America’s housing crisis has reached a tipping point. No longer limited to the coasts, cities and metropolitan areas across the country are experiencing a supply crunch, rising rents and tough questions about housing attainability.
The numbers are certainly grim, as data cited by Bruce Katz and Andrew Gibbs recently in Governing illustrate. Rental affordability reached an all-time low in 2022. An estimated 22.4 million renters now spend over 30 percent of their income on housing. Homeownership affordability also remains at historical lows, with home prices now at 7.6 times median income, a significant increase from the previous peak in 2006 of 6.8 times median income.
Stymied by Congress, the federal government has offered few solutions — credit enhancements here, a blueprint there. At the same time, states, localities and private actors have begun to take the crisis into their own hands, driving novel solutions across housing trust funds, development entities, land use and more. This focus on bottom-up innovations would benefit greatly from models developed in other countries, which have addressed similar housing challenges with a different mix of national and local incentives, requirements and delivery mechanisms.
Denmark offers one such model.
Denmark has a population of 5.7 million, comparable in size to the states of Colorado or South Carolina. Although only about 4 percent of Americans live in subsidized affordable housing, 20 percent of Danes live in affordable housing, which typically rents at about half of the market rate, or in what is known as “social housing,” priced at about one-third of the market rate. This achievement is driven by several factors.
First, Denmark has its own version of inclusionary zoning. In Denmark, city governments are mandated by the national government to require developers to set aside 25 percent of all new housing construction (including major renovations) for affordable and social housing. Within this 25 percent allocation, a subsection of 30 percent is reserved for social housing. As in the U.S., this housing is income-based and subject to limits on rents that can be charged.
Second, the stick of affordability requirements is coupled with a carrot of innovative finance. The Danish national government provides a 40-year interest-free loan to developers to keep the affordable and social housing rentals below market rates. These interest-free loans account for about a fourth of the entire construction cost or loan financing; the remaining three-fourths is financed by a private mortgage credit institution.
Within 30 years, the mortgage is repaid. During the subsequent 10 years, the government interest rate-free loan is repaid. Thereafter, the rental revenue flows right back into the housing corporations and the industry at large. While there is no net revenue during the 40 years covered by the mortgage and the loan, there is a steady flow of reinvestments during this period.
Once rental revenue is translated to reinvestment capital, one-third flows back into the individual housing estate for maintenance and improvements. Two-thirds flows into the industrywide National Building Fund, which is also private, and the fund in turn redistributes its share into the industry: one-third for maintenance and improvements of existing stock, another third for construction of new stock and the remaining third for social activities.
The primary feature critical to the success of this model is its revolving finance model. This approach emphasizes long-term sustainability rather than quick-fix solutions.
Effectiveness Through Collaboration
The final piece of the Danish housing puzzle involves the scale and efficiency of the market’s driving institutions, facilitated by extensive digital integration. As an illustration, the National Building Fund operates with a lean team of 65 individuals, servicing 511 housing corporations. The top five of those corporations manage between 20,000 and 80,000 housing units each. Being entirely privately owned, managed and financed, and so large in size, the industry is shielded from public-sector interference and its funds are sheltered from the public sector.
The effectiveness of the Danish strategy relies on strong collaboration across various levels of institutions, including private credit organizations, investors, developers and housing corporations. Effective partnerships among the public, private and civic sectors are essential for success.
This ecosystem — and the combination of affordability restrictions, revolving funds and large-scale housing corporations — gives cities flexibility in how housing developments are staged and sequenced. Typically, a city planning office mandates affordable and social housing through master planning and building permits, but the city may offer concessions on a project to offset the mandates. It might, for example, allow the developer to proceed with a highly commercial development first, maximizing immediate yield and offsetting subsequent affordable and social housing development, which is usually undertaken by the large housing corporations. Although those corporations would never venture into commercial market development on their own, they do collaborate with private investors and developers to either acquire or jointly develop affordable and social housing projects, which are managed by the housing corporations.
If the city or its development corporation finds that private developers are unable to meet the 25 percent quota, even with concessions, they may directly engage with large affordable and social housing corporations. In such cases, the city may sell land to a housing corporation at favorable rates to ensure the entire area meets the 25 percent quota.
Ultimately this process revolves around project-by-project calculations. Are the numbers feasible? Can the city meet the 25 percent quota? Moreover, can developers still turn an eventual profit if they are required to allocate 25 percent of their project for affordable and social housing?
In many instances, private developers and affordable and social housing corporations negotiate the financial aspects of each project directly, with minimal involvement from the city. Therefore, it’s crucial for these corporations to possess substantial financial reserves and market influence. This ensures their ability to effectively engage in negotiations and execute projects alongside private developers.
Adaptable Ideas
Could the Danish model be adapted to the United States at the city and state level?
As with many international models, Denmark’s approach has deep historic and cultural roots that are quite distinct from those of the U.S., where most affordable housing development involves mandates on developers, tax incentives, subsidies for renters or some combination.
The idea of social housing was first introduced in Denmark during the 1850s, a time when Copenhagen was experiencing higher population density than Paris and London and the medical community was expressing concerns about the rapid spread of diseases in impoverished neighborhoods. Subsequently, social housing initiatives were undertaken by trade unions, and later cooperatives — common and extensive in Denmark — took charge. Today, the affordable and social housing sector is exclusively dedicated to providing such housing and is entirely privately owned, managed and financed.
Despite these differences, there is much for the U.S. to adapt around:
- The disposition of public assets, such as land and buildings, to enable the financing of affordable and social housing
- The use of long-term, low-cost capital to subsidize below-market-rate rents (which is already part of Montgomery County, Md.’s approach to inclusionary zoning)
- The scaling of affordable and social housing corporations, which builds financial capacity and market acumen, enabling greater intervention in the housing market
As with climate change and other challenges that transcend national borders, the housing crisis demands that cities get out of their comfort zones and experiment with models that have been tried and tested in other parts of the world. The Danish housing model offers a great place to start.
Luise Noring, a citizen of Denmark, has a long-standing career in the governance and financing of cities. Her firm, City Facilitators, aids cities in addressing complex issues spanning housing, climate and infrastructure. She also writes fiction centering around significant societal challenges.
Governing’s opinion columns reflect the views of their authors and not necessarily those of Governing’s editors or management.
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