Increasing Investment in Affordable Housing in Britain

Investment in affordable housing is a critical issue that has garnered significant attention in recent years, particularly in countries like the UK and the US, where housing shortages are exacerbating social and economic inequalities. Capital Economics has been commissioned by Shelter to research and report on the financial mechanisms that could lead to additional investment in affordable housing. This report aims to explore the various aspects of investing in affordable housing, including the current state of the market, the benefits and challenges of such investments, and potential strategies to increase investment in this vital sector.

In Britain, there are simply too few homes in the right locations, and we are not building new properties fast enough to close the gap. With an estimated shortfall of over 100,000 newly built homes each year, the misalignment of supply and demand is driving property prices up at a much higher rate than incomes. Indeed, the ratio of house prices to income has risen in fourteen of the last eighteen years. This trend is not unique to the UK; in the US, nearly 60 percent of Black renters and 30 percent of Black homeowners are moderately or severely cost burdened, well above national averages. The housing crisis disproportionately affects vulnerable populations, including students, seniors, people with disabilities, and those in rehabilitation and re-entry programs.

‘Affordable housing’ plays a crucial role in ensuring accommodation for individuals and families who might otherwise be priced out of the market. It is not just a matter of providing shelter; affordable housing significantly determines access to employment, education, public and social services, and critical amenities that help families achieve economic mobility. For example, having a reliable place to live enables people to go to work, attend school, and participate in their communities. Research shows that every year spent in a higher-quality neighborhood increases a child’s earnings in adulthood. Moreover, affordable housing can act as a counterbalance to other riskier investments, cushioning the overall portfolio from excessive volatility.

To address the housing crisis, various financial mechanisms and incentives are available to encourage investment in affordable housing. In the UK, public-private partnerships are essential for developing affordable housing. Governments might offer incentives like tax breaks, land rights, or subsidies to private developers who agree to build affordable housing. In the US, the Low-Income Housing Tax Credit (LIHTC) and Section 8 vouchers through HUD are significant incentives for investors. Additionally, the Community Reinvestment Act (CRA) encourages financial institutions to invest in affordable housing and other development projects. These incentives can significantly reduce the risk and increase the profitability of affordable housing investments.

Despite the potential benefits, investing in affordable housing is not without its challenges. Regulatory complexity, lower rental income, limited rent increases, long-term commitments, increased tenant turnover, and subjectivity to regulatory and eligibility changes are some of the key drawbacks. For instance, strict zoning laws and limits on building heights or densities can hinder affordable housing development by increasing land and construction costs. Moreover, the need for specialized facilities and services for certain groups, such as seniors and people with disabilities, can add to the complexity and cost of development.

To increase investment in affordable housing, several strategies can be employed. Unlocking land through creative incentives and partnerships, augmenting programs to unleash private capital, scaling off-site home construction, reinvesting in public housing and shared-equity models, and revamping housing choice vouchers are some of the proposed solutions. For example, more preassembled portfolios of CRA-compliant multifamily housing investments could reduce time and complexity to assess investments and help banks, particularly smaller institutions, overcome potential capacity constraints that may impede investments in affordable housing. Additionally, expanding the secondary loan market for Community Development Financial Institutions (CDFIs) could provide more capital for affordable housing projects.

Investment in affordable housing is a multifaceted issue that requires a balanced approach to address both financial and social objectives. While there are significant challenges and risks associated with such investments, the potential benefits, including steady cash flow, long-term appreciation, social impact, and portfolio diversification, make it a compelling opportunity for investors. By leveraging existing financial mechanisms and exploring innovative strategies, it is possible to increase investment in affordable housing and create positive outcomes for both investors and communities.