Does social housing actually work? Setting the record straight on the Vienna Model

By Tobias Peter – Co-Director, AEI Housing Center. Excerpts:

"while progressives may wax eloquent about the Vienna social housing model-- particularly its low rents and ample supply-- the merits for this system are far overblown. More critical newspaper reports and academic studies from neighboring Germany or Switzerland have been ignored entirely in US-based discussions of Vienna’s social housing. However, their findings demonstrate how Vienna is a poor model for duplication, calling into question the rave reviews of the mainstream media and US politicians."

"Vienna’s social housing model is extremely complex and opaque. In-depth information and analyses are hard to come by. Some of this is by design: The main arm of the city’s social housing is not obligated to report its accounts to the public and stopped communicating even basic results in 2013. This report uses reporting in various German-language newspaper articles or various historical sources.2 The main source, however, is the most comprehensive evaluation of Vienna’s social housing system that has been published by German academics Prof. Dr. Harald Simons and Constantin Tielkes. In their 95-page study of the Vienna social housing model, the micro census data and extremely limited public information available paints a picture of Vienna’s social housing model as “expensive, insecure, conflict-prone, bureaucratic, not transparent, [and] socially unjust” and where “rents [are] not lower than in German big cities."

"Despite the apparent success cited in media coverage, Vienna’s social housing model has not been replicated, even in neighboring countries. This is because its emergence largely owes to Vienna’s unique historical conditions during the 1910s and 1920s, while a massive population decline over the following decades helped sustain it."

"While the political and social upheavals of WWI undoubtedly played a major role in the establishment of Vienna’s social housing system, Vienna’s steep population decline in the seven decades that followed the war greatly helped to sustain it. From 1914 to 1988, Vienna’s population declined from 2.1 million to 1.5 million. Particularly from 1945 to 1988, Vienna added about 160,000 new social units – or about 40% of its stock today -- while its population fell from 1.7 million to 1.5 million (see Figure 5). 

The ability of Vienna to provide housing for thousands of residents at low rents without relying on the private market was only possible because Vienna’s population was shrinking—reducing demand pressures that have sent land prices soaring in many other major European and North American cities."

Vienna’s social housing model: Renter’s paradise for some, ticking time bomb for the rest

Vienna’s social housing model has endured for 100 years, but cracks have emerged and are beginning to widen.

Fairness and cronyism

While the New York Times calls Vienna a “renter’s paradise,” it is only for some. Ultimately, the system is inherently unfair as it creates winners and losers. 

Many tenants that have lived in social housing units have benefited from decades of subsidies. Since housing (and rents) can be bequeathed to children, grandchildren, and other relatives in the case of a death or a move, certain groups benefit for generations. This can lead to perverse outcomes, where rents for identical units vary by longevity of the tenant. (The existing rent for Gemeindewohnungen is estimated at 6.84 EUR per sq. meter, whereas new it is 8.00 EUR per sq. meter, see Figure 6). This creates a system where single doctors or lawyers with large earnings, who live in handed down units, may pay lower rents and live in larger units than families with children, who just moved in.

The system also favors politicians, who can dole out benefits to friends and family. It is generally well- known that the long waiting list (currently at about 21,000 households) can be skipped with the right connections. The system is also prone to corruption and fraud. Over the years, there have been multiple media reports of contractors overcharging, costing the city multiple millions of euros.8 

Despite the NYT’s claim that in Vienna’s social housing “[r]ents are much cheaper than in comparable larger German cities,” this is not the case for recent contracts, if one factors in utilities, repairs and maintenance, and taxes. Rents are taxed at 10% in Austria, but at 0% in Germany. Utilities can be expensive for Austrian renters because they are responsible for most maintenance and upkeep including the HVAC and heat, which is often not the case in Germany. Once these added expenses are properly accounted for, rents for recently concluded tenant agreements in all of Vienna (which includes social housing) are only marginally lower than in major German cities. Rents are 13.4% higher in Berlin than in Vienna when exclusively looking at avg. monthly rents, but when you include utilities and taxes, the difference shrinks to 3.3%. This is hardly the “renter’s paradise” described in the media.

Furthermore, new entrants, especially low-income families or immigrants, face significant obstacles to entering the social housing system. For example, moving into a 750 sq. ft. Genossenschaftswohnung typically requires an upfront fee of 35,000 EUR (about $38,250), charged to help offset the cost of housing construction. While it is true that the tenant can recoup some of that sum at move-out, it still represents a steep entry fee.

But there is more. Since tenants “own” their own maintenance and improvements in social housing units, moving in requires compensation to the prior tenant, who leaves these improvements behind. A recent study shows that around a quarter of tenants are affected, and that the median cost was between 2,000 to 3,000 EUR ($2,186 to $3,278), which may be an underestimate due to sample bias.9 An older study from 1985 showed that about 80% of renters had to compensate the prior renter at a median sum equivalent to 4 to 7 years of rent.10 The compensations can be far-reaching and can include unnecessary and trivial improvements such as the installation of waterbeds.

For many newcomers that can’t break into the social housing system, private housing represents the only viable alternative, albeit a much more expensive one. Vienna’s rents from 2008 to 2016 increased 20% for social housing, but increased 60% for private housing. Due to the European Central Bank’s low interest rate policy and a worsening housing shortfall in Vienna, these numbers are likely even more extreme today. While half of high-income households (those with 180+% of area median income) live in rent- subsidized social housing due to low income eligibility thresholds, others are frozen out.

Another cause for concern is the mounting costs of Vienna’s social housing—and whether it is even sustainable. Austria spends about 0.25% of its GDP on social housing – the third highest in the Organisation for Economic Co-operation and Development (OECD) and about 4 times as much as Germany.11 These efforts are financed through a 1% tax on wages confirming that social housing (73% of which is located in Vienna) is not free and that lower rents for some are supported by everyone else.

While the city does not make a detailed budget available to the public, researchers have uncovered that Vienna’s Gemeindewohnungen appear to have a serious liquidity problem and are losing money. In 2016, the shortfall was estimated at 827 million EUR ($904 million) or about 1.6 times the annual intake on rents. While this is only a best guess, it represents a very large number that would eventually have to be made up through general revenue. These shortfalls have created other complications for the city.

Rather than rely on the existing structure of Gemeindewohnungen, the city has created a new government entity to build additional social housing. It may also be why the city has only in 2015 resumed housing construction activities, despite a 30% increase in the city’s population from 1991 on. Its liquidity problems are also preventing Vienna’s Gemeindewohnungen from maintaining or upgrading existing units, many of which are a hundred years old and may have deferred maintenance from a long- term tenant. About one-third of Gemeindewohnungen either lack central heat or a bath within the unit. While Vienna’s housing authority deems these units to be acceptable; Germany’s housing authority deems any unit lacking its own separate bathroom to be unacceptable to those receiving social assistance.

The growing list of maintenance and quality issues is self-perpetuating, where an estimated 7% of Gemeindewohnungen are vacant, not earning any income for maintenance or improvements. Due to the high cost of entry for Genossenschaftswohnungen, yet the low quality of Gemeindewohnungen observers are seeing an increasing bifurcation along income for these types of buildings, which will likely only worsen."