Opening remarks for the European Parliament’s Committee on Employment and Social Affairs

Good afternoon. Thank you very much for giving me the opportunity to speak at today’s Committee meeting and discuss the findings of a new IMF report on affordable rental housing in Europe.

Our report shows that the pressure on affordable rental housing is one dimension of a worrying trend of increasing inequality. With data from advanced European economies from the mid-2000s to 2018, we find that many tenants, especially low-income tenants, have not taken enough advantage of disposable income gains to offset rising rental costs. This contrasts with the typical homeowner who could reduce their housing costs relative to their household income in a low interest rate environment.

Unevenly distributed gains from economic expansion have been the main drivers of rising rental costs and declining rental affordability. But our study also finds that some structural changes in Europe have played a role. In particular, the shift to increased urbanization, the shift to highly skilled jobs in services and a higher incidence of tourism have also increased the pressures on affordability for tenants, especially low-income households.

The pandemic will likely worsen the situation for tenants. Many people who hire work more frequently in contact-intensive industries, generally have less access to telecommuting, or were early in their careers with less secure jobs. Catching up on lost income will likely take longer, especially for those who need to transition into new industries.

Let me provide some key figures on the plight of low-income tenants, and then outline some policy options that could be an integral part of the overall recovery policies after the coronavirus crisis.

  • A typical young family used almost a third of their income for rent.
  • For a low-income household, which is a household with an income in the bottom 20 percent of the income distribution, the share of the income needed for rent was even higher, at 40 percent. This number – 40 percent – is usually the threshold for a household to be considered overburdened with rent payments.
  • Shockingly, in almost three-quarters of the countries analyzed, around half or more of low-income tenants were overburdened in 2018.
  • And in some large cities, the surge in rental prices has been particularly hard. In 2013-2018, rental prices increased by 20-55% in real terms, for example in Dublin, Madrid, Copenhagen, Stockholm and Luxembourg City. And in Lisbon, rents have more than doubled during this period.
  • As a result, over 50 percent of low-income city tenants were overburdened in most countries.

Is there a way to stop and reverse these disparities during the recovery? Yes there is. Let me talk about the policy options.

In general, effective policies must include efforts that improve long-term income opportunities for low-income households and young people, so that they benefit from the structural transformation of the economy. Examples of policies include education upgrades, retraining and skills upgrading, more effective active labor market policies and mobility support for those who change jobs and locations.

The most powerful immediate policy tool to address rent affordability and provide support is to increase the levels and coverage of portable housing allowances.

Governments should also consider initiatives that increase the supply of affordable housing on a more permanent basis and thereby ease demand pressures. In particular, we see a role for more public investment in social housing, especially where the stock is low. Social housing varies considerably from country to country, ranging from less than 3 percent of the total housing stock in Portugal to more than 35 percent in the Netherlands. The “Next Generation EU” package offers an opportunity for such investments. Increased investment in housing can create jobs, increase the supply of affordable rental housing and facilitate professional mobility. The Portuguese National Recovery and Resilience Plan is a good example of targeting the creation and rehabilitation of affordable rental housing for low-income families and students.

Other policy options for increasing the rental housing stock include financial incentives, for example by taxing vacant properties and shifting some housing subsidies that favor high-income landlords towards private investment in rental housing development.

At the same time, we caution against the increased use of rent controls. While rent controls serve to balance power between landlords and tenants and provide some degree of certainty over rental costs, they only tend to protect current tenants and are associated with lower housing supply.

Let me conclude by noting that one of the greatest social and economic risks for Europe is the worsening inequalities resulting from the pandemic. Therefore, we urge governments to continue their efforts for greater inclusion. And this must include measures that make rental markets more affordable, especially for low-income households and young people.

Thank you.


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