Ara housing production, supported by the state, collapsed by 37 percent last year without much fanfare. At the moment, the Ara initiatives are practically stuck, and even the election spring hasn't made political decision-makers speak out about the adequacy of housing production.
Last year, the 5 apartments that received an interest subsidy were only 600 percent of the entire year's housing starts. It is the lowest share since 15 and, in percentage points, half less than what is set as a target for the capital region in the MAL agreements for land use, housing and transport.
Ara production has run into unprecedented difficulties due to rising costs and interest rates following Russia's war of aggression in Ukraine. A large part of the annual funding authority in use remains unused when the costs of the projects do not pass a strict screening.
The Ara system cannot handle such a sudden and strong increase in costs. Therefore, changes must be made to it quickly, so that Ara can cope with its part as a builder and maintainer in Finland.
Four quick fix kit for Ara regulation
- Accepting the increased cost level in an exceptional situation
The Interest Subsidy Act requires Ara projects to be reasonable in terms of costs, but it does not define more precisely what is meant by reasonableness in each case. There is a lot of room for interpretation when considering costs. At the moment, especially new Ara projects in the capital region are paralyzed by unclear legal interpretations on whether costs higher than normal Ara limits can be allowed in the current exceptional situation.
Based on construction, interest and maintenance costs, Ara calculates the starting rent level for the project to ensure that the rent is reasonable and more affordable than the general rent level in the area. However, the calculated starting rent is not the same as the final rent level. For example, utility rental housing operators often do not transfer the higher costs in full to rents.
The Ministry of the Environment must immediately interpret whether the legislation enables financial decisions to be made at higher costs compared to the usual level and market rents.
- Lowering the deductible proportion of the interest subsidy
As interest rates hurtle upward at a rapid pace, the interest subsidy has an even greater importance as an enabler of housing production. Currently, the deductible rate is 1,7 percent until the end of 2023, after which it would rise to 2,3 percent.
The fixed-term deductible reduction of the interest subsidy must be increased and the deadline extended until the end of 2024. At the same time, the adequacy of Ara's interest subsidy authority must be ensured.
- More flexible use of the funding authority for different support models
Ara production has traditionally also played a role in economic policy in securing sufficient housing production. The so-called intermediate model, which was developed rapidly in the wake of the financial crisis, helped the Finnish economy to get back on its feet when it boosted the construction of new apartments in growth centers in 2010-2011 and, with it, employment.
Since 2016, the current 10-year interest subsidy model has been in use in addition to the 40-year interest subsidy loan. During the period of zero interest rates, it has mostly remained a dead letter, but nowadays there would be a need for the model again, as the conditions for self-financed rental housing production have become more difficult.
Ara has different clauses for short and long interest subsidized loans, as well as interest subsidized lending for right-of-occupancy apartments and rental housing properties for special groups. If necessary, Ara should be able to transfer funding authority from one project form to another, depending on which is most needed. From the point of view of the overall supply of apartments, it is not meaningful if the authorization is not used, for example, because the long interest subsidy model would not be successful, but there would be more demand for the short one than planned.
In addition, it would be good for Aran to give developers more discretion to use different types of contracts than is currently the case. In the majority of Ara projects, traditional competitive contracts are used. However, some developers of rental apartments want to take advantage of a negotiated contract, which enables more long-term cooperation and development with the main contractor.
At the same time, Ara's processing times should be shortened and the transparency of the financing criteria should be increased, so that both developers and builders could better anticipate the conditions for the project's implementation. Decisions now take too long, 9-10 months at worst. For the time being, the construction company that submitted the accepted offer is tentatively bound to the project and has to maintain readiness to start the project without any certainty of its realization.
- Tools and a model for securing financing for repair grants
The prevailing cost and interest rate freezes not only new construction, but also basic improvement projects and energy renovations, both in the Ara housing stock and in other residential buildings. Ara has different forms of support for this, such as interest subsidized and guaranteed loans as well as planning and energy grants. Currently, even they do not eliminate the funding problem, but the toolkit needs to be renewed so that the necessary renovations are not caught up in funding.
Renovations are needed not only to maintain the condition of the buildings, to extend their service life and to ensure living comfort, but also to reduce energy consumption, emissions and operating costs. The realization of the green transition requires double the amount of energy efficiency-improving renovation construction every year. The Energy Efficiency Directive for Buildings (EPBD), which is being prepared, will contribute strongly to the improvement of energy efficiency and low carbon in the building stock, which must be prepared for in advance.
A dedicated minister for housing and the built environment
Housing construction and the adequacy of housing supply greatly affect the dynamics of the entire economy, employment and tax collection. Along with Ara production, free-financed housing production has also suffered greatly in the past six months, when the rise in interest rates and the cost of living, as well as general uncertainty, have brought the housing market to a standstill.
New apartments are being completed this year and next year, clearly less than what is the long-term need, about 35 apartments per year. It is detrimental to economic recovery. Even the record years preceding housing starts have not saturated the market, as the average production throughout the 000s has been 2000 apartments per year.
The challenge is that no one seems to take responsibility for our housing policy. There is no phone number to call.
For this reason, together with the other fourteen communities of the Real Estate and Construction Forum, we have proposed that Finland needs a minister responsible for housing and, more broadly, the entire built environment.
We need a minister who also has ownership over the smoothness of planning and construction. In the next term of office, we must also be able to implement those changes to the law that streamline planning and licensing, which were not fully implemented in the reform of the Land Use and Building Act. This is necessary not only for sufficient housing production, but also for other construction. For example, securing green transition investments requires a better and more predictable investment environment than the current one.
Aleksi Randell
CEO
aleksi.randell@rt.fi + 358 9 129 9201Confederation of Finnish Construction Industries (CFCI)
Assistant: Lotta Räty
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