Hawaii urged to steer clear of Vienna housing model

by Melissa Newsham, Grassroot Institute, October 19, 2023

The so-called Vienna model of “social housing” has been touted as a solution to Hawaii’s housing shortage. However, a new report authored by Tobias Peter, senior fellow and co-director of the AEI Housing Center in Washington, D.C., challenges the purported success of this model. 

In a report published in August titled, “Does social housing actually work? Setting the record straight on the Vienna Model,” Peter exposes the long-overlooked shortcomings of the Vienna model and delivers a bold conclusion: 

“While there is an obvious housing affordability problem in the U.S., the Vienna social housing model is not something the U.S., any state, or even any local jurisdiction should copy.”

Essentially,  he says, Vienna’s situation is unique. Its public housing program was introduced in 1918 to improve living conditions for the working class. Its methods were to heavily tax vacant land, capital gains, privately built homes and luxury goods and services such as cars, hotel rooms and leisure activities.

The vacant land tax — coupled with strict tenant laws and hyperinflation at the time — led landowners to sell their vacant lands to the city at a significant discount, while the tax on private homes discouraged private sector homebuilding.

There also were major demographic shifts underway that enhanced Vienna’s ability to provide relatively affordable housing. 

“From 1914 to 1988,” Peter says, “Vienna’s population declined from 2.1 million to 1.5 million. Particularly from 1945 to 1988, Vienna added about 160,000 new social units — or about 40% of its stock today -— while its population fell from 1.7 million to 1.5 million.” 

Consequently Peter says, “The ability of Vienna to provide housing for thousands of residents at low rents without relying on the private market was only possible because Vienna’s population was shrinking — reducing demand pressures that have sent land prices soaring in many other major European and North American cities.”

In other words, without mass land acquisitions at bargain rates by the government, onerous taxes and a huge population decline, the Vienna model would likely have been neither feasible nor necessarily desirable. 

In addition, Peter says, “As the city has actively discouraged private building through its policies over the years to ensure its grip on housing and political power, Vienna’s low homeownership rate may be part of the legacy of its social housing project. If replicated, such an approach would represent a very severe trade-off for the homeownership-focused U.S.”

According to Peter, approximately 60% of Vienna residents live in municipally owned or supported housing with subsidized rents, and only about 20% of the city’s housing units are owner-occupied.

Meanwhile, Peter says, the alleged benefits of the Vienna model have been overstated. 

For example, Vienna’s public housing units can be inherited by relatives upon a tenant’s departure or death, so renters of identical units might be paying significantly more than those with existing contracts. Peter says such disparities are considerably lower in privately financed apartments compared to publicly owned or supported ones. 

Peter also refutes claims that rental prices in Vienna are significantly cheaper than in comparable cities, such as in Germany. When taxes on rent and utility costs are factored in, the cost difference in housing between Vienna and Berlin, for example, narrows to only 3.3%. 

Then there’s the issue of financing. According to Peter, social housing in Vienna is financed through a 1% tax on wages. Unfortunately, the system has a budget shortfall of about 1.6 times the annual intake from rent, raising concerns about its sustainability.

Liquidity issues, meanwhile, have resulted in maintenance and quality problems, with about one-third of municipally owned apartment units lacking central heat or baths. 

Peter says that in general, the Vienna model “has shown to be under increasing strains from mismanagement, segregation by income and budget shortfalls. Ultimately, there is no free lunch and Austrians are paying for their experiment with higher taxes that in some cases benefit very wealthy individuals.” 

Fortunately, Peter, who has appeared in programs and events hosted by the Grassroot Institute of Hawaii, offers feasible, free market alternatives. 

In particular, he is a fan of the so-called Tokyo model — the subject of his keynote presentation at an Institute event in 2022 — which employs light-touch density zoning that allows “the market to respond to price signals and create abundant and naturally affordable housing.” 

The model permits higher-density development “by right,” meaning projects that meet all zoning requirements can proceed without undergoing discretionary approval processes. 

Light-touch density zoning enables fast, cost-effective, adaptable and relatively higher-density additions to the housing supply while ensuring compliance with building zoning codes. 

Research by Peter and his colleagues estimates that the adoption of the system could add 26,000 additional units to Oahu over 10 years.  

While there is no quick fix to Hawaii’s housing crisis, Peter’s report suggests a promising way forward through the liberalization of zoning regulations, rather than reliance on a system that may, in fact, exacerbate the problem. 

To read Peter’s full report, go >>> here <<<.