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British social rented housing in a European context

Mark Stephens, Nicky Burns and Lisa MacKay

25 February 2002

A comparative analysis of the social rented sector in seven European countries.

Social rented housing in Britain is undergoing radical reform – often inspired by European experiences. This report compares the social rented sector in seven European countries, looking at labour market and social security systems, and challenges the assumptions behind the British reform agenda. The report: 

  • Analyses the ownership, allocation, pricing and financing of the social rented sector in seven European countries;
  • Presents the first comparative data on the social composition of the main tenures;
  • Highlights the comparative poverty of social housing tenants in the UK compared with their European counterparts; 
  • Links housing to social security systems Provides a critique of the current reform agenda in the UK.

Summary

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This study examined the social rented sector in Britain and in six other European countries: Denmark, France, Finland, Germany, the Netherlands and Sweden. The study, by a team from the University of Glasgow, found that:

  • British social housing operates in a different social and economic context from the other countries surveyed. Britain experiences higher levels of inequality and poverty. Consequently, the British social rented sector provides a safety net for vulnerable households whilst its role in enhancing affordability for a wider range of income groups is more evident in the other countries.
  • Britain has been unusual in providing social rented housing which has been owned and managed by local government on a (near) monopoly basis.
  • The more fragmented structure of the social rented sector in the other countries surveyed limits the opportunity to pool rents, creating anomalies within as well as between landlords.
  • The British housing benefit system is distinctive, with several unusual features, but these are attributable to its function as a safety net. In the other countries studied, housing allowances enhance affordability, with a safety net provided by the social assistance system.
  • Britain relies much more heavily on capital grants (in the housing association sector) than any other country. The most common form of subsidy is interest rate subsidy, which is often reduced over time.
  • As many social rented systems move towards financial surplus, these surpluses are sometimes captured in part by government or redistributed between landlords through mergers. Denmark provides an example of a transparent mechanism for redistributing surpluses between landlords through a sector-wide building fund.
  • Private finance is of major importance in promoting social rented housing in all of the countries surveyed other than France.
  • The survey suggested that the cost of private finance tends to be higher in Britain than in the other countries. This finding requires more detailed examination.

The role of the social rented sector

In four of the countries surveyed, including Britain, the social rented sector now makes up around 20 per cent of the housing stock. The Netherlands has the largest social rented sector (more than 33 per cent), and Germany the smallest (6 per cent).

There is no consistent trend in the size of the social rented sector. Whilst it has diminished greatly in Britain and Germany as a result of government policy, it has been stable elsewhere. Production fell generally in the 1990s, usually due to financial constraints, but Britain had the smallest social housing building programme during this time.

As the importance of social rented housing in meeting housing shortages has diminished, differences in its role have emerged. Britain places much importance on its use as a safety net for vulnerable households, and is the only country where specified groups have a legally enforceable right to housing. Various mechanisms exist in other countries to ensure that social rented housing provides a safety net, for example the use of local authority nominations in Denmark and Sweden. But in France, social landlords are often reluctant to house the poorest households.

The social rented sector in other countries performs a greater role in enhancing housing affordability for a wider range of income groups than it does in Britain. Income limits exist in Finland, France and Germany, but these are sufficiently high as to permit income-mixing. Allocation procedures often depart from the needs-based system frequently operated in Britain. Priority is given to existing tenants of estates in Denmark whilst application-driven systems, where time waited is the main 'currency', are widely used in the Netherlands.

British housing exhibits a greater level of polarisation between tenure than other countries. After adjusting for the relative size of the social rented sector, households from the poorest two income deciles are much more likely to be housed in the sector than in the other countries. Moreover, the rate at which the use of the sector falls as incomes rise is most dramatic in Britain. This pattern is not the result of the exclusion of 'nuclear' families from the British social rented sector - in common with France and Germany there is a greater proportion of such families in the British social rented sector than in the population as a whole. Further analysis showed that greater income inequality in Britain combines with tenure polarisation to give British social renters substantially lower average incomes compared with the national average than their counterparts in the other countries.

The provision of social rented housing

Britain has been unusual in providing social rented housing owned and managed by local government on a (near) monopoly basis. There were four main types of social landlord in the countries studied. Municipal housing companies, which enjoy greater operational autonomy than British local authority housing departments, are the main provider of social rented housing in Sweden, Finland and Germany, whilst a weaker form provides the bulk of French social rented housing. Housing associations are the preferred model in Denmark and the Netherlands, whilst a variety of non- (or limited) profit companies operate in France, Finland and Germany. Germany is unusual in providing much social rented housing through private sector landlords. A major cause of the shrinking of the German social rented sector is this housing passing into the market rented sector once subsidised loans have been repaid. Outside Britain local monopolies seldom exist.

Social landlords are generally bound by rules relating to registration, regulation of activities, auditing and supervision. Deregulation occurred in the Dutch and German social rented sectors in the 1980s and 1990s. However, the most recent policy proposals of the Dutch government indicate an effort to regain some leverage over the operation of housing associations.

Financial organisations linked with the social rented sector often play a regulatory role. In countries where dependence on private finance has increased, the importance of external agencies in monitoring social landlords' financial and managerial profile has also increased.

Rent setting

Recent policy debate in Britain has focused on anomalies in rent structures, between regions, landlords in the same region and within landlords. Rent setting at the level of the landlord is determined by the debt structure of the organisation, subject to various subsidies that are generally designed to tackle the fact that debt is most expensive to serve in its earliest years. In Britain a distinct advantage of monopoly local landlords has been the ability to pool rents, limiting rent anomalies between old and new properties. The more fragmented structure of the social rented sector in some of the other countries studied limits the opportunity to pool rents, although it is now permitted in Germany and actively encouraged in Finland. Denmark's cost-rental system operates largely at an estate level; this creates particularly acute rent anomalies, with older, popular properties in central areas sometimes having lower rents than newer, peripheral and less popular estates. Other countries, including the Netherlands and Sweden, also reported anomalies in rents at the level of the landlord, with rent structures often failing to reflect fully differentials in popularity.

The study found that rent rises in the 1990s had been greatest in Britain, Finland and Sweden. These countries recorded real rent increases of more than 30 per cent. In Sweden rent rises are agreed in negotiations between local landlords and tenants' associations. The French government issues guidelines, but landlords are free to set rents as they wish, whilst cost-rental principles apply in Germany, Finland and Denmark (subject to small profits in Germany and Finland). In recent years, the British government has introduced more central control over rent increases in England, a policy also followed by the Dutch government. Credit rating agencies have expressed concern that such rent controls limit the financial flexibility of landlords and might endanger long-term maintenance.

Housing allowances

Several features of the British housing benefit system have attracted criticism. There are three main complaints:

  • Recipients of social assistance do not have to make a contribution to their rent.
  • All recipients are insulated entirely from rent rises.
  • The steep 'taper' (that determines the rate of benefit withdrawal as incomes rise) creates a poverty trap.

These features are unusual, but the distinctive nature of the British system is attributable to its function as a safety net, designed to prevent post-rent incomes falling below social assistance levels. Moreover, British social assistance benefits do not make any provision for housing costs.

Housing allowance schemes in the other countries fall into two categories. In Sweden, Finland and Denmark the housing allowance system enhances affordability, whereas social assistance provides a safety net. Eligibility for housing allowance must be tested before social assistance. In the Netherlands, the housing allowance also acts mainly to help affordability, but since social assistance provides only standard allowances for housing costs, it is possible for post-rent incomes to fall below social assistance levels. Germany operates a similar system, except that additional payments from social assistance may be made if post-rent incomes fall too far. Whilst the systems operated in other countries do not pay all of a tenant's rent, they are also withdrawn less quickly as incomes rise.

While there is no common trend in the numbers of housing allowance claimants in the 1990s, real costs were higher at the end of the period in all countries where figures are available. Sweden was the only country to have achieved significant reductions in housing allowance costs; by 1999 these had almost returned to their 1990 levels. These reductions were achieved in part by falling unemployment, but also by excluding childless claimants aged 29-65 from the system. Such households could seek protection from social assistance.

A higher proportion (almost 66 per cent) of British social tenants are dependent on housing allowances than in the other countries - one-third in the Netherlands and Sweden, around 40 per cent in Finland and 50 per cent in France. The high (60 per cent) proportion of Danish social tenants receiving housing allowances is attributable to a generous scheme operated for pensioners. The study also found that Britain devotes a higher proportion of GDP to housing allowances than in the other countries.

Further analysis revealed that the high level of housing allowance dependence and expenditure in Britain is attributable to inter-tenure polarisation, greater labour market polarisation and the lack of generosity of the social security system.

Subsidies and surpluses

Housing subsidies are usually divided to reduce the level or the cost of servicing housing debt in its early years when its real burden is greatest. The need for such subsidies has diminished as inflation and interest rates have converged downwards throughout the advanced economies. Pressures on government budgets have also increased, although there is evidence that many European governments experienced falling debt as a result of lower interest rates and falling unemployment, rather than by tackling underlying subsidy commitments. Expenditure may be squeezed during a future recession.

The countries surveyed use a variety of subsidies. State loans are still a feature of the French and Finnish systems, whereas Britain relies much more heavily on capital grants (in the housing association sector) than any other country. Recurrent subsidies are mainly a feature of the German system and British local authorities. The most common form of subsidy is the interest rate subsidy, which is often reduced over time. The Netherlands has now abolished subsidies, having first provided the housing associations with payments designed to relieve them of debt. Sweden's interest subsidy system has now been replaced with the equivalent of a tax allowance (for new loans).

As many social rented systems move towards financial surplus, these surpluses are sometimes captured in part by government (Sweden and Britain), or redistributed between landlords through mergers (Netherlands and Britain). Denmark provides an example of a transparent mechanism for redistributing surpluses between landlords through a sector-wide building fund.

Private finance

Private finance is of major importance in promoting social rented housing in all of the countries surveyed except France. It is usually drawn from the dominant types of financial intermediary in each country. Special intermediaries exist in Britain and the Netherlands to help access capital markets on behalf of social landlords. British social landlords are unusual in accessing the capital markets directly. The most extensive securitisation programme exists in Finland, whereby state loans are securitised in order to provide funding for new loans or interest subsidies.

The survey suggested that the cost of private finance tends to be higher in Britain than in the other countries. The measurement of the cost of funding is extremely complex and this finding requires more detailed investigation. However, a likely explanatory factor is the absence of a loan guarantee system in Britain.

Conclusion

The researchers conclude that:

  • British social housing operates in a different social and economic context from the other countries. Britain experiences higher levels of inequality and poverty and, consequently, the social rented sector provides a safety net for vulnerable households. Its role in enhancing housing affordability for a wider range of income groups is more evident in the other countries.
  • The priority given to the social rented sector in providing a safety net makes it difficult to create a market within it. Tenants in British social rented housing are very poor and it is very difficult for them to exercise market-type choices. Where they do, they are likely to do so from a weak position in relation to others.
  • The priority in British housing policy should be to ensure that the social rented sector provides a comprehensive and high quality safety net. This has implications for policies relating to long-term planning, allocations, regulation, rent setting, housing benefit and financing.

About this project

This study is based on material collected from experts in each country featured, and a series of interviews in the course of study visits to the Netherlands, Denmark, Finland and Sweden.

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