby capturing the difference between social rent and estimated market rent for the dwelling.⁽²⁰¹⁾

Housing policies are relevant for the labour market outcomes of individuals. The lack of affordable housing may affect the accessibility to good quality education, training and job opportunities, and discourage labour mobility, increasing the probability of higher unemployment rates and contributing to labour and skills shortages. ⁽²⁰²⁾ Living in poor quality accommodation can negatively affect health and well-being, likely reducing productivity. In turn, worse labour market outcomes (e.g. being unemployed, frequently moving in and out of employment, working on a fixed contract, receiving a lower wage) might prevent housing conditions from improving in the absence of buffers. For example, they might reduce the ability to pay rents and the chances of obtaining a mortgage, especially in more expensive areas with better job opportunities, limiting mobility, or not providing sufficient means to improve housing quality. ⁽²⁰³⁾The design of housing policies and their complementarities to other policies also matter. For instance, in the presence of high transaction costs, housing policies supporting home ownership might reduce labour mobility, increase the acceptance of lower wages or increase demand.

Increasing the supply of housing, including by investing in social housing, is very often essential to improve housing affordability, especially for households with lower incomes. Social dwellings are usually publicly owned (with countries investing in the stock of social housing, enabling them to benefit from an economic rent accruing to owners of property) or semi-privately owned (by housing corporations) but can also be privately owned. ⁽²⁰⁴⁾Social housing usually takes the form of rental accommodation provided at below-market prices. In recent decades, social housing models in Europe have increasingly focused on lower-income households, primarily targeting older people and single-parents, while other vulnerable groups, such as single-person households, households without children, and migrants, are often low on the priority list or not eligible for social housing. ⁽²⁰⁵⁾ In addition to improving housing affordability, social housing can support macroeconomic objectives by easing supply bottlenecks, thereby mitigating house price pressures. This can in turn help to address labour shortages. ⁽²⁰⁶⁾ Social housing also plays a key role in housing first-type programmes for homeless people. In this respect, social and affordable housing policies underpin the EU social economy strategy. ⁽²⁰⁷⁾ More broadly, increasing the supply of housing can require a coherent mix of investments and reforms to address diverse issues such as the supply of basic infrastructure, spatial planning and other regulatory restrictions, or an insufficient supply of qualified labour.

The stock of social housing is quite low in the EU, with big investment gaps. The lack of affordable, good quality housing has several structural drivers, including low incentives, bottlenecks in construction and investment gaps regarding in particular energy efficiency and social housing production. The construction of social housing has decreased across the EU in recent decades, and some countries, particularly in Eastern Europe, have privatised large parts of the social housing stock. ⁽²⁰⁸⁾ Currently, social housing as a proportion of the overall housing stock exceeds 20% in only three Member States: the Netherlands (34.1% in 2021), Austria (23.6% in 2019) and Denmark (21.3% in 2022). It is between 10% and 20% in France (14% in 2018), Ireland (12.7% in 2016) and Finland (10.9% in 2021). ⁽²⁰⁹⁾ Long waiting lists are common in Member States with both larger and small social housing stocks, reducing the effectiveness of social housing in improving housing affordability for the most vulnerable households. ⁽²¹⁰⁾ Long waiting lists are common in Member States with both larger and small social housing stocks, reducing the effectiveness of social housing in improving housing affordability for the most vulnerable households.

Between 2014 and 2021, government expenditure on housing benefits per inhabitant, aimed at improving access to housing, increased in the EU.Taking into account differences in the cost of living between countries, it went from 109 to 120 PPS per inhabitant ⁽²¹¹⁾on average, ranging from less than 1 PPS per inhabitant in Bulgaria, Croatia and Portugal to over 300 PPS per inhabitant in Ireland and Finland in 2021. It was strongly driven by expenditure on rent benefits, mostly comprising housing allowances (86.2% of rent benefits in 2021), with the exception of Belgium, Estonia, Ireland, Lithuania, the Netherlands, Romania and Slovenia, where social housing expenditure constituted a major share of rent benefits. Countries with the lowest initial levels of public spending on housing caught up more strongly between 2014 and 2021, ⁽²¹²⁾but the overall dispersion across countries widened (Chart 3.15). ⁽²¹³⁾ In light of recent trends, many Europeans responding to a recent survey believe that addressing the high cost of living (48%) and the lack of social housing and homelessness (23%) should be a main priority in their country. Around 6 in 10 respondents think that their governments should increase their spending on housing, with variation across countries ranging from below 30% in Finland and Denmark to over 80% in Cyprus, Ireland and Greece. ⁽²¹⁴⁾

Social housing and housing allowances reduce the AROP rate in the short term, without accounting for the possible longer-term effects on housing prices and housing affordability. Comparing the adjusted AROP rate, which excludes social rent subsidies and/or housing allowances from equivalised household disposable income,⁽²¹⁵⁾ to the standard AROP rate provides a good measure of the impact of both policy instruments in reducing poverty. It does not however capture other relevant aspects of housing affordability such as supply and demand for affordable housing, underlying drivers or broader societal impacts. In 2022, housing allowances decreased the AROP rate by an estimated 1.4 pp (from 17.7% based on AROP rate before housing allowances to 16.3% of AROP rate) in the EU on average, with the biggest decreases in Finland (4.3 pp), Ireland (3.5 pp), France (3.1 pp) and Germany (3.0 pp) (Chart 3.16). ⁽²¹⁶⁾ Similarly, in 2019, the provision of social housing proxied through social rent subsidies decreased the AROP rate in the EU by an estimated 0.4 pp on average (from 18.1% in AROP rate before housing allowances and social rent subsidies to 17.7% in AROP rate before housing allowances). ⁽²¹⁷⁾ The highest decreases were observed in Ireland (3.7 pp) and Belgium (2.4 pp). The higher average impact of housing allowances could be due to relatively low public spending on social housing (Chart 3.15). While this analysis suggests that social housing and housing allowances reduce poverty, it does not account for the impact of other related policies or institutional setups and bottlenecks relevant for the functioning of rental and housing markets, thus likely reflecting the upper bound of the impact. For instance, the potential shift of (part of) housing allowances to landlords through higher rents might reduce the effectiveness of housing allowances in reducing poverty, i.e. in the absence of effective rent regulation policies. ⁽²¹⁸⁾ Depending on the design, however, housing allowances might instead drive-up housing prices and reduce housing affordability over time, especially in markets with limited housing supply. ⁽²¹⁹⁾

The estimated direct impact of housing allowances on poverty reduction is particularly strong for vulnerable households. For example, households where no adult (+3.2 pp) or only one adult (+1.8 pp) is employed are more likely to be at risk of poverty after housing allowances are excluded from equivalised disposable income, compared to households where more than one adult is employed (Chart 3.17). Similarly, this probability is higher for tenants (+2.7 pp) and owners with a mortgage (+0.7 pp), compared to outright owners. Households with children (+2.3 pp), households with no adult with tertiary education (+0.9 pp), and households with at least one adult with a migration background ⁽²²⁰⁾ (+0.5 pp) are also more likely to be at risk of poverty after housing allowances are excluded from equivalised disposable income.