2. Boosting investment in affordable housing in Latvia: The potential of a revolving fund scheme

This chapter makes the case for the establishment of a Housing Affordability Fund in Latvia. It begins by highlighting investment needs in affordable housing in Latvia in order to address persistent housing quality gaps and emerging affordability challenges. It then outlines the main legal, institutional and policy steps taken by the Latvian authorities to establish the Housing Affordability Fund to channel investment into affordable housing. The analysis is complemented by the perspectives of a range of Latvian stakeholders who participated in an online survey and follow-up focus groups and in-depth interviews.

Real house prices have increased considerably in Latvia over the past two decades, in line with the rise in average incomes, and accelerated during the COVID-19 crisis. Even though Latvia households spend, on average, less on housing costs relative to their OECD peers and few households are overburdened by housing costs – many people live in poor quality housing and cannot afford to upgrade their home or move to a better-quality dwelling. There is also a sizable “missing middle” of households that are ineligible for existing public support (such as social housing or housing allowances), yet still cannot reasonably afford a commercial mortgage. Across Latvian stakeholders, the housing situation is widely perceived as unsatisfactory. On the supply side, investment in housing has stagnated in recent decades, the social rental housing stock and the private rental market remain extremely underdeveloped, and the pace of new construction remains sluggish.

Housing prices in Latvia have been on the rise, on average, in recent years, along with a steady increase in average incomes. Following a sharp drop around the Global Financial Crisis in 2008, real house prices began to pick up again in late 2015 and have steadily increased thereafter (Figure 2.1). There has nevertheless been a slight decline in real house prices in the second half of 2022. In parallel, the steady rise in average incomes over the past decades – with median disposable income more than doubling between 2006 and 2019 – has dampened the impact of rising house prices, as reflected in the relative stability of the price-to-income ratio since 2015. The evolution of real house prices in Latvia over the past two decades has been much more volatile than that of the OECD average.

As reported in OECD (OECD, 2020[2]), Latvian households are, on average, spending less on housing costs relative to their peers in other OECD and EU countries. The housing market is dominated by homeowners (Figure 2.2), resulting largely from the privatisation of the housing stock in the 1990s. Nearly seven out of ten Latvian households own their homes outright, including more than 70% of households who were at risk of poverty in 2019 (European Commission, 2019[3]). Average spending on housing among Latvian households (20.9% in 2019) is below the OECD and EU averages (22.6% and 22.0%, respectively), and has generally been declining in recent years (Figure 2.3, Panel A) (OECD, 2022[4]). Meanwhile, fewer than 3% of Latvian households are overburdened by housing costs (meaning that they spend more than 40% of their disposable income on housing costs), which – is among the lowest shares in the OECD (Figure 2.3, Panel B) (OECD, 2022[4]).

At the same time, many Latvian households across the income distribution live in poor quality housing. On average, just over one-third of all households live in overcrowded housing conditions, including nearly a quarter of households in the top income quintile – the largest share in the OECD (Figure 2.4). While housing quality has improved over time, almost one in five poor households live in a dwelling without an indoor flushing toilet, and more than 6% of households in the bottom quintile are considered to live in “severely deprived” housing conditions (OECD, 2022[4]). Housing quality gaps stem in large part from an ageing housing stock: two-thirds of dwellings were built during the Soviet era (when insulation materials were not used during the construction process) and another 22% prior to 1945 (OECD, 2020[2]), followed by insufficient maintenance and improvements in the decades since construction. More than two-thirds of the population reported in 2020 that housing maintenance expenditures represented a burden on their household financial situation (Central Statistics Bureau of Latvia, 2020[5]). Representatives from local governments and housing management companies who are on the frontlines of addressing residents’ housing challenges report a lack of available apartments of suitable quality, despite substantial demand.

Many homeowners cannot afford to maintain or upgrade the quality of their existing dwelling, nor can they afford a commercial mortgage to move to a better-quality home. This is especially a challenge for people in the middle of the income distribution – the “missing middle,” as characterised in OECD (2020[2]) – who are too rich to be eligible for social housing and the housing allowance, yet too poor to reasonably afford a commercial mortgage. Around 44% of all Latvian households find themselves in the “missing middle,” which is comprised largely of households in the second and third income quintiles, as well as a disproportionate share of single-person, single-parent and elderly households (OECD, 2020[2]). An underdeveloped formal rental market further limits affordable housing options, which has been stymied in part by rental regulations that have historically provided few protections to landlords or tenants. Recent legislative reforms have addressed many of these shortcomings. As a result, even if most Latvian households do not “overspend” on housing, most people find themselves stuck in low-quality housing, which creates additional hurdles to labour mobility.

The housing situation in Latvia is widely perceived as unsatisfactory by a range of Latvian stakeholders, especially with regard to housing affordability. According to a series of stakeholder engagement activities conducted by the OECD in the context of this project (Box 2.1):

  • 88% of respondents of the online survey reported that it is difficult to access affordable formal rental housing

  • 85% of respondents reported that it was difficult to build new housing in their region

  • 85% of respondents that rising energy costs are making housing less affordable in their region

  • Just 35% of respondents reported that it was difficult to access a mortgage to purchase a home in their region.

Representatives from local governments and housing management companies who are on the frontlines of addressing residents’ housing challenges report a lack of available apartments of suitable quality, despite substantial demand: “There are no apartments available… and the demand is enormous.”

Overall investment in housing (gross fixed capital formation, GFCF) has been stagnating in Latvia and remains well below the OECD average. In 2022, investment in dwellings in Latvia accounted for just over 8% of total investment (gross fixed capital formation) – compared to an EU average that was around three times the share (26%) (Figure 2.5). By contrast, Austria, Denmark and the Netherlands invested between 20 and 25% of total investment in dwellings in 2022. Apart from a significant jump in housing investment just before the Global Financial Crisis, where GFCF reached nearly 20% of total GFCF in 2007 and 2008, respectively, Latvia has averaged just under 11% of total investment towards dwellings over the past two decades, compared to an EU average of over 25% over this period. Meanwhile, at less than 2% of the overall housing stock, Latvia has one of the lowest shares of social rental housing among OECD and EU countries (Figure 2.6) (OECD, 2022[4]).

According to the stakeholder survey, there is a consensus that decades of underinvestment in housing have contributed to the current state of poor-quality housing in Latvia. There has been no largescale public investment programme in housing since the 1990s. Most support instruments introduced by local governments have remained small (e.g. financial incentives to improve multi-apartment buildings, such as the renovation of courtyards, waste disposal sites, historical buildings and their facades). Further, they have tended to target households that are considered solvent, while public supports for the most vulnerable populations (e.g. limited housing allowances and support to partially cover utility costs) have not fundamentally addressed their housing challenges. Public support for energy efficiency upgrades and repair loans, provided via Altum, are available, but also small in scale.

Moreover, the pace of new housing construction is sluggish and well below the OECD average, with most new construction concentrated in the capital region. While demand for new housing exists also outside the capital region, this demand is often not met because of the lack of financing and the perceived higher risk of investing in regions. New dwellings represented just 0.3% of the total stock in 2017 – one of the lowest shares in the OECD (Figure 2.7) (OECD, 2022[4]). Almost all new residential buildings are developed in Riga and Pierīga. The pace of housing renovations remains slow, averaging roughly 60 multi-family apartment buildings annually between 2001 and 2013 (Altum, 2021[7]). According to the stakeholder survey, real estate developers cite access to finance, burdensome administration and access to qualified labour and affordable construction materials as additional barriers to affordable housing development. Moreover, public procurement procedures and development approval processes are viewed by developers as inflexible.

While quality and affordability gaps are widespread, the local housing context – in terms of the size, age and type of housing – differ considerably across regions. As a result, local authorities consider that they could benefit from greater flexibility to design and implement affordable housing projects that respond to clearly assessed local needs, rather than a “one-size-fits-all” approach. Among the main barriers to improving housing quality and affordability, Latvian stakeholders highlighted several decades of underinvestment in housing, and the small scale of current public support for housing, with insufficient incentives for developers to invest in affordable housing. Some stakeholders perceive that banks and developers are loath to invest in the regions, due to limited economic activity, low household incomes, and infrastructure gaps.

The establishment of a revolving fund scheme to channel investment into affordable housing could thus help to address a gap in the existing policy framework, characterised by decades of low levels of investment in housing, an ageing housing stock, an underdeveloped rental market, and the “missing middle” households who do not have access to public supports for housing, yet still cannot reasonably afford a commercial mortgage. Findings from the stakeholder survey support this finding: there is near universal agreement among stakeholders surveyed that the Housing Affordability Fund can help address Latvia’s housing challenges (Figure 2.8). Further, participants in the focus groups viewed national involvement in the affordable housing solution as “long overdue and very necessary.”

Since the publication of the 2020 OECD report (OECD, 2020[2]), the Latvian authorities have set the groundwork to establish the Housing Affordability Fund through a series of legal, institutional and policy steps (Box 2.2).

In parallel, the Latvian authorities have introduced other important reforms relating to housing, including:

  • The expansion of the housing guarantee programme to provide more support for large families and new specialists: Specialists are eligible to receive guarantees since February 2018. The loan guarantee for large families (families with four or more children) was increased to 30% of the loan since June 2020; these families can apply for the loan more than once to meet changing housing needs, if they have additional children.

  • The introduction of a new housing subsidy, Balsts, for large families to purchase or build a home (November 2020): Families with three or more children can receive a housing subsidy of up to EUR 12 000 (up to 50% of the total cost home purchase) for the purchase of a new home.

  • Reforms to the housing benefit to increase the generosity and reach of the scheme:

    • From 1 January 2021, the guaranteed minimum income threshold was raised, as was the amount of the benefit, drawing on a revised eligibility formula. In the winter of 2022, further adjustments to the calculation formula were introduced to reach an even larger share of the population.

    • From 1 July 2021, national regulations established the formula for calculating the housing benefit amount, income testing procedure and minimum thresholds of housing expenditure, harmonising these across municipalities; the housing benefit was also renamed, Mājokļa pabalsts.

  • Approval of a new law on residential tenancy (March 2021; came into force in May 2021), which aims to balance protections between of landlords and tenants, simplify the previously long litigation process in cases of landlord-tenant disputes, and promote investment in the rental market, thereby stimulating labour mobility.

  • The introduction of a support programme for the renovation of multi apartments and their surroundings: As of July 2021, individual homeowners (or landlords that are legal entities that own the building) may apply for a loan issued by Altum to cover the costs of construction and improvements to multiapartment buildings and the immediate surroundings.

  • Support for energy efficiency improvements of single-family houses: As of February 2021, families with children who own single-family dwellings can apply for support for technical assistance (up to EUR 1 000) and a grant to upgrade the energy efficiency of a single-family dwelling (up to EUR 5 000).

  • The expansion of Altum loan and mezzanine-loan programme: Since the end of 2021, support is available for real estate developers of residential construction projects for rent and sale at market conditions.

The Housing Affordability Fund, approved through the Regulation of the Cabinet of Ministers No. 459 on 14 July 2022, was established to support the construction of new affordable rental dwellings that meets minimum construction standards and energy efficiency requirements, to be developed outside the capital region in a first phase. Rental dwellings are defined in the Regulation as a building with at least three apartments that are leased in accordance with the new rental regulations. To incentivise development of affordable dwellings, the Fund will facilitate the provision of long-term loans to developers, as well as a capital rebate for the partial repayment of the loan principal, under specific conditions set out in the Regulation. The scope and conditions of the Fund are summarised in Table 2.1, Table 2.2 and Table 2.3.

With the initial funding envelope of the Fund, the Latvian authorities aim to achieve the following targets through 2026:

  • By the end of Q4 2024: Approve the development of 300 affordable rental apartments

  • By the end of Q3 2026: Approve the development of 700 affordable rental apartments (of which 300 apartments will have been built).

Certainly, given the scale of housing affordability and quality gaps in the country, Latvia’s housing investment needs to extend beyond the initial scope of the Fund. The Latvian authorities aim to focus on affordable rental housing in order to stimulate a new segment of the housing market by developing a “proof of concept” to private investors and developers, given that such projects have been slow to develop without government support. The objective of this work, and namely the engagement with peer countries, has been to distil lessons from more mature revolving fund schemes for housing, enabling the Latvian authorities to scale up the Fund, ensure its sustainability well beyond the initial funding envelope and address the significant affordable housing needs faced by the country.

Indeed, from the perspective of Latvian stakeholders, the Fund is broadly expected to help address Latvia’s housing challenges. The top three priorities for the Fund, according to stakeholders, should reportedly be to improve the quality of the housing stock, to build new affordable rental housing, and to address affordable housing gaps outside the Riga region (Figure 2.9). Meanwhile, many stakeholders agreed that the scope of the Fund could, over time, be expanded to facilitate support for housing renovations and could include projects in the capital region.

Nevertheless, stakeholders pointed to a number of potential risks associated with the Fund and its activities that should be anticipated and mitigated by the Latvian authorities. For instance, rising energy costs and geopolitical uncertainty risk weakening the investment appetite of banks and developers. Managing the rising costs of construction and labour will be another top challenge, particularly in the current context of strong inflationary pressures and the cost-of-living crisis. A shared concern among many real estate developers was the need to ensure that necessary infrastructure will be in place to support the new residential developments produced through the Fund. Others suggest that attracting developers to take part in the scheme is not guaranteed, nor is the necessary co-operation among the different public and private actors, which will be key to the Fund’s success. Finally, there are considerable capacity gaps that require attention: both in terms of limited and uneven capacities within State and local institutions, which are important risks to the effective management and monitoring of the Fund, as well as limited professional building management capacity, which poses a substantial risk to the production and maintenance of the affordable units through the proposed Fund. These issues require attention and mitigation efforts by the Latvian authorities.


[10] Altum (2022), Call for tender: New state support programme for the construction of low-rent houses in the regions of Latvia, https://www.altum.lv/22-novembri-sakas-pieteikumu-pienemsana-zemas-ires-namu-buvniecibas-projektiem/ (accessed on 23 May 2023).

[7] Altum (2021), Energy efficiency program for apartment buildings, https://www.altum.lv/lv/pakalpojumi/maju-energoefektivitate-1/daudzdzivoklu-maju-energoefektivitate-pamatinformacija/dzivoklu-maju-renovacija/?allow_cookies=1 (accessed on 8 November 2021).

[8] Cabinet of Ministers (Latvia) (2022), Regulations of the Cabinet of Ministers No. 459, Regulations on support for the construction of residential rental houses in the European Union Recovery and Resilience Mechanism Plan 3.1, https://likumi.lv/ta/id/334085-noteikumi-par-atbalstu-dzivojamo-ires-maju-buvniecibai-eiropas-savienibas-atveselosanas-un-noturibas-mehanisma-plana-3-1 (accessed on 23 May 2023).

[5] Central Statistics Bureau of Latvia (2020), Housing maintenance expenditure influence on household financial situation (%) | Oficiālās statistikas portāls, Official Statistics Portal, https://stat.gov.lv/en/statistics-themes/population/housing/tables/mai030-housing-maintenance-expenditure-influence (accessed on 17 April 2023).

[3] European Commission (2019), “Country Report Latvia 2019”, 2019 European Semester: Assessment of progress on structural reforms, prevention and correction of macroeconomic imbalances, and results of in-depth reviews under Regulation (EU) No 1176/2011.

[9] Ministry of Economics (Latvia) (2023), Creation of a financing fund for the construction of low-rent housing, https://www.em.gov.lv/lv/finansesanas-fonda-izveide-zemas-ires-majoklu-buvniecibai (accessed on 23 May 2023).

[1] OECD (2023), Analytical house price indicators, Main Economic Indicators, https://doi.org/10.1787/cbcc2905-en (accessed on 26 April 2023).

[6] OECD (2023), Investment by asset, https://doi.org/10.1787/8e5d47e6-en (accessed on 23 May 2023).

[4] OECD (2022), Affordable Housing Database - OECD, http://www.oecd.org/social/affordable-housing-database.htm.

[2] OECD (2020), Policy Actions for Affordable Housing In Latvia, OECD Publishing, Paris, https://read.oecd-ilibrary.org/view/?ref=137_137572-i6cxds8act&title=Policy-Actions-for-Affordable-Housing-in-Latvia.

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