1. Overview and key recommendations

This report proposes a series of recommendations and a roadmap, comprised of 16 Policy Actions, to inform the development of Latvia’s Housing Affordability Fund over the medium- to long-term. It draws on the rich and varied experiences of Austria, Denmark, the Netherlands and Slovenia, which have well established funding mechanisms for affordable housing, as well as the perspectives of a broad range of stakeholders in the Latvian housing market. The analysis and activities undertaken by the OECD took place in parallel to the establishment of the Housing Affordability Fund. This allowed for ongoing feedback between the OECD and the Latvian authorities and in some cases enabled the Latvian authorities to adjust course, drawing on good practice from peer countries. Nevertheless, the main focus of the OECD work has been on the medium- to long-term potential of the Fund, identifying priorities and concrete actions that could be undertaken by the Latvian authorities by 2026 (which corresponds to the time horizon of the RRP) and beyond 2026, to scale up the Fund’s capacity and leave a lasting contribution to the housing market.

There is a strong case for increasing investment in affordable housing in Latvia. Real house prices have increased considerably in Latvia over the past two decades, in line with the rise in average incomes. Latvian households spend, on average, less on housing costs than their OECD peers and few households are overburdened by housing costs, but 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. This is especially the case in Latvian regions: while housing quality and affordability gaps are widespread, the nature of the challenge differs across municipalities and regions. On the supply side, overall investment in housing – defined as gross fixed capital formation in dwellings – has stagnated in recent decades, the social rental housing stock and the formal private rental market remain extremely underdeveloped, and the pace of new construction remains sluggish.

To address these challenges and to channel more investment into affordable housing, the Latvian authorities have taken a number of legal, institutional and policy steps to establish the Housing Affordability Fund (see Box 2.2, below). The establishment of the Housing Affordability Fund, approved through the Regulation of the Cabinet of Ministers No. 459 on 14 July 2022, was considered by a broad range of Latvian stakeholders as “very necessary and long overdue.” The main characteristics of the Fund, in terms of its institutional set-up, funding and financing, and management and monitoring, are outlined below:

  • Institutional set-up: The Fund is embedded within existing funding and asset management institutions: Altum (the country’s development finance institution) and the State Asset Possessor (the state’s public asset manager). In addition, the Ministry of Economics, as the primary national ministry responsible for housing policy, and municipal authorities also have key responsibilities (Chapter 3).

  • Funding and financing: The initial funding to establish the Housing Affordability Fund (EUR 42.9 million) comes from the Latvian Recovery and Resilience Plan (RRP); in addition, Altum may also contract a state loan of up to EUR 10 million. Eligible housing development projects are to be financed by an equity contribution from the real estate developer, a loan issued by Altum, in addition to potential loans from a commercial bank and/or other international financial institutions. As a financial incentive to real estate developers, a (conditional) capital rebate is granted for the partial repayment of the Altum loan of between 25-30% of total eligible project costs (depending on the project delivery date). Repayments of the Altum loan will be returned to the Fund to finance new affordable housing construction projects and after the loan repayment the same applies for half of the monthly rental income from the affordable rental units (the “revolving” dimension of the scheme).

  • Management and monitoring: In the initial phase, the Fund will support the construction of new affordable rental housing outside Riga and neighbouring municipalities. Housing units built with the support of the Housing Affordability Fund are allocated to households that meet income limits, which are established according to housing size. Moreover, monthly rents cannot exceed a maximum of EUR 5.87/m2, in addition to costs associated with the real estate tax and insurance and utility costs. Municipal authorities, who manage the queue of eligible tenants, may identify priority groups within the population. In addition, a share of tenants’ monthly rent (an additional EUR 0.25/m2) will be allocated to a savings fund to finance building improvements and maintenance.

In setting up the Housing Affordability Fund, the Latvian authorities looked to benefit from the rich and diverse experiences of peer countries with extensive practical expertise in developing revolving fund schemes to channel investment into affordable and social housing. The cases of Austria, Denmark, the Netherlands, and Slovenia – all countries with more mature revolving fund schemes – were explored in detail.1 In summary:

  • Austria: Austria does not have a stand-alone revolving fund per se, but rather a system of actors and financing tools functions as a self-sustaining financing mechanism. Low-profit housing associations (LPHA) finance 10-20% of new projects from their equity; tenant contributions (3-7%); public loans regulated by federal provinces at favourable terms, other public construction grants; and commercial loans at favourable terms. Surpluses generated by the LPHA must be reinvested into affordable housing; further, housing finance loans must be repaid to regional authorities to be re-invested in future housing projects.

  • Denmark: The National Building Fund, established in 1967, is a dedicated, independent housing fund. Initial capital came from contributions from a gradual rent increase in the social housing sector (as per a political agreement in 1966); currently, funding is based on a share of tenants’ rents (2.8% annually of the total acquisition cost of the property), in addition to housing associations’ contributions to mortgage loans (~3% of the property development cost).

  • The Netherlands: Like Austria, the Netherlands does not have a dedicated revolving housing fund. Rather, housing associations can access the guarantee fund for social housing construction (the WSW – Waarborgfonds Sociale Woningbouw) that backs the largest share of outstanding capital market loans. This system of housing associations together operates as a sort of revolving fund, based on the ability of housing associations to access lower interest rates from the WSW and their co-operation agreement to bail out housing associations if/when required. The State and municipalities serve as guarantors of last resort.

  • Slovenia: The Housing Fund of the Republic of Slovenia (HFRS) is a public, state-owned financial and real estate fund. The Fund was established in 1991 to finance the National Housing Programme and encourage housing construction and the renovation and maintenance of apartments and residential buildings. While the Fund operates within the framework of the state, it is nonetheless a separate legal entity and financially independent, acquiring and managing long-term capital investments for its own purposes. A share of the rental income and revenues from apartment sales constitute the revolving elements of the scheme, together with returns on housing loans approved by HFRS to local communities, local public funds and non-profit housing organisations.

Exchanges with experts from the four peer countries focused on the mechanics of the different funding models and sought to highlight the strengths and limitations of the peer practices, as well as their applicability and relevance for Latvia. Lessons centred on three key dimensions: the institutional set-up of the scheme, the funding and financing of the scheme, and operation (management and monitoring) of the scheme (Table 1.1). Concrete policy illustrations and good practice examples from each country are presented in Chapters 3-5, with detailed background information on the national financing schemes of the four peer countries summarised in Annex A. Related practices from other OECD countries were also considered when relevant, and these practices are presented in Chapters 3-5.

In parallel, engagement with a diverse range of stakeholders in the Latvian housing market helped to ensure both the applicability and transferability of peer experiences in the Latvian context, as well as the effective design and implementation of the Housing Affordability Fund to respond to Latvia’s specific needs and challenges. Stakeholder engagement was structured through a number of activities: an online stakeholder survey, focus groups and in-depth interviews, along with a series of webinars to discuss policy challenges and draft recommendations. These activities involved, inter alia, Members of Parliament, representatives from national and municipal public administrations, commercial banks, real estate developers, housing management companies, and households eligible for the housing to be developed through the Fund. Moreover, many of these Latvian stakeholders participated in the learning exchanges organised with experts and officials from the four peer countries.

Stakeholders also provided key perspectives to identify key challenges that would need to be overcome for the Fund to be effective – such as institutional capacity gaps in some of the public administrations with a central role in the delivery of the scheme, as well as significant infrastructure gaps that could hinder development in some of Latvia’s less-dynamic municipalities and regions). Additionally, they pointed to risks associated with the Fund’s activities and its potential development, including rising energy costs and geopolitical uncertainty that may weaken the investment appetite of banks and developers; and challenges for developers to manage rising construction and labour costs.

Building on these findings, Latvia could consider a number of additional steps to ensure that the Fund becomes a sustainable financing instrument and leaves a lasting impact on the housing market. Proposed Policy Actions and good practice examples from which Latvia could take inspiration are presented in Table 1.2, Table 1.3 and Table 1.4. Proposed actions, expected timeframe, institutions, and stakeholders to be involved and key implementation steps are detailed in Chapters 3 (Institutional set-up), 4 (Funding and financing) and 5 (Monitoring and management). Good practices are provided, drawing largely on the experiences from the four peer countries engaged in the project, along with a selection of other OECD countries.


← 1. These four peer countries were selected jointly by the OECD, the European Commission and the Latvian authorities. Experts from each peer country took part in a series of bilateral policy exchange workshops organised by the OECD between December 2021 and July 2022, with the participation of a range of Latvian stakeholders, as well as representatives from the OECD and the European Commission.

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