The Guru Is In
The Guru is In: Affordable rental isn’t a tenure, it’s a business
By David A. Smith
4 min read
A few weeks ago at the World Bank’s biannual Global Housing Finance Summit, a conference of roughly 350 housing executives from around the world (mainly from national governments and the Bank itself), I spoke on Financing Housing Down the Income Pyramid, and the ensuing Q&A session produced this challenging question from the audience, “How do we create effective affordable rental tenures?” That choice of words instantly set me thinking, and in formulating my answer, I stumbled on the right way to frame the question.
If you work on affordable housing globally, a few things are constant:
- Every household wants to own their home.
- Though the mechanisms and strategies vary widely, all governments incentivize housing.
- While all government officials promote homeownership, few of them actively promote affordable rental.
Broadly speaking, the UK and US have the world’s oldest, most sophisticated, and most effective ecosystems for producing privately owned, long-term, high-quality, affordable rental:
- The UK through its Housing Associations, many of which are world-class, and its remarkable plebiscite model of stock transfer.
- The US through both the REIT inventory (conventional market) and our infrastructure of specialized affordable housing developer-owner-managers, for-profit and non-profit.
Both systems use a complex government-enabling environment (UK: grants and registered social landlords; US: REIT laws, LIHTC, state HFAs, and most recently CDFIs) that has been evolved over decades with the explicit twin goals of (1) creating competition among private sponsors for resources, and (2) maintaining effective public accountability over those private sponsors.
In both the UK and US, the government produces affordable rental not directly but indirectly; it produces public resources that the private sector converts into affordable rental. While outsourcing of production may seem inefficient to a newly minted economist or to GAO, it has massive invisible efficiencies: risk transfer, outcome compliance, and collectible recapture yielding effective enforcement.
Both systems recognize that rental presupposes a landlord, and that being a landlord is a tough job – and, in fact, a much tougher job for affordable rental than for market rental. In unregulated market property, the activities may be complicated but at least the objective is simple: maximize Net Operating Income and property value. In affordable housing, the objectives are dual, both economic and social: Achieve financial viability, and simultaneously optimize affordability. For the owner, these two are diametrically opposed: each improves at the expense of the other.
Direct government ownership and operation, which many countries favor, puts both objectives at risk – and when I look around the world at direct governmental attempts to create housing affordability, in many cases I see failures of the type familiar from past US programs: underinvestment in capital improvements; slow decline of building quality; decay of customer service priorities in favor of administrative rigidity; lack of intra-governmental accountability.
Adding the private sector changes the dynamics because it makes the roles clear and divides them between two actors. Government allocates resources, sets rules, and holds participants accountable. The private owners develop, own, and operate, and must achieve both economic and social objectives. American affordable housing providers have had 50 years’ experience learning this complex skill: we were deeply into sustainability and double bottom lines long before it was cool. It’s become embedded in the financial and economic DNA of our programs, and because of that the new sponsors it spawns learn double-bottom-line ownership and management by instinct.
To those two dimensions, social and economic, time adds a third one: long-term stewardship. What was affordable today will not be tomorrow; what is economically viable today will not be tomorrow. Competencies must be refreshed and augmented by new skills brought on by new technology, programs, policy imperatives, and markets. Capacity waxes and wanes, sponsors come and go. But the properties abide, and for them to remain as affordable rental, the most critical issue is their continuing or changing sponsors’ acumen. Without continuously evolving sponsors, the properties wither and die. Without them, there is no affordable rental tenure.
I signaled the moderator. “Affordable rental isn’t a tenure,” I began. “It’s a business.”
