Social Rental Agencies in Hungary – Overcoming Legal and Financial Constraints

EUROPEAN RESEARCH CONFERENCE

Housing First. What’s Second?

Berlin, 20th September 2013

Social Rental Agencies in

Hungary – Overcoming Legal

and Financial Constraints

J. Hegedüs, V. Horváth and E. Somogyi

METROPOLITAN RESEARCH INSTITUTE




The presentation is based on

two ongoing projects

1. TENLAW (Tenancy Law and Housing

Policy in Multi-level Europe) project under

EU FP7

2. MRI joint project with Habitat for

Humanity Hungary supported by the

Open Society Foundation




Outline of the presentation Economic, social and demographic trends after transition

Toward a new housing regime – failures of the

municipality based social housing system

Housing affordability – key element of the housing

problems

Innovative solutions – their limits and constrains

Social Housing Agencies – a new possibility

International experiences

Market/state failures regulating private rental market

Hungarian model proposed by MRI/HFHI

Macro economic/social factors influencing the

housing market




Macro economic/social factors

influencing the housing market Economic growth

Priority of economic policy: growth (and

structural adjustment)

Stages of the growth: 1990-1996, 1997-2002,

2003-2008, and the crisis

Low employment rate, informal economy,

income inequality and insecurity

Demography (low fertility, migration, etc.)

4




Toward a new housing regime? Post-socialist welfare

Critical elements of the social housing

problems

Housing conditions

Lack of social housing stock

Affordability




Housing policy and its social

elements

Social housing is a „shared” responsibility

between the national and local government

– but no (financial and political) incentives to

build up an efficient social housing system




Lack of social housing policy Early attempts - failures

Social construction subsidy (1994-1998)

Investment in public rental sector (2000-2004)

Rent subsidy and tax advantages (after 2004)

Why?

Lack of political commitment to social housing,

and the ideology of the private ownership

Local level: mixture of mission and

rational/financial oriented behaviour –

privatization as prefered option




Diverse startegies of municipalities

Attitude towards privatization

Allocation of vacant units

Contract type (one year, etc.)

Social accommodation for non-paying

tenants

Eviction practice and arrears




Housing affordability Housing affordability related to macroeconomic

trends: incomes, income distribution and

housing cost (rent, house-price and utility)

Conflicts between households, utility companies

and municipal/government institutions (with a

possible role of NGOs) – different strategies

Facts:

Public utility arrears

Rent arrears in municipal housing sector

Mortgage arrears




Innovative, but fragmented solutions at

local level - examples

Public sector

Social „accommodation”

in Szombathely

„Lélek-program” in district

8

Mortgage rescue

program: National Asset

Management Agency

Ocsa social housing

construction program

Private rental and NGO

Trambulin house

Veszprém „Hell’s Tower”

– Maltese Charity Service

Rent subsidy programs

for private rentals

Mortgage rescue

programs – private rental

sector

Social real estate

brokerage




Constraining factors on expansion of

good practices Difficult to standardize related procedures –

complex individual cases, marginalised target

group

No monitoring over the financial performance of

the programmes (not the interest of the

participating institutions)

Limited financial resources

Political concerns: increasing the threshold

increases the eligible population

disproportionately




Opportunity to use private

rental sector for social housing Tenure structure

large privately owned

housing sector

No reliable data on private

rental

Tenure structure, 2011

12

Unhabited homes




Private rental sector – after transition Notes on PRS in socialist housing systems

PRS in post-socialist systems:

Financial aspect: user cost approach Long term relative advantage: owner occupation means higher „profit”: No imputed rent; No tax/financial incentives to potential landlords; Tax exemptions and support to home ownership.

Legal aspect: under-regulation Rental regulations: only provides general framework; details of contract are freely negotiable.

Current system avoids risks of overregulation, but does not address typical sources of landlord-tenant conflicts.

Court and law enforcement system expensive and slow

Outcome: PRS becomes a residual sector




What can we learn from the SRA

models used in different countries?

Sufficient incentives for

the demand and supply sides

and for the intermediary institutions

Different target groups

Central or local programme management

Legal framework: stable and predictable




Unmanaged risks related to

PRS in Hungary

Risks of the landlord

Rent arrears

Cost of the evictions

Utility cost non-payment

Damages to the property

Risks of the tenants

Rent

stability/predictability

Legal residence

Long term lease

Consequences: informal „risk management” and

under-utilization of the privately owned housing stock




Opportunity - advocacy Economic crisis – mass problem of FX

loans

National Asset Managament Agency: special

state owned rental sector (largest program in

the last 23 years)

Social housing construction - pilot

Strategy: creating a new public tenure

form („charter” city approach)




Proposal for introducing SRAs in

Hungary: organizational structures

Program managmenet

Type of SRA Centralized Decentralized

SRA as an intermediary

agency

A B

SRA as a managment

agency

C D

17

Issue: risk sharing schemes between

• SRA and Landlord

• Central Government – (Municipalities)- SRAs




Organizational structurte of new

public sector – pilot project

Metropolitan Research Institute 18




Elements of the design:

Pricing the risks

Market rent = return on „investment” + cost of

risks and management

Subsidies

Housing allowance

Tax allowance

SRA management support (e.g. risk fund)

Institutional/organizational elements




Summary of pricing the risks


Risk types Estimated probability Rent level (HUF/month/m2)

400 600 800

rent payment risk 20% 80 120 160

vacancy risk 8% 32 48 64

utility non-payment 10% 40 60 80

quality risk constant 120 120 120

Total risk HUF/month/m2 272 348 424

Gross rent HUF/month/m2 672 948 1 224

1-(gross rent/net rent) % 68% 58% 53%




Housing allowance proposal


Submarkets Rent allowance in different allegible income groups Rent

level A lowest B middle C highets

I. 50% 30% 5% 400

II. 50% 30% 10% 600

III. 70% 40% 20% 800




Organizational elements Planning – expected cost/size of the

program

Registration of SRAs

Registration of landlords/contract

Allocation of units

Rent setting

Housing assesment

Conflict resolution




Estimates for program cost for

10 000 units Subsidies

1000 EUR

/year Note

1000 EUR

/year Note

1. PIT allowance 2 560 Everybody eligible 2 560 Everybody eligible

2. Supplementary income benefit 624 15% of the clients use it 624 15% of the clients use it

Tax expenditure 3 184 3 184

3. Rent allowance 7 200 18 000 HUF/unit/month 4 800 12 000 HUF/unit/month

4. Risk fund contribution 5 088 20% of the rent 1 872 5% of the rent

5. Programme management 800 5000 HUF/family/month 800 2000 HUF/family/month

Budget expenditure 13 088 7 472

Total cost 16 272 10 656

Year 1 Year 10




What is the strategy?

Incentives

Landlords

Tenants

SRAs: institutional interest of exisiting

organizations

Cost of the program

Politics of housing

Social Rental Agencies in Hungary – Overcoming Legal and Financial Constraints

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