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People should be able to afford a home and there is a way for the city to make this possible
The first part of TheMayor.EU’s series on the housing crisis in Sofia took a deep dive into the data behind the current market in an attempt to quantify the lack of housing. It also tried to put all the information into a practical scenario by asking who can afford a home in the city. In this part, we will focus on the different ways the local administration can solve the housing issues.
Buying a home is often the single biggest investment that a family makes. And since it is such a big investment, the benefits can be quite profound, both in terms of improving one’s living conditions and towards building generational wealth.
Homeownership is the foundation of generational wealth, which in turn keeps a family’s upward mobility from being derailed by temporary setbacks, like unemployment. It is also a jumping-off point towards better education, further increasing the prospects of later generations. Plain and simple, it gives people life opportunities.
Bulgaria has a relatively high homeownership rate of 84.3% (in 2020, according to Eurostat) - an enduring legacy of the Communist era. That rate has created an incredible societal buffer in the last 30 years. The country has been through a lot due to rapid de-industrialisation, massive brain drain, a meteoric rise of organised crime in the 1990s and the crash of 2008. Homeownership has been vital in keeping a lot of people afloat.
The first part of this article revealed, however, some uncomfortable facts behind that 84.3% figure. The government’s market-driven approach to housing in the capital is pushing more and more people into overcrowded living conditions. This also prevents at least 40% of the city’s population from being able to afford any property on the market.
The lack of affordable housing makes it extremely hard for many families to build generational wealth and pass it onto their offspring. So, how can Sofia Municipality turn the tide?
The market will never provide
Ashna Mathema is a housing expert and the Founder of Total Housing Inc. She is also the main author of the publicly available 2017 World Bank report “Bulgaria: Housing Sector Assessment”. (Her views expressed here do not reflect the views of the World Bank.) She explained that the market will probably never provide housing for the lowest 20% of income earners. That holds true in Sofia, as well as in any other city unless the government decides to create clear incentives.
“Developers always build what they think they can profit from, and that’s natural; they do not, and cannot be expected to target lower-income groups– unless there is a good reason. Lower-income groups spend the bulk of their budget on other essential needs, like food and fuel, and do not have much left over to spend on housing. That’s why the private (formal) housing market is beyond their reach – there is simply nothing available for them.”
At the same time, people who do not have a lot of income to begin with, such as single parents, starter families and young professionals, are also pushed out from the market. “
This creates a vicious cycle, where low-income groups and up-and-coming families find it very hard to buy – or rent – a suitable house that meets their needs (in terms of family size, location, etc.). The demand is there but ‘effective’ demand is subdued, which is what Ashna Mathema describes as a dysfunctional housing market.
“No matter how low the developer goes, the chances that these groups will be satisfied by the market is probably unreal,” she adds.
Social housing shortage
Emil Hristov, an urbanist at Sofiaplan, who is working on the city’s new Urban Masterplan, says that it is extremely important to make a distinction between social housing and affordable housing. He explains that social housing should be reserved for the bottom 20%, living below the poverty line, whereas affordable housing should target low-income households, as a tool to help them build generational prosperity. Social housing should be next to free, and affordable housing needs to be subsidised to an extent.
That being said, according to him, there is no legal definition for 'social' or 'affordable' housing in Bulgaria and policymakers use social housing as a catch-all term to describe both. He points out that the city has not had a housing strategy since 1989 and the sector is run by property investors and developers. Furthermore, the amount of housing the city owns has diminished over the years and it currently sits at 2% of the stock. This figure includes both social housing and apartments for diplomats or government residencies.
Ashna Mathema explains that this is not surprising, as the global consensus in the past 30 or so years has been that governments should not own housing. At the same time, the shortage of social/public housing in Sofia is exacerbated further by an old rule that allows tenants in social housing to gain ownership over the property after living there for a certain number of years. This diminishes the already limited stock. It will be very costly to replenish this stock in the years to come.
But the local government does not have access to the same resources it did back when the economy was centrally planned during the Communist era. It needs to do this through policy that specifically targets low-income groups. If the targeting is not done well, however, a lot of that help will be snatched up by middle-income groups.
Ashna Mathema goes into further details: “If a middle-income person is unable to afford a house in the market, he will find a way to buy out the person who has benefited from the subsidised unit. And the person with the subsidised unit will likely sell it because he has other critical expenses and needs the money.”
The World Bank’s 2017 report on housing in Bulgaria goes into a lot of detail in describing the situation, but it also offers policy propositions based on the underlying principle that public sector resources should focus on those who are in most need. Ashna Mathema argues that the bottom 20% - many of whom may be living in informal or otherwise inadequate housing conditions – need some form of social assistance in housing, as there is nothing they would be able to access in the formal housing market. Whether they get that in the form of social housing, or cash subsidies, or vouchers will depend on the local context and the availability of resources. The point is that the market will only take care of the upper- and middle-class’ needs.
Emil Hristov explains that currently there is a noticeable lack of political or public pressure to create more affordable housing: “Citizens face a market run by investors and they can do little to effect change.”
This is exacerbated by the fact that older generations already have homes while the recent graduates, starter families, single-parent households are finding themselves in a heavily saturated market. He points out that there are a lot of practices from across the world, that can be implemented to remedy the situation in Sofia. There is a lot that can be done.
“The problem isn’t just that a lot of people can’t afford a home, but also that certain people can afford more than one,” pointed out Mr Hristov.
Ashna Mathema expands on the topic by explaining that building new municipal homes with public money could be quite costly in the long run. The same goes for buying housing at market prices for social purposes. Both options are expensive, time-consuming and it is quite hard for a government to scale them up to reach the desired effect.
Instead, it may be better to retain the housing stock they currently have and build up slowly. More importantly, given that the housing needs are so varied across income groups, it may be good to consider a menu of options for increasing affordability.
One is the streamlining of the building permit process and provision of trunk infrastructure for new developments. This initiative has the potential to reduce costs on construction, as according to Ms Mathema, currently, developers spend a large part of their investments funds before construction even begins: “A developer who spends 20-30% of his capital on permits and infrastructure is not going to build cheap homes, because the base cost is really high.”
Another approach Emil Hristov proposes is for the city to negotiate public-private partnerships with developers and reduce permitting costs in favour of the developer handing over a certain percentage of the new apartments. This would enable Sofia to create social and affordable housing with very little expense involved.
He posits: “Say a developer builds 10 apartments and the municipality reduces his costs by 10% in exchange for one of the apartments.” Another option for the municipality is to mandate owners of multiple properties to put them on the rental market.
Ashna Mathema, on her part, concludes: “It is hard to accomplish and it takes years. But it’s important to pull two levers in parallel: create an environment to accelerate private supply and develop a sound subsidy system aimed at lower-income households. These things need to go hand in hand.”
All these propositions are not that radical or hard to imagine but are based on working solutions from across the world. However, it is also very difficult to create a robust and working housing strategy and no country or city has ever gotten it 100% right. The situation will not change overnight, but the government needs to start from somewhere.
Fixing the affordability problem matters because bettering the living conditions in the city could have profound and immeasurable benefits for society, similar to those provided by a good educational system. They could contribute to a more stable society that can focus on building wealth, health, and innovation rather than scramble to secure decent living conditions.
Follow TheMayor.EU to read the third part of the story in which Ivaylo Petkov, head of the municipal Commission on Housing, shares what the City of Sofia plans to do in the coming years regarding housing.
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