In the course of the last twenty years, I have worked in the UK, in Germany and in Switzerland. My work has led me to engage with the housing market in each of these countries. As a result, I have observed the workings of these more or less dysfunctional housing markets at close quarters – and witnessed much wringing of hands about the shortage of affordable housing. Depending on prevailing political attitudes, the focus of lamentation has shifted from one set of contributing factors to another.
My recollection of working in the UK is that the debate tended to focus on house builders, planning constraints, and the workings of the dreaded housing ladder. In Germany, pet topics included institutional investors buying up rental properties, contributing to gentrification and driving up rents. In Switzerland, tropes include high-net-worth individuals distorting local markets and capital being poured into so-called “concrete gold” to avoid low or negative interest rates. Other issues, such as AirBnB lettings displacing long-term rental tenants or the income-elasticity of demand for living space are recognised and discussed in all three countries. My conclusion is that the list of forces contributing to housing market failure is very long and that trying to fix the housing market’s gremlins and ensure that it provides sufficient good and affordable homes is like playing whack-a-mole: as soon as one issue is addressed, another crops up.
In many respects, the three nations display a varying willingness to intervene in the market, with the UK at one end of the spectrum and Switzerland at the other. Interestingly, this corresponds to the respective share of owner-occupied housing, which ranges from 65% in the UK (ONS, 2016) through 46% in Germany (destatis, 2018) to 38% in Switzerland (FSO, 2017).
Working in strategic planning for the City of Lucerne, driving up the supply of affordable housing is a major part of my job description. As in numerous other Swiss cities, successive referenda have extended the City of Lucerne’s remit to restrict the untrammelled play of market forces. Lucerne is committed to raising the proportion of housing association owned rental stock from 11 percent in 2012 to 16 percent by 2037. The housing associations in question have to be non-profit and are required to provide rental housing at cost.
The City of Lucerne does not sell any of its land. Instead, we grant development licences for around 80 years. Roughly approximating a leasehold, this model sees land ownership remain with the city, whilst developers receive a licence to construct buildings on it and retain ownership of the buildings for the duration of the contract, pay an annual rent equivalent to 2 – 2.5% of the land value. When the contract reaches an end, ownership of the licence and the buildings on the land reverts to the city in exchange for payment of 80 percent of its market value at that point in time.
The procedure for awarding these development licences is set out by an act of parliament, as are the terms and conditions of their contracts. Requirements include design procurement through architectural competitions, demanding environmental performance standards, a ban on sub-letting, and a policy of allocating rental dwellings at an occupancy rate of 35m2 per capita.
But even whilst looking forward to a steady stream of moderately-priced housing entering the market under these conditions, I would nevertheless hesitate to claim that Lucerne, or any other Swiss city had fully resolved the thorny issue of affordable housing. The basic situation is not too bad. As a national average, households currently spend around 20 percent of disposable income on housing, fuel and energy (FOS, 2019). At the same time, homelessness is not much discussed, but not unknown. A recent study by the Christoph Merian Foundation found around 100 homeless, and around another 100 people living in temporary accommodation in Basel, a city of around 200,000 residents1.
However, whilst housing associations are required to offer housing at cost-rent levels, one issue is that these might not actually be very cheap in absolute terms, given the high standards to which many housing association developments are built. Another issue is that housing associations are not required to offer housing to prospective tenants who are not members. Joining a housing association may require a minimum deposit of several thousand francs. This means that individuals on very low incomes may be excluded from accessing housing even where rents might be quite moderate. How these issues are handled is up to each individual housing association, but there is some truth in the charge that many affordable housing association homes are occupied by middle-class professionals on comfortably adequate incomes.
In a further interesting twist, housing associations currently often offer better interest rates on deposits than the low or even negative interest rates on offer from high-street banks. As a result, many fairly affluent individuals join housing associations merely in order to deposit savings and without any intention of ever renting their accommodation. This helps provide housing associations with funding for development projects, and some can boast fairly well-filled coffers. Together, these factors mean that the housing association homes the city is promoting cannot be directly equated to affordable, let alone social housing.
North of the Rhine, the university cities of Freiburg and Tübingen in Germany´s south-western state of Baden-Württemberg have led the way in pioneering the Baugruppe model. This involves a number of interested parties working together to design and build blocks of flats which subsequently become conventional condominiums. Tübingen has been particularly enthusiastic in embracing this delivery model, applying it to successive development sites and steadily refining the way that it works.
Baugruppen have been the subject of much research, mostly favourable in conclusion. For example, Gerd Kuhn and Tilman Harlander (20102) point to research indicating that Baugruppen reduce total construction cost by around 15-25 percent, and see further benefits in terms of consultation, community cohesion and innovation. However, there has also been some criticism. The social scientist Katharina Manderscheid (20043) found that Baugruppen tended to benefit people with good incomes and relatively high levels of academic achievement. The Baugruppe model requires considerable facilitation and support from the city council, and yet the homes it delivers can later be sold on the open market. As a result, the Baugruppe mechanism could be viewed as a resource-intensive way of offering resourceful and well-educated people a leg up on the housing ladder.
In pursuing the Baugruppe model, Germany once again beats a path between the UK, where successive Governments have seen private-sector house building as the only show in town, and Swiss determination to constrain the impact of market forces on the housing market. Sadly, there is little evidence that the German Baugruppe model generates a sustained supply of affordable housing.
Against the background of these observations, it strikes me that many sources of market failure in housing are not actually intrinsic to housing as such. For example, low or even negative interest-rates are intended to stimulate the economy. Yet they make it cheap for those with a good credit rating to borrow money and spend it on housing (amongst other things). At the same time, low interest rates encourage individuals and institutional investors to plough funds into real estate. This flow of funds into the housing sector does not trickle down into more affordable housing.
The UK and Germany are not alone in failing to sustain effective pension systems based on income-tax based mutual insurance and inter-generational solidarity. To varying degrees, this is more or less a global phenomenon. Investing for our old age, whether individually or through pension funds goes along with the need to maximise the return on investment. Again, this tends not to lead to more affordable housing being made available. In fact, it may have the opposite effect.
Another global phenomenon is the increasing disparity between low and high incomes. According to the United Nations Development Programme4, average income ratios between the richest 10 percent and the poorest 10 percent of the population ranged from 13.8 in the UK, through 9 in Switzerland to 6.8 percent in Germany ( for comparison: Finland has a ratio of 5.6, whereas China has a ratio of 21.6 and many countries of the south have even higher ratios). These disparities, especially in unstable countries, generate a vast global flow of money searching for a safe haven. Where this flow touches down, the investments it generates bear little or no relation to actual local housing demand. Safe, neutral and politically stable, Switzerland is particularly vulnerable to this effect. Passed in 1983, Lex Koller (another Swiss intervention in market forces) bans non-resident foreigners from acquiring property in Switzerland, but the legislation offers enough loopholes to resemble the proverbial Swiss cheese.
One idea gaining traction in Switzerland is that the model of the development licence could be extended to all land, with ultimate ownership resting with the state. The idea is that this could restrict the extent to which land is owned and traded as a commodity, and thereby prevent speculation. In principle, the concept of freehold land ownership resting with the state is not unprecedented. For example, around 93 percent of land in Israel is owned by the state, the Development Authority or the Jewish National Fund. The land owned by these three bodies is administered by the Israel Land Authority, a government agency which generally offers 49 or 98 year leases5.
I cannot comment on the effectiveness of this system in Israel. Clearly, the success of such an approach would depend on the conditions attached to development licences. The Swiss system of direct democracy would hand ultimate control of these conditions to the electorate. My observations of the measured and well-informed debate around referenda on highly complex issues lend me a degree of confidence in the Swiss people’s ability to engage constructively with highly complex questions. Even now, issues of planning and development are often decided through national, cantonal, and local referenda. Examples include legislation against urban sprawl (rejected, 2019), a new national spatial planning framework (approved, 2012), and restrictions on building second homes (approved, 2012).
I am firmly convinced that the shortage of affordable housing cannot be addressed without looking beyond failing housing markets to tackle the increasing dysfunctionality of global capitalism. Clearly that is a tall order, but looking back at my experience of the housing market in the UK, in Germany and in Switzerland, I tend towards the view that a greater willingness to intervene in the housing market can increase its ability to address demand in general, particularly with regard to the provision of good quality affordable housing.
Dominic Church AoU is the project leader for Strategic Planning at City of Lucerne