How to get much more social housing per euro
A cheap, flexible, abundant source of funding is going unused.
Sprouting from old docklands on the north side of Copenhagen is the new neighbourhood of Nordhavn.
Norhavn has a futuristic feel. There is a cylindrical building on top of a fifty foot tall concrete podium; an apartment block shaped like an asterisk; a park on top of a cube-shaped building, clad in rusty metal. The population density is about four times greater than that of Manhattan.
Nordhavn also feels familiar. It’s familiar in the sense that it has Copenhagen’s traditional density and street layout. The apartment blocks are about six stories tall. They have courtyards. The streets are fairly narrow.
Like the rest of Copenhagen, Nordhavn feels wealthy but also egalitarian. It has a lively community vibe at ground level. Cars are rare. 20 per cent of the housing is subsidised.
Nordhavn is, in short, the type of place Ireland is trying to build. It’s people-centred, sustainable, affordable, and close to town. How did the Danes do it?
To be sure, building a new neighbourhood like Nordhavn is not easy. Much has to go right. Transport is a big part of it. Nordhavn has a new train station to move residents in and out. Without the trains, Nordhavn would have had to be a small fraction of its size and density.
Another thing the Danes are good at is crowding-in private investment. Crowding-in is where government funding induces private investment that wouldn’t have come otherwise. Crowding- in is about nudging the private sector to fund worthy projects.
By contributing a small amount of funding, in just the right way, the Danish government encouraged private investors to fund the vast majority of Nordhavn’s social housing. These homes are 90 per cent funded by private investors.
The Danish government masterplanned Nordhavn, invested in the train line, and kicked in 10 per cent of the cost of its social homes. The return on its investment is 6,000 homes so far, with many more to come. That’s what crowding-in looks like in action.
Crowding-out
The opposite of crowding-in is crowding-out. With crowding-in, government investment unlocks private investment that would not have happened otherwise; with crowding-out, government investment blocks private investment that would otherwise have happened.
Crowding out happens at a small scale when, for example, the government funds a startup that private investors would have liked to fund. In Ireland the government has a legacy of running hotels, shipping companies and sugar refineries. In funding those industries, the government occupied slots private investors would have liked to occupy.
Crowding out can happen at the level of the macroeconomy. When the government runs a big deficit, it absorbs the capital that would otherwise have been used to invest in projects. The effect is higher interest rates and less investment.
The art of governing is to make as many worthwhile projects happen as possible, given limited funding. Where the government can kickstart projects by throwing in a little bit of funding, it should try to do so. Where it’s crowding out other investors, it should think about stepping back.
How Ireland funds social housing
Building more affordable housing is the Irish state’s top priority. The government does a lot to subsidise housing. It offers a variety of funding schemes to the approved housing bodies (AHBs), whose job it is to build new social housing.
There is the capital assistance scheme. This scheme pays 100 per cent of the cost of new housing (as well as acquisitions of existing stock). The problem with it is that the scheme is onerous to take part in, and a condition of using the scheme is that AHB’s rent rates are controlled tightly.
An alternative is the capital advance leasing facility, or CALF. The CALF is a type of long term subsidised loan, from the exchequer, for up to 30 per cent of the cost of a scheme.
And there’s senior debt from the Housing Finance Agency (HFA). The HFA provides subsidised loans to the AHBs. These loans make up 60-70 percent of the funding for a typical social housing project. The HFA gets its funding, not from the Irish exchequer, but from the European Investment Bank and deposits from local authorities.
Private funders – like banks and private lenders – are another source of funding for the AHBs. In practice, they are not much relied upon, because they can’t match the low interest rates offered by the HFA.
The Irish social housing system, then, is heavily dependent on the CALF plus HFA funding model. Private funding does not play a major part.
How Denmark pays for social housing
In Denmark, about 90 per cent of a typical social housing project is privately funded. Here is how it works: the Danish banks issue government-guaranteed social housing bonds on the public credit markets. The bonds pay a coupon of around 3.3 per cent, which is the same interest rate as charged by Ireland’s HFA. The proceeds from these bond sales fund the Danish equivalent of AHBs.
There are three main benefits of the Danish setup.
The first is that the Danish government’s housing budget goes much further because the private sector bears more of the funding burden. The Danish exchequer commits only 10 per cent of the cost of each project, in the form of subsidised loan. The Irish exchequer, by contrast, funds 30 per cent of a typical project through CALF. Every Danish krone of subsidy goes three times farther than an Irish euro.
The second benefit is that the bond market’s capacity to fund projects is flexible. The Danish government can dial up and dial down funding flexibly, as it sees fit. And the bond market’s lending capacity is functionally bottomless. Doing it through a government agency like the HFA, by contrast, means the state has to commit to a certain stable level of funding over time. It’s hard to spend more on a short term basis, and hard to cut the budget when circumstances demand it.
The third benefit is that bond market funding is very cheap – at perhaps 50 basis points over the government’s cost of borrowing.
A fourth benefit is that bond market funding is “off balance sheet”. This means it’s not categorised along with the rest of government borrowing. It’s a specific pot of money for a specific purpose. This gives the government greater flexibility to fund its other priorities.
To be sure, bond investors don’t fund projects out of the good of their heart. A key to unlocking this stream of cheap funding is that the government needs to backstop projects to limit investors’ potential losses. And there would be some work involved in creating a “bond factory” at the Irish pillar banks.
Another pipeline
In April at the Irish Home Builders Association Housebuilding Summit, the Secretary General of the Department of Public Expenditure, David Maloney, said the way Ireland subsidises housing is not working: “We have some schemes now that offer subsidies of over €275,000 per unit. [It’s] simply an unsustainable approach for 300,000 units,” he said.
The HFA is the workhorse of Irish public housing funding. It funds AHBs, local authorities, cost rental and student accommodation. It delivers cheap funding, at scale, to the AHBs and local authorities. And it doesn’t rely on exchequer subventions.
The problem is that the HFA’s budget isn’t nearly big enough to cover Ireland’s social housing requirements. The AHBs are expected to build 4,500 homes per year. The HFA’s budget allows €800 million per year for the AHBs. Divide one number by the other and you get €178,000 in AHB funding per home. These projects are 70 per cent funded by the HFA, so homes have to be delivered for no more than €254,000 (€178,000 divided by 0.7). Needless to say, it’s not possible to deliver a home for €254,000 in Ireland in 2025. The average cost of delivering a social housing unit across Ireland in 2023 was €309,000, and as much as €386,000 in Dublin.
This is why we could do with an extra funding pipeline. Even in a scenario where the Irish state is filthy rich, and housing is the government’s number one priority, it’s struggling to match funding with demand.
An additional funding pipe would be useful in three ways. First, it could substitute partially for CALF funding, which is paid directly by the exchequer. The existing CALF budget could be stretched further. Second, it could fill the funding gap as construction costs rise. And third, it could be used to fund more ambitious social housing targets. Once the pipeline is up and running, it could even be used for other priorities like clean energy, water or transport.
A pipeline of cheap capital is a useful thing to have.