The Regulator’s View: An Interview with the Dutch Housing Regulator

Background: The Centraal Fonds Volkshuisvesting (CFV) is the regulating body for Dutch Social Housing. I spoke with Daphne Braal-Verhoog the Director and Geraldien Bruin Manager of the Department of Policy and Legal Counsel to discuss both their roles and the future of the housing industry in the Netherlands especially in light of the new rules. They first explained that CFV’s central role in 1988 involved giving restructuring aid to housing agencies that experienced financial problems. The role of the agency expanded in 1997 to financial governance of the social housing industry. The change came into affect because for approximately two years, the social housing industry went unregulated after privatization occurred in the mid 1990’s. The responsibility of governing the housing sector briefly laid with the cities but conflicts of interest and checks and balances became a problem.

As mentioned, the initial job of this agency involved helping housing agencies with financial problems. Since 1988, 25 total bail out requests from housing agencies were made. The reasons for bail outs over the years change. In previous years bailouts resulted from mismatches in the market including downturns in the general real estate market. Recently the bailouts resulted from financial speculation, playing in derivatives and bad commercial real estate ventures gone awry. The big game changer that shocked the system happened in 2012. “Vestia, the Netherlands’ largest housing association, lost €2 billion in January 2012 after interest rate swap deals – designed to protect against interest rate increases on variable rate loans – went wrong. The 90,000-home landlord had to raise rents and sell stock to pay €1.3 billion back to the banks and the rest of the sector coughed up €700 million to bail the organization out’’.[1] According to Ms. Braal, this truly changed the nature of the housing sector.

Regulations…Why???: Up until this point, the social housing industry led by Aedes was extremely successful at pushing away regulation. The social housing sector developed and built so much real estate that everyone benefitted. Cities leaned on social housing agencies to build. National lawmakers saw progress and the building sector boomed. Between 2000 and 2009 the industry gained a reputation as an investment machine. If a city needed a new school, shopping or employment programs, the housing sector responded. Backed by the CFV fund, the social housing sector became to big to fail in many senses and was heavily leaned on by cities and regions to drive economic development. The behavior caused many moral hazards according to Ms. Braal. Policymakers and controllers did not systematically look at regulating the industry.

Before coming to CFV, I thought maybe there agency was at fault for not pushing stronger regulations. I found out that CFV lobbied for better regulations since the 1990’s but to no avail. They warned that when interests rates went up, there could be a huge consequence. Many in the sector told staff at CFV they were being pessimistic. On top of that, Aedes and the industry continued to fight regulation. Because everyone benefitted from what happened in the 2000’s Aedes and the social housing industry became an extremely powerful lobby. Its hard to comprehend the social housing industry being the 800 pound gorilla but in many senses this became the case.

Parliamentary Inquiry and Increased Supervision: The parliamentary inquiry in 2012 brought regulations back to the social housing industry. Up until then, The CFV completed annual auditing based on reports of external auditors. The basis of audits took into account value of assets, liquidity current investment strategies. The controllers submitted opinions but did not control if opinions or ideas became implemented. CFV could bark but lacked authority to bite. They relied on their ability to convince housing associations to make needed changes but lacked true authority. Now CFV saw its authority broadened dramatically. The agency still looks at investment strategies and assets but controls more in the field of risk management. CFV looks at the quality of data, audits contracts, conducts interventions of light to heavy and spends significantly more time on site during the year. The agency can now take actions against a housing agency that is out of line.

With the increased regulatory power, CFV believes the industry is headed into the right direction. The agency will now act as a comprehensive regulator which they believe will add need checks and balances to the industry. CFV will examine morals and integrity at housing agencies which means they can be more proactive about governance, policy and integrity in operations. The power to push for culture change in an organization is now within their rights. One example is the ‘’Fit and Proper Test”. The CFV will now work with partners to administer this test to executives and boards of housing agencies across the country. The major task of this test is to ensure that:

  1. leadership understands operations and risk management.
  2. people in executive positions have the right leadership qualities.
  3. responsibility to stakeholders is taken into account
  4. leaders understand risk assessment

Will the Sector Step Up?: While the regulators play a major role in ensuring the long term vitality and health of the social housing sector, both Ms. Braal and Ms. Bruin believe the major changes need to come from the industry itself. The new changes came about for a reason. Mistakes, lack of regulations and unneeded risk taking led to problems within the sector. The boards of commissioners at housing agencies need to internalize this regulatory environment and take action that embraces the changes within the company culture. The question now is the attitude of the directors and the boards. How will they decide to embrace the change. It is important that housing agencies do not try to work around the changes and that advocates like Aedes works with members to implement changes and not to fight regulation at every corner. Questions still remains if the industry will embrace increased regulation or continue to look for ways to fight it and have it rolled back.

Affect on Industry and Economy: Within the tighter regulations comes legislation that restricts the type of development housing associations can take on. They must focus real estate development on low income households from now on. One common point of contention I hear from both Aedes and member companies is that nobody will build for the middle class or workforce. With the social housing sector almost banned from developing in this arena, the private market must now take up the cause. It was the private market who went to the EU and complained about the building practices of social housing companies in the Netherlands. I asked both Ms. Braal and Ms. Bruin about the changes and if they could negatively affect the overall economy and affordability of the market as predicted by the social housing industry. They responded by saying “The ministry created the level playing field and now the private market must step up. The market for building and investing in real estate is strong so now is the opportunity for the private market to be involved in middle income housing. “ Ms. Bruin specifically said “If the private market does not step up in the next five years, they probably never will and the housing associations will be back in the middle income housing development game’’.

Future: CFV will continue to changes as its new role takes affect the summer of 2015. The future is anything if certain. Questions continue to abound. Will the private housing sector will fill the developer role as promised? Will the affordable housing sector lead by Aedes truly accept regulation and be active participants in building safer programs free of speculation? Will directors and boards internalize change and work within their organizations to ensure the culture fits with the new rules? Time will answer these questions. What is sure is that the CFV intends to use its increased regulatory responsibility to help restore faith and trust in a social housing system that is bloodied and beaten in the eyes of the population in the Netherlands.

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