Explaining similar problems and evolutions in two countries with very different development paths and policies:

Private renting in Flanders (Belgium) and Finland

Anneli Juntto[1] (University of Kuopio) and Sien Winters[2] (HIVA - KULeuven)

The Future of the Private Rental Sector
Seminar at the International Meeting Centre of St Marienthal, 5-9 Febuary, Östritz, DuitslandJanuary 2010

Abstract

Flanders and Finland have similar shares of private renting and face many similar problems on the private rental market. More specifically the income level of renters is declining and the rent-to-income ratio for private tenants is high. In both cases tenants have a strong wish to become home owner, but only the better off can afford an own house. Future prospects for the supply side of private rental housing are however unsure and difficult to predict in both countries.

It is interesting to observe similarities in two countries with a very different housing market, different housing institutions, legislation and housing policy. Flanders and Finland belong to different welfare regimes, i.e. continental corporatist and Scandinavian social democratic using Esping-Andersen’s old welfare state regime model (1990).During the ‘90s Finland has changed in more liberal direction, i.e. by total abolishment of rent regulations, at the same time preserving traits of social democratic welfare regime. Using the classification of Kemeny Flanders and Finlandboth have a dual rental market system. According to Kemeny housing systems can however have contrasting elements/parts, a mixture of liberal and more comprehensive welfare elements. In Finlandthe market rental is more liberal and social housing more universal than in Flanders. The Finnish tenure system offers also more housing tenure alternatives.The explaining factor to differences between these two countries can also be the life style, individualization, role of family and housing preferences, which differ widely. And although problems at first sight are quite similar, the development paths and directions are different. As a result of liberalization,abolishment of rent controls but also demographic and lifestyle changes andrecurring recessions the private rented market in Finlandhas experienced renaissance since 1990 onwards. This cannot be observed in Flanders. On the contrary, the private rental market is still diminishing.

In both countries survey results give a better insight in the features, future prospects, and problems and the opinions of actors in the private rental market. As well tenants as landlords were questioned concerning the characteristics of the let dwellings, paid rents, the process of selecting tenants and the relationship between tenants and landlords. In this paper we describe and discuss similarities and differences between the survey results against the background of the distinct housing markets, housing policy and housing culture in Flanders and Finland.

1. Introduction

In the private rental sector decisions are made by market subjects, investors on supply and tenants on demand side. There are thus many both quickly and slowly changing elements in the dynamics of private renting. The totality of each country’s housing provision system must be remembered.Owner occupied and rental housing markets as well as nonprofit and private rental housing are not opposites but instead affect each other and are practical alternatives for households. Thus rates of interest, house prices, other investment prospects as well as incomes and future expectations affect private rental housing decisions. Lately economic uncertainty has grown; this means more unsure developments for the private rental sector.

Because of the importance of individual decisions for private rentalin this article survey material describing the investors’ and tenants’decisions and characteristics of private rental actors is used. The main sources for Flanders are the ‘2005 Housing Survey’ and the ‘2005 Exterior Housing Inspection’, two surveys carried out on behalf of the Flemish Minister responsible for housing with a sample size of respectivily 5.216 and 8,249 dwellings and a response rate of 67% and 98%. Both samples only consisted of dwellings in which people or families were officially domiciled. For Finland we make use of the‘Housing and Wealth Survey’ 2004/2005 (with a sample size of 3500 covering all country and a response rate of 63%) carried out on behalf of Ministry of environment and Statistics of Finland and the Private Rental Housing surveyin Helsinki 2009 to private persons acting as landlords and to tenants living in other than social housing (3000 sample each, problem is low response rate, only 24%). In addition all relevant general statistics and research material is used.

2. Theoretical background

Distinct structural characteristics are behind the social construction of the rental sector. Following the Esping-Andersen’s (1985, 1990) welfare regime models, Flanders can be classified as continental corporatist, while Finland belongs to the Scandinavian social democratic model.

Contrary to what Esping-Andersen has claimed for the welfare state as a whole, Kemeny (2006) argues that the Nordic countries do not comprise a uniform category as regards rental housing: while Sweden and Denmark have integrated rental marets, Finland and Norway have dualist rental markets. The ‘dual model’(1995)implies that non-profit renting is separated from the private rental market by the government.The non-profit sector is confined to the poor and tenants in the private rental sector have weak or non-existent security of tenure. In ‘integrated rental markets’an independent often largernon-profit rental sector competes with the profit rental sector and the owner occupation sector. Non-profit renting is accessible to the general public and does not receive specific government protection or support. Subsidies and regulations are phased down until non-profit companies can participate on equal footing with others on the open rental market.

Kemeny (2006) classifies Finland into the dual rental market group together with the English speaking countries, two other Scandinavian countries (Norway and Iceland) anda number ofother countries, while Germany, Sweden, Denmark, the Netherlands, Switzerland and Austria are examples of the integrated market model. Reasons why Finland fits in the dual rental model are the liberal profit rental regime and the means-testing used in social housing. However, gradual reducing of social housing subsidies, a feature of the integrated market model, alsohappened in Finland.

Kemeny (2006) considers Belgium as a dual rental market system. Winters & Elsinga (2009) argue that in especially also Flandersshows thefeatures of a dual rental system.However, in Flanders there is some form of tenant security, the quality of non-profit housing is good compared to private renting and the social housing is means-tested but not confined solely to the poor.

3. Rental market characteristics

3.1 History and dynamics of private rental in Flanders and Finland

More diversified household structures, changing regional and urban structures demand more diversified housing solutions. These dynamic features as well general turbulence in the current housing markets make the analysis and prognoses concerning private rental sector difficult.

In Finland like in many European countries private rental markets were established in the first wave of industrialization. By the First World War private rental housing dominated urban housing markets. All social classes lived in rental dwellings. There were high class rental dwellings in new stone buildings in the city centre as well as modest one room dwellings meant for industrial workers’ families in wooden buildings on the city fringe. Being a private landlord was at that time often a profession (Juntto 1990). Many landlords owned whole rent houses as their main occupation and income in contrast to situation of one hundred years later. Now private landlords are investors with their main occupation and incomes elsewhere.

Gradually however owner occupancy in housing companies (legislation from 1926) gained ground in Finnish cities. In housing companies owned shares entitle the use of certain dwelling which can be in own use or let. Shareholders finance usually all building costs with private banks housing loans or their savings. Yet in 1950 70 % of the housing stock in cities was private rental. Finland was for long a peasant society and in the countryside own houses and farms dominated. The number of farms was at its highest in late 1950’s and the state loaned more these farm settlements than urban building.

Finland has experienced recurring phases of rental regulation during and after wars. After the First World War rent regulation was in power to 1922 and during and after Second World War from 1940 to 1961 in the capital to 1965, followed by a short period of non rent regulation, which resulted in higher rents. Rent regulation was again applied in a milder form in Finland from1968 onwards up to the beginning of the nineties as a part of corporatism.One of the reasons for establishing a social housing system in 1948 in Finland was a wish to get rid of rent regulation. In 1948-1966 also strong tax incentives were given for private rental dwellings in new buildings. Rent incomes were totally tax free for the first ten years in new houses. Lots of small, even one room dwellings were built in consequence, but after tax exempts ended many rental dwellings were sold out to home-owners.

Flanders shows a very different history. Right from the time of the first housing law of 1889, the main policy focus was on home ownership. Behind this policy choice lay the Catholic Party’s vision of ownership of a single-family dwelling as important for a stable family situation. The State provided a number of tax incentives to stimulate the construction of workers’ dwellings. In addition, premiums were introduced in 1922 for the construction and purchase of dwellings, the State provided cheap loans for the purchase of homes by large families, and housing associations were set up which devoted themselves to the sale of dwellings and the provision of cheap mortgage loans. From a socialist viewpoint, arguments were adduced for the construction of social rental dwellings. By the start of the 20th century, housing associations were being set up to build social rental dwellings. However, their impact was relatively limited. Even when, after the Second World War, housing policy throughout Europe gained a role in reconstruction and as an instrument against economic depression, Belgium primarily opted to stimulate the construction of private owner-occupied housing (Goossens, 1982; Deschamps, 1997, De Meulder, 1998). Social housing in Belgium now accounts for 7% and in Flanders for 6%. After the transfer of housing policy to the three Belgian regions (Flanders, Wallonia and Brussels) the Flemish government increased investments in social housing.

Development of a private rental policy has not been a priority in Belgian housing policy and also not for Flanders after the regionalisation. Government support for private tenants remained extremely limited and support for private landlords did not exist at all.

3.2 Extent and development of the private rental markets

Both countries can be called ‘home owning societies’ (Kemeny 1982). The shares of homeowner households are 74,4% in Flanders (2005) and 65,6% (2008) in Finland. In both countries today a high wish to own a dwelling and also often to live in one family houses can be observed: in Flanders50% of tenants prefer to become homeowner, in Finland this is even 70%, . In Finland according to the 2005 Housing and Wealth Survey the wish to own was not so much grounded anymore in ideology but in more practical especially economic motives. Home owning was considered to be a good investment, more profitable and rents as too high. Also in Flanders financial considerations are most important for becoming home owner. Reasons for preferring rental housing in Finland were low incomes, consequent affordability problems and very often the flexibility of rental housing, which suits better for households in a “mobile” life phase or situation (young people, divorces, mobility, immigration) (Juntto, 2007).

As table 1 demonstrates the rental sectors’ development shows important differences. Finland has engaged more strongly in development of social housing. The market share of social housing (16, 2%) is slightly higher than the private rental (14,7%) in 2007, in 2005 the same; while in Flanders the private rental sector (18, 5%) clearly outweighs the social sector (5, 6%). The share of private rental in Flanders has been decreasing permanently since WWII. Estimates suggest that the private rental market represented at least half of the housing market just after the War.

Also in Finland the history of private rental housing from the first statistics (cities in 1910) was a steadily decline up to the beginning of the 1990’s.Yet in 1950 in cities private rental dwellings formed majority of the housing stock, but in the countryside home owning dominated. The private rental stock diminished in Finland most in the 1970’s (by 14 percent of housing stock) and in the 1980‘s % (ten percent of total housing stock) when rents were regulated. In 1990 the share of private rental housing was at its lowest, only nine percent of all dwellings. But after that both social rental housing and the private rental market in Finland experienced an exceptionally strong upward trend continuing with private rental to 2004, when the rental dwelling stock was 802000 dwellings compared with 545900 dwellings in 1990. The revival of the private rental coincides with a liberalization of the rental legislation, as will be explained later.

Future developments of the private rental sector in Finlandand Flanders arerather unsure and difficult to predict. Situations and expectations of interest rates and alternative investment possibilities affect especially the decisions of the new private investors. For Flanders there is no information concerning the development since 2005. The impact of the financial and economic crisis is not clear yet, but following the largest organization of private landlords, during the last year the share of private rental probably will not have decreased anymore, due to a postponement of home acquisition by tenants and of housing sale by owners.

In 2000’s Finnish housing markets and private rental housinghad many uncertainties. These developments are not consequent trends, instead housing demand has made many turns. Firstly in 2000-2004 home owning becamepopular with better financing conditions, lower interest rates and longer amortization times as a result of EMU. Real incomes were also rising.Social housing was not needed as much and its starts began to stagnate after 2000, until recession brought a revival in 2009. However already before the world wide economic recession of autumn 2008 owner occupied markets in Finland began to “cough” from 2006/7onwards,because of rising interest rates and too high house priceswith consequent affordability problems. From autumn 2008 also increase in unemploymentand uncertainty of house prices has dampened owner occupied housing markets and building. Rental dwellings wereagain much sought after2005 and rental investments became more profitable, their risks also have been smaller than in alternative investments.

Table 2. Rental housing in Flanders and Finland

Flanders / 1947* / 1961* / 1970* / 1981** / 1991** / 2001° / 2005°°
Fl Tenant / 58.5% / 44.5% / 40.1% / 32.6% / 29.5% / 25.8% / 24.1%
FlPrivate / 20.5 / 18,5
FlSocial / 5.3 / 5.6
Finland / 1950 / 1960 / 1970 / 1980 / 1990 / 2000 / 2005 / 2007
Fi Tenant / 43 / 39 / 37 / 29 / 21,6 / 32,3 / 33,0 / 32,1
Fi Private / 42 / 37 / 33 / 19 / 9,2 / 14,7 / 16,7 / 15,6
Fi Social / 1 / 2 / 4 / 9,7 / 12,4 / 16,2 / 16,5 / 16,5

Sources: Flanders * Descamps (1997), **Goossens, et al. (1997), ° FOD Economie [Federal Economy Department] - ADSEI, SEE 2001, °°Heylen et al. (2007).

Finland, Housing Statistics, figures counted from households

3.3 Characteristics of private tenants

With about 2, 5 million households the size of the population is almost the same. But the demographic structure, housing mobility and housing habits are very different. While in Finland 40,6% of households are one person households, this is 29, 8% in Flanders. Residential mobility is greater in Finland. In Scandinavian countries and also in Finland a growing individualization and lifestyle has led to a greater fragmentation of households and families and as a result many small households (72% 1-2 person households). Young people move early from parents home. The Scandinavian type of welfare state, with its wide housing allowances, has also helped to splitter up of households. Also in Flanders a reduction in family size can be observed. The main factors here are a decrease in fertility, an increase in divorces and the ageing of the population. An increasing number of persons is living alone. As a result of these evolutions as well in Flanders as in Finland the number of households has been increasing during the last decennia and is still expected to increase further in the future. In Flanders migration is expected to be an important factor for the future.

Finns are very mobile, estimated to move 13 times during their lifetime. Dwellings in Finland are rather small, when family grows this means moving. In countries where roomy one family houses dominate, frequent moves are not as usual and necessary. Finland had very little immigration until the beginning of 1990’s, after which immigration increased. Immigrants found an ample supply of state subsidized rental housing.

In Flandersas well as in Finlandtenants’socio-economic profile is weak and weakening compared to home-owners. The low incomes of tenants as well in Flanders as in Finland partly can be explained by renting being a life phase housing form. InFinland 95% of the age group less than 25 yearslived in rental, in age group 25-29 years 59%. In next age group30-34years home owning was already more common, only 39 % were tenants andmiddle age 45 years and more tenants’ share was only 22%. Also in Flanders the share of tenants is decreasing with age. In 2005 it was 71,7% for the age group less than 25 years, 43,3% in the group 25-34 years, 21,1% in the group 35-45 years and around 20% for the age groups older than 45 years except from the group older than 75 years. But since 1985 the share of home owners in the youngest age group has increased with more than 10 percent points (Heylen & Winters, forthcoming). Private rental as a transition phase in the housing career therefore in Flanders can be considered as less important than in Finland and even of diminishing importance.