Social Housing and the Strong Towns Approach (Part 2)
This is Part 2 in a multi-part series on social housing. Read Part 1 here, and stay tuned for future installments!
Social housing in Bouça, Portugal. (Source: Flickr.)
Social housing is enjoying a moment in the United States. And, as we saw in Part 1 of this series, the proposals on the table today look, deliberately, very unlike the public housing that has been deeply troubled, stigmatized, and controversial for almost all of its 80-year history in the United States. They take their cues, instead, from models found overseas, perhaps most notably that of Vienna, Austria, where over half of residents live in publicly subsidized and rent-regulated housing, much of it of very high quality.
But we can’t just copy-paste these models into a vastly different political and land use context. We need to understand how the mechanism that social-housing advocates are proposing in the U.S. would work here.
The New Social Housing Model: Mixed Incomes and Cross Subsidy
Almost all American social housing advocates today explicitly advocate mixed-income housing. In addition to promoting integration, this brings social housing closer to being financially self-sufficient, not dependent on perpetual support from a political establishment with effectively no skin in the game. This is an understandable reaction to the past failures of public housing, which ended up concentrating only the poorest of the poor in often terrible conditions.
Basically every mixed-income proposal relies on what is called cross-subsidization, in which higher-income tenants subsidize the rents of lower-income tenants and the expansion of the program. This is not an untested idea but a feature of successful models in places like Vienna.
The logic of cross-subsidization is the same as that of inclusionary zoning, a widespread policy in which cities require private developers to include a certain percentage (typically 10–20%) of low-income units within a market-rate apartment building. The low-income subsidy comes out of the market-rate rents.
This in itself is no silver bullet for costs, and we know that because inclusionary zoning already isn’t. Think about the premise. Cross-subsidy works because market-rate rents are significantly more than high enough to cover the operating expenses and retire the construction debt: in other words, because market-rate development is highly profitable. If market rents weren’t so inflated, cross-subsidy wouldn’t look so attractive. It’s a textbook case of where the policy remedy to a very expensive housing market depends on those very high prices for its viability. The treatment perpetuates the disease.
Cross-subsidy is generally able to produce very limited numbers of affordable units relative to market-rate units, and if that ratio gets too high, development becomes unprofitable. We recently witnessed exactly this in Portland, where an unworkable inclusionary zoning requirement caused market-rate development applications to fall off a cliff with all the grace of Wile E. Coyote.
If it would cause private developers to lose money, it is also going to cause a supposedly self-sustaining government to lose money, and so we’re back at the subsidy problem: who’s paying for social housing.
Mythbusting: “With This One Neat Trick, Social Housing Is Basically Free!”
The pie-in-the-sky version of social housing advocacy involves a highly suspect claim that it’s a free lunch. Some advocates assert that a social housing agency can simply pay for itself at scale, without requiring any ongoing subsidy out of taxpayer dollars. Development is profitable, after all, and this is a developer like any other, only it’s part of the public rather than the private sector, and instead of retaining a profit margin at the end of the day, its mission is to keep rents low for poor residents.
The challenge is that even a public sector developer is subject to most of the same forces that have driven market-rate housing costs sky-high.
A foundational insight of Strong Towns is that the government does have to be in the black. Not in everything it does, of course: the public sector does some things at a loss (provide parks, for example) and makes up for them with revenue from elsewhere. But in aggregate, the public sector has to be solvent. And specific public programs need a stable revenue stream to keep operating, or they get into trouble.
Building buildings is tremendously expensive. Social housing construction will not be exempt from this. Laypeople sometimes assume that non-profit housing will be vastly cheaper to build and operate than for-profit housing, but they overestimate the difference between non-profit and for-profit. It’s more like the difference between x ≥ 0 and x > 0.
A public developer will still have to buy the same materials that the private sector has to buy, and hire the same workers the private sector has to hire. These costs are through the roof right now. Pandemic supply chain disruptions haven’t helped, but the problems are deeper. The largest one, perhaps, is a historic shortage of workers in the skilled trades in the fallout of the 2008 market collapse, in which many people simply left those occupations or chose not to enter them.
Land acquisition is another hurdle. In some places, local governments own vast amounts of land in and around cities. This is, for example, true of Vienna, where the government can not only build on that land but can also strategically use those reserves to stabilize the market price of land.
But it’s not true in the U.S. Here, governments may have to pay a very high market price to acquire suitable sites to build social housing. One genuine advantage a public entity has is the ability to exempt itself from local zoning, potentially acquiring land cheaply and then vastly upzoning it. The ability to do this is still constrained by politics, if not by land costs. But keep in mind land cost is ~10% of a typical development project: even bringing it all the way to zero only gets you that far.
So, housing is terribly expensive to build. It’s more expensive than can be supported by the rents low-income people can pay—because if that weren’t true, we wouldn’t even be having this conversation. Everyone would be happily living in market-rate housing.
The more detailed and serious proposals I’ve seen all propose to pay for the construction of social housing by issuing bonds. That is, by taking on debt. But debt is not a funding source: it’s just a way of moving cash flow from the future to the present. You still have to pay for the project. Market-rate developers pay off their construction debt out of the market-rate rents their finished project brings in. To achieve any deep level of affordability for low-income tenants, it is likely that subsidy will be needed from outside the social housing agency. Even in Vienna’s storied model, this is true. Social housing is funded on an ongoing basis by a 1% tax on the salaries of every Viennese worker, half from wages and half from a matching employer contribution.
I’m just going to say it: right now, I doubt that there is the political will anywhere in America for the billions and billions of dollars of subsidy required to fund social housing at a scale that would be: a) much more expansive than that which existed in the 1950s and 1960s, and b) much better maintained and higher quality than those infamous projects.
What we do fund—what we’ve demonstrated we’re willing to fund—is actually often decent housing, but for only a tiny number of people relative to demand. There are very, very long waiting lists for public housing, and any sort of income-restricted housing, in the U.S.
There are serious, workable social housing proposals for the American context. This isn’t something inherently unaffordable, and advocates are right that cross-subsidy is the real game-changer compared to the failed model of public housing for only the poor (but nicer than the stuff we used to shove the poor into).
But all of the serious, workable proposals require a serious local political commitment to the idea of social housing. And those are the rocks on which public housing went aground in the past. Where social housing has been successful, it’s a function of broader political and social conditions allowing for success. And those conditions aren’t going to transfer from one city to another, let alone nation. We can’t just copy-paste Vienna, as much as we might wish.
There are good reasons to aspire to change the political context and expand the social housing stock, perhaps quite a lot. But if we are to get realistic about what that would entail, a big piece of the puzzle is policy makers taking the exact same steps that would also make market-rate housing a lot easier and less costly to build than it is now. We’ll pick up there in Part 3.
