The European Union, Social Housing and State Aid

I am now shifting to the Netherlands where I will spend some time with the Aedes Company. They provide both advocacy and training to social housing companies here in the Netherlands. While here, I will also visit with member companies to better understand Dutch social housing and the differences here compared to Germany and the USA. One of the most interesting topics to me is the role of the European Union in social housing. One of the big issues that became apparent before coming here is the role the EU plays in a topic called State Aid. State Aid is defined as using taxpayer resources to provide help to organizations in a way that gives an advantage over others. Some State Aid is illegal under European Union (EU) rules because it distorts competition in a way that is harmful to citizens and companies in the EU. The definition of Services of General Economic Interest (SGEI) is an important one in this context. (SGEI’s) are economic activities that public authorities identify as being of particular importance to citizens and that would not be supplied (or would be supplied under different conditions) if there were no public intervention. Examples are transport networks, postal services and social services. This blog consists of several sources. I used sources as needed but all credit goes to the sources listed at the end of this blog.

Issue: In the last decade, various complaints were filed with the EU regarding social housing activities in the Netherlands and Sweden and a few other member states. The nature of the EU’s response or the country in questions response raises questions to the scope that a housing agency or entity can receive government assistance to provide housing to middle or higher income groups. Below are short case studies describing the situations in each country.

Case Study 1: The Netherlands: The Dutch situation is different from most other EU members because of the size of the sector. No other EU country has a housing stock with a share of 32 per cent social housing. The size and diversity of the Dutch social housing stock constitutes a point of concern for the level playing field between social and profit-making housing providers. This led the Dutch Association of Institutional Investors (IVBN) to file a complaint to the European Commission. The complaints focused on the fact that social housing companies in the Netherlands were developing higher end real estate. This meant the associations were challenging the private sector in the upper portions of the real estate market. The housing association received many opportunities that the private market did not. Because of this, the IVBN believed the housing associations were receiving an unfair advantage. In particular:

1. State guarantees for borrowings from the Social Housing Guarantee Fund-Lending to housing associations is guaranteed by a fund from a group called the WSW. WSW pools the resources and power of all housing associations, while WSW’s obligations ultimately guaranteed by the state. Housing Associations benefit because of lower rates due to the backing of public funds.
2. Support from the Central Housing Fund(CFV)-The CFV provides aid to housing associations that have insufficient financial means to fund important investment projects or to secure their financial continuity. The aid from the CFV is financed from a general levy on all the housing associations and not from general taxation. In other words, the CFV basically redistributes funds from financially healthier housing associations towards weaker ones.
3. Sale of public land by the municipalities at prices below market value-This support is available to housing associations for social housing development.

The EU Commission ruled on each of these complaints in the context of illegal state aid. The results are as follows:

• WSW lending allows the housing associations an advantage as the promises reduce borrowing costs. It is selective, as only housing associations profit from such guarantees while private landlords and real estate developers do not. The final guarantee by the state is free, which represents a transfer of state resources. The measure enhances the housing associations’ competitive position in regards to their competitors like private landlords and developers. The `EC considers that the measure distorts competition. The Commission considers that given the high level of cross-border investment in real estate and the significant role of the housing associations in the Netherlands, the measure is liable of affect intra-community trade. At the very least, such support acts as a deterrent for foreign investors who may consider real estate investments in the Netherlands.
• On point two, the commission once again stated that the fund was set up and run by the state and serves as an instrument of state policy. Therefore the measure involves a transfer of state resources. The decision on this point refers to the Court of Justice’s decision in the Pearle Judgment. [1]
• Buying land at below market prices was also seen as a benefit. It is an act of the state (sold by municipalities), selective (only targeted at housing associations) and there is a transfer of state resources in the form of revenue. It distorts competition and affects intra-Community trade.

The EU did not believe renting out housing to households that were not low income consisted of a public service. The EU did recognize that a housing company needs flexibility to operate and that empty units are negative. However; permanent extra capacity was not deemed by the EU as a public provision and furthermore it disturbed the completion on the real estate market. The EU believed that extra stock beyond what is necessary should be sold off and any market rate development activity should be done on the private market without any public involvements or help. Lastly, social housing should be aimed at those who are disadvantaged or low income.

The Netherlands took into account the EU recommendations and in 2011 by a Ministerial Decree made the following changes.

• Socially disadvantaged households were set at earning 33,000 euro a year or less.
• The max rent in a social housing unit was set at 647 euro per month.
• 90% of units in a housing association need to be allocated to the socially disadvantaged group mentioned above.
• A system needed to be put into place to monitor the ratio of tenants with fines available if a housing association does not meet the goals.
• Independent audits.
• If demand for housing is not there by target group, the housing association can rent to those outside but cannot access state funds for the development of housing until

Case Study 2: Sweden: The Private Property Owners in Sweden’s grievance was a new explanation of the term “financial assistance”. Instead of focusing on conventional subsidies in terms of cash going from one party (the government) to another party (the housing companies) or lending money at below the market level, subsidy now also included cases where the owner did not demand a market based rate of return on the market value of the assets in the company. “This was accomplished by comparing the net operating income of the company to the market value of the properties. As rental properties in attractive areas in the big cities had high market values because of the option to convert them to condominiums while the net operating income was low because of the rent regulation, the rate of return on market value was very low in the municipal housing companies in the large expanding cities. The difference between a market based rate of return and this actual rate of return was seen as a subsidy.”[2] Even if it was not expressed in this way, it meant that nearly by description there were benefits if a company did not try to take full advantage of profits and did not charge the price that would lead to full profits. Directly after the grievance was filed, the Swedish government said that they would look into this and the European Commission waited for the result of this.

The result was the municipal companies decided to act more like the private market. That meant if more could be made on rent, they should do so. . Investments that did not bring the rate of return needed would not be made. They also decided that the profitability of a company also depends on their relation to their tenants. That meant dramatic increases in rent would not be good for a private or public company. While the change in theory was supposed to put the municipal housing companies on the same path as private companies, rents have not drastically changed since the law was implemented. However, the municipal housing companies have drastically changed admission criteria. Because of this it is becoming tougher for low income people to rent from municipal housing companies. If there are credit, criminal or other types of background issues, these families or people often end up in a black market of renting. Because of this, rents can be higher and maintenance can be shabby at best.

This is only a first impression on the subject of State Aid and the EU. I will continue to look deeper into the subject. I am interested to see if this subject is something that worries other EU countries or if it is limited to these markets because of unique situations.

Case Study 3 : Belgium: The Flemish government required developers of all projects containing 50 or more flats to give at least 20% of the land to social housing organizations. They had other options like selling some of the dwellings at a controlled price or offsetting units by paying €50,000 each per unit not supplied. Private real estate developers filed a complaint which went to the EU court of justice in 2011. The main crux of the situation was the government not notifying the EU of this requirement and that they believed it is State Aid. The EU court did decide that notice needed to be given because the assets provided were not just for disadvantaged citizens but also for a wider array of social groups. The Belgian Constitutional Court annulled, by its decision on 7 November 2013 , both the social obligations and the compensations for private residential projects.

Case Study 4: France: In July 2012, a private organization that brings together developers filed a complaint to the EU Commission. The complaint centered around money granted by the French government to social housing providers. In particular the complaint stated that part of the social housing stock in France had no income limit for entrance and was therefore not in existence to help low income or disadvantaged citizens. I could not find a resolution for this case at this time.

Conclusions: The EU does give flexibility to member state but recent decisions calls into question the option of taking a universalistic model of social housing.   A strict interpretation of what social housing is, will make it difficult for countries with a rich housing tradition like the Netherlands to ensure a social mix policies.  The case of the Netherlands shows the effect of EU legislation which varies according to ideal types of social protection. ‘’It undermines the social markets of the northern welfare states. The unitary housing market (The Netherlands, Denmark, Sweden) is forced to become a dualist market.’’

Sources:

• The effect of EU-legislation on rental systems in Sweden and the Netherlands- https://www.kth.se/polopoly_fs/1.343275!/Menu/general/column-content/attachment/Nr%203.pdf
• Case C-345/02 judgment of the Court of 15 July 2004 Pearle BV, Hans PrijsOptiek Franchise BV and Rinck Opticiens BV v Hoofdbedrijfschap Ambachten
• EU Parliament Report: Social Housing in the EU- http://www.europarl.europa.eu/studies
• Boccadoro, N. (2008), The impact of EU rules on the definition of social housing, in
• Whitehead, C. and Scanlon, K. (eds.), Social Housing in Europe II, A review of policies
• and outcomes, London: London School of Economics
• Gruis, V. and Priemus, H. (2008), European Competition Policy and National Housing Policies: International Implications of the Dutch Case, Housing Studies, 23:3, 485-505
• Krajewski, M., Neergaard, U. B. and Gronden, J. W. (2009), The Changing Legal
• Framework for Services of General Interest in Europe: Between competition and
• solidarity, Hague: TMC Asser Press.
• Mosca, S. (2011a), State aid. Rules more flexible but definition challenged, Europolitics,
• Supplement to n° 4328, Friday 16 December 2011: 16-17.
• Mosca, S. (2011b), Court to rule on definition of social housing, Europolitics,
• Supplement to n° 4328, Friday 16 December 2011: 20-21.