5. Operating a revolving fund scheme for affordable housing in Latvia

Effective management and monitoring of affordable housing finance schemes helps to ensure that:

  • the dwellings produced through the scheme effectively target and are allocated to households in need of support;

  • rent levels balance the need to sufficiently contribute to the costs of developing and operating the dwelling, while also remaining affordable to households;

  • the dwellings produced through the scheme are well managed and maintained;

  • effective systems are in place to monitor progress and ensure compliance, including by collecting data that help track progress and adjust course; and

  • there are mechanisms to address tenants’ demands and possible complaints.

In line with these objectives, this chapter assesses key dimensions relating to the effective management and monitoring of affordable housing finance schemes, including:

  • the management of the affordable units, encompassing the eligibility criteria, allocation of the units, rent setting, dwelling management and maintenance; and

  • the monitoring and control of the financing scheme itself, including data collection, auditing and mechanisms to ensure compliance with the rules and regulations, measure results over time, and assess impact over time.

For each of these dimensions, the chapter first provides a comparative snapshot, highlighting where Latvia stands in comparison with peer countries, and then builds on the international practices to point at policy recommendations of relevance for Latvia.

Table 5.1 provides a comparative snapshot of the decisions relating to the management of the affordable dwellings produced through the funding scheme.

In all countries covered except Denmark, eligibility criteria for affordable units generally depend on maximum household income levels. In Latvia, Austria and the Netherlands, income thresholds are set high enough to enable a relatively large share of the population – including middle-income households – to access the dwellings. Given that income levels are highly concentrated at the lower end of the distribution in Latvia, the income thresholds established in the Regulation enable roughly half of Latvian households to be eligible for one-room dwellings, with an even greater share of households eligible for larger dwellings. By comparison, around 80% of the population is eligible for social housing in Austria, compared to just under half in the Netherlands.

The target beneficiaries of the affordable dwellings produced through the Housing Affordability Fund are broadly defined in Latvia’s Regulation as “households who cannot afford housing on market terms.” The relatively high income ceilings established in the Regulation facilitate access to middle-income households – the “missing middle” (see (OECD, 2020[1])). OECD estimates that roughly half of Latvian households would be eligible to lease one-bedroom flats produced through the Fund, according to their income levels (Figure 5.1). Income thresholds are defined by the national government in all countries except Austria (where they vary across municipalities); in the Netherlands and Latvia, income thresholds are adjusted annually. In Slovenia, there are relatively low-income thresholds, in addition to other criteria, for non-profit dwellings; in general, for cost-rent dwellings there are no income thresholds but eligibility criteria vary according to the housing project and the target beneficiaries. There are no income criteria to access social housing in Denmark; in principle, all individuals over 15 years old are eligible to apply.

In peer countries, in addition to income ceilings, other eligibility criteria apply. This includes, for instance, requiring that tenants have citizenship or permanent residency in the country (Austria; non-profit dwellings in Slovenia); already work or live in the municipality or region in which they are applying for a dwelling (Vienna, Austria; non-profit dwellings in Slovenia); and/or meet some criteria relating to their current employment or recent employment history (non-profit dwellings in Slovenia). In the Netherlands, the Housing Act specifies that households living or working in the municipality are prioritised in the allocation of social housing.

In terms of the rent-setting approach, Austria and Denmark rely on a cost-based approach, where rent levels should be roughly equivalent to the costs incurred to develop, operate and maintain the dwelling. Slovenia relies on a modified cost-based approach for cost-rental dwellings, which is adjusted based on further considerations (e.g. location factors, tenant characteristics, funding source of the project). The Netherlands and Slovenia (for non-profit dwellings) use a utilities-based approach, where rent levels are calculated according to various characteristics relating to the size, quality and location of the dwelling. In Latvia, rent levels are only partially cost-based, given that they include a fixed monthly rent of up to EUR 5.87/m2, in addition to costs relating to the real estate tax, insurance costs, utilities and charges, and a monthly fee to cover future repairs; tenants must also pay a security deposit equivalent to two-months’ rent.

In all countries, a building manager is responsible for the day-to-day operations of the affordable units. The building manager will be selected by the housing developer in Latvia. In Austria, Denmark and the Netherlands, housing associations manage the affordable dwellings; in Slovenia, the owners of the dwellings are responsible for the day-to-day management.

To finance dwelling maintenance and improvements costs, in addition to the monthly rent payments, tenants in Latvia contribute to charges relating to the management and maintenance of the dwelling, as well as a monthly fee, to cover building improvements. Tenant contributions to maintenance are common in peer countries, though the calculation and management of these fees vary. In Latvia, the monthly fee is equivalent to EUR 0.25/m2, compared to a progressively increasing amount in Austria (EUR 0.50/m2 in the first years after construction and then increasing to EUR 2/m2 thereafter). An important difference, however, is that in Latvia, tenant contributions to building improvements are allocated into a savings fund that is specific to each developer and/or building manager; in Denmark and the Netherlands, such contributions are mutualised into a common fund for all affordable dwellings. In Slovenia, property owners may pay into the reserve fund, but tenants do not.

In the first phase, the rent-setting calculations of dwellings produced through the Fund are designed such that the dwellings are likely to support the unmet housing needs of middle-income households – the “missing middle” identified in (OECD, 2020[1]). Many lower-income households would require additional financial support (such as the monthly income-tested housing allowance) for the units to be reasonably affordable (measured in terms of the share of household income dedicated to housing costs). Further, in the initial phase, the Fund aims to increase the supply of affordable rental housing in the regions (outside Riga and surrounding municipalities), even though all households that meet the income eligibility requirements are eligible to live in the new dwellings, regardless of their current place of residence. Refer to Annex 5.A for a description of the housing affordability simulation undertaken by the OECD.

Over time, however, there is an opportunity for the Fund to contribute to social mixing objectives by ensuring that dwellings are accessible to a range of low- and middle-income households (to this end, the experience of peer countries, highlighted in Box 5.1, Box 5.2 and Box 5.3 provides a useful practice). To this end, it will be important to measure and monitor several key aspects in the production, allocation and affordability of the units produced through the Fund, such as:

  • The regional production of the affordable rental units, to better understand market conditions as well as identify whether any barriers exist to affordable housing development in specific regions or municipalities;

  • The allocation of the rental units, disaggregating by household income level and other socio-demographic characteristics of the tenants, as well as by the region of origin of the tenants, to better understand the market demand as well as any impacts of the Fund on labour mobility;

  • The affordability of the rental units produced through the Fund, by collecting data on rent levels as a share of tenants’ household income; and the extent to which financial support schemes (e.g. the monthly housing benefit) increases the affordability of the newly developed units among low-income households who benefit from such supports.

The Regulation creating the Housing Affordability Fund stipulates that tenant contributions for building improvements will be allocated to a fund that is specific to each building (e.g. linked to the building developer and/or the building manager); this means that building improvements will be financed at the scale of each building produced through the Fund. This approach contrasts with that of most peer countries, in which tenant contributions for improvements are mutualised into a common funding scheme, and building improvements are financed at the scale of the system as whole (Box 5.4). The risk with Latvia’s approach is that it may be harder to generate sufficient scale to cover the costs of any building improvements.

Table 5.4 provides a comparative snapshot of the mechanisms in place to supervise and monitor the funding mechanisms; the main actors engaged in monitoring and managing the affordable housing sector; and the approaches aimed at dealing with tenants’ complaints:

  • In all countries, monitoring and control of affordable housing funding depend on the main actors that fund and manage affordable housing. In Denmark and Slovenia, where the housing fund is a stand-alone independent body, the board and management of the fund are responsible for supervising and reporting on the activities of the fund. Both funds prepare annual reports with information on the activities carried out the by the funds. The Danish Fund collects a wealth of financial data and has also access to socio-economic data from the Danish statistical office.

  • Where housing associations play an important role in the provision and management of affordable housing, monitoring and controls are also exercised over housing associations through the umbrella organisation and regional governments (Austria), an ad hoc authority (the Netherlands) or municipalities (Denmark). Latvia’s monitoring and control system is currently aligned with the monitoring of the RRP, of which the fund is part. The Ministry of Economics will supervise compliance with RRP regulation. Altum will supervise the use of the loans until the dwellings are ready for use and the capital rebate is granted. The Possessor will monitor the operation of the dwellings, including the allocation of the dwellings, adherence to income thresholds, occupancy of the assigned dwellings. Altum prepares an annual report where the activities linked to the fund are likely to be reflected.

  • External auditing of financial statements of housing associations and funds are in place in virtually all countries. Latvia’s Housing Affordability Fund is currently monitored through the RRF mechanism and an external auditing could be considered as the Fund expands.

  • In some countries, there are specific mechanisms to deal with complaints from tenants of affordable housing units. This is the case in Denmark and the Netherlands, where there are committees that deal with complaints and try to solve them before they reach the judiciary. In Latvia no such mechanism is currently envisaged.

The choice of a relatively “light” monitoring and control mechanism is a wise and efficient choice while the Fund is still in its infancy. It will nonetheless be important to anticipate the monitoring and control needs in the early phases of the Fund, and to support the development of the Fund over time. This is especially important for the two public institutions charged with carrying out the management and monitoring functions of the Fund and its activities, Altum and the State Asset Possessor. The human resource capacity of these institutions can continue to be built up over time, to include, as relevant, financial, real estate and economics expertise. Gaps can be addressed through targeted training and/or hiring, drawing on peer country experience (Box 5.5).

The monitoring and controls of the activities of the Housing Affordability Fund will require the collection of significant amounts of data, which can in turn be leveraged to help monitor and inform policy decisions. Experiences from peer countries (Box 5.7) suggest the key role of the national fund in supporting efforts to expand data collection on affordable housing over time. In the case of Denmark, financial data were collected first, followed by data on building maintenance standards; followed by data on the socio-economic characteristics of households living in the units produced through the Fund as well as the broader neighbourhood. Initially the data will be used for monitoring purposes. The Netherland’s experience in collecting financial data would be also relevant in the early stages of the Fund (Box 5.6). Over time, these data could be made publicly available for research and analysis. They will also serve as a basis for the design and implementation of housing policies.

Latvia should envisage building up the data infrastructure of the Fund over time, building on the monitoring requirements:

  • Construction and quality standards: Altum will have to monitor the delivery of the units and ensure that the units meet the quality requirements established in the Regulation before providing the capital rebate.

  • Construction costs: once the units are delivered and rented, every three years until the entrustment act ends, the Possessor will have to control every three years for at least ten years that the beneficiaries of the capital rebate are not overcompensated.

  • Financial data: Altum will have to monitor the loan performance and loan conditions, requiring the collection of financial data.

  • Affordability: Over time, the Fund’s data collection can become a tool to monitor the affordability of the units developed, by assessing rent levels against household income, and, where needed, to adjust tenants’ eligibility criteria by adding data on occupancy of the affordable housing units (see policy action recommended below).

Setting up a dedicated website for the Fund could help to increase its visibility and facilitate access and exchange of information, particularly relating to investment opportunities and monitoring requirements. This is critical, because, in the initial phase, there is no single institution responsible for managing the Fund, and information relating to its activities will inevitably be posted on multiple institutions’ websites (e.g. the Ministry of Economics, Altum and the State Asset Possessor). A single virtual interface, which could include, for instance, application forms and filings for loans, loan reporting and data filing for rents, would be relatively inexpensive to set up and manage. The Danish National Housing Fund’s portal provides a useful example (Box 5.8). In Slovenia, the HFRS also has a dedicated website with information on its instruments for tenants, local communities, non- profit housing organisations and local housing funds. This describes programmes, calls, tenders of the Fund and comprehensive information on its policies and activities. In addition, tenants can apply for rent online on HFRS portal.


[2] 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).

[7] Elsinga, M. and H. Lind (2013), “The Effect of EU-Legislation on Rental Systems in Sweden and the Netherlands”, https://doi.org/10.1080/02673037.2013.803044, Vol. 28/7, pp. 960-970, https://doi.org/10.1080/02673037.2013.803044.

[6] Government of the Netherlands (2023), Am I eligible for a social rental home from a housing association?, https://www.rijksoverheid.nl/onderwerpen/huurwoning-zoeken/vraag-en-antwoord/wanneer-kom-ik-in-aanmerking-voor-een-sociale-huurwoning (accessed on 23 May 2023).

[5] Government of the Netherlands (2014), Housing Act 2014, https://wetten.overheid.nl/BWBR0035303/2022-01-01/#Hoofdstuk2 (accessed on 23 May 2023).

[8] National Building Fund (Landsbyggefonden) (2023), Organization, https://lbf.dk/om-lbf/organisationen/ (accessed on 23 May 2023).

[9] National Building Fund (Landsbyggefonden) (2023), Self-service solutions, https://lbf.dk/selvbetjeninger/ (accessed on 23 May 2023).

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

[1] 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.

[3] OECD (2020), Social housing: A key part of past and future housing policy, Employment, Labour and Social Affairs Policy Briefs, http://oe.cd/social-housing-2020. (accessed on 15 April 2021).

A simulation by the OECD found that the new affordable dwellings are most likely to support the unmet housing needs of middle-income households – the “missing middle” identified in OECD (OECD, 2020[1]). The highest income households are ineligible to lease the units because they exceed the income ceilings; lower-income households would not be able to easily afford the rent levels without additional financial support from municipal authorities (such as the housing benefit). Without such additional support, the new units are unlikely to be affordable to low-income households relative to their monthly disposable income. This is in line with the government’s envisaged objective of targeting middle-income households.

To recall, the rent-setting calculation outlined in the Regulation includes a variable component that can be no higher than EUR 5.87/m2 (EUR 5/m2 at the time of the simulation), along with a number of other required tenant contributions, such as, inter alia, utilities, the real estate tax and insurance costs; rent levels can be adjusted annually in line with inflation. For the purposes of the OECD simulation, two scenarios were envisaged to estimate the affordability of a one-room dwelling produced through the fund: a legislative maximum rent scenario, where the variable component of the rent-setting calculation is assumed at the legislative maximum (e.g. EUR 5/m2), in addition to the other required tenant contributions; and an average rent scenario, where the variable component of the rent-setting calculation is calculated based on a lower tenant contribution per square metre (assumed here as EUR 2.5/m2), in addition to the other required tenant contributions. The results suggest:

  • Under the legislative maximum rent scenario, rent levels would account for 22% of the disposable income of households earning right around the maximum income allowed to be eligible for a one-room apartment. However, households earning the minimum wage would end up spending 43% of their disposable income on rent for the one-room dwelling, and would thus be considered overburdened by housing costs (see OECD (2022[4])).

  • Under the average rent scenario, around one-third of eligible households would spend over 40% of their disposable income on rent for a one-bedroom dwelling and thus be considered overburdened by housing costs.

Although the Housing Affordability Fund will not fund new affordable rental development in Riga and several municipalities surrounding the capital city, all Latvian households – regardless of their current place of residence – are eligible to apply to live in the newly produced dwellings so long as they meet the income criteria. While it is not expected that many households will choose to leave the capital region to rent a dwelling in another region, regional take-up of the affordable units should be closely monitored. More broadly, it will be important for the Latvian authorities to measure the affordability of the units produced through the Fund by collecting data on rent levels as a share of tenants’ household income.

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