The jump in interest rates since 2022, has revealed a forgotten tool. Now that money costs money again, public agencies have access to something the market wants: lower-cost capital. While we wait for rates to come down, might we take advantage of this opening and give the developers of a publicly-beneficial product a leg up? How could we use public debt to incentivize affordable housing development? What would it look like on steroids? The Netherlands offers a window into a parallel universe, where, instead of dispersing into a patchwork of programs and developers, the last century of public investment in affordable housing has flowed into a singular, evolving system.

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The Dutch System

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In the Netherlands, affordable (or social) housing is primarily provided by independent, non-profit housing associations called woningcorporaties. Together, the 275 housing associations own two-thirds of the nation’s rental units, housing nearly 29 percent of households nationally at an average rent of €578 (about $645) per month.¹ The size of individual housing associations varies, with portfolios ranging from 400 to over 80,000 units, collectively amounting to 2.3 million units valued at approximately €221.5 billion.²

 

While public housing in the U.S. is reliant on operating subsidies from the federal government, Dutch housing associations generate enough rental income to cover their operational costs. In 2022, they collectively earned €16.9 billion in rental income, which was used to cover €14.6 billion in maintenance, overhead, and interest expenses. With €1.2 billion in additional income, the social housing sector was left with an operational surplus of €3.5 billion, which was reinvested into the housing stock.³ This fiscal sustainability—and the autonomy that comes with it—is rooted in over a century of building and operating social housing. Unlike the patchwork of programs and tools for affordable housing in the U.S., since 1901 the Netherlands has had a singular, integrated system for building, operating, and managing below-market housing. 

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Like the U.S., the Netherlands is currently facing a supply shortage. As providers of affordable housing, housing associations have been charged with a “build, build, build” agenda. By 2028, the housing associations are expected to invest €85 billion in the construction and rehabilitation of social housing, including 186,000 new units. This investment will be financed by the housing associations themselves without direct subsidy, using €57 billion in loans, €15 billion in operational surpluses, and €10 billion from the sale of existing units.⁴ So what is the secret sauce? How do these 100% below-market projects pencil? While Dutch housing associations do not receive direct subsidies from the government, they do have access to three indirect subsidies: cheaper loans, cheaper land, and tenant-based rental allowance.⁵ In this piece, I will zero in on one of these mechanisms: cheaper debt. As we go through the system, ask, how might the Dutch approach to lending open up a new source of jet fuel for affordable housing development in the U.S.?

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The Guarantee Fund

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Easy access to long-term, low-interest loans has been the essential DNA of the Dutch social housing system since 1901. Initially, housing associations borrowed directly from the national government, but since 1984 they access the private capital markets through the Guarantee Fund for Social Housing (waarborgfonds sociale woningbouw).⁶ This independent foundation insures loans made to housing associations and assesses both individual and sector-wide risks. 

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The guarantee fund has three layers of insurance that will take over payment obligations if a housing association’s cash flow and capital reserves are insufficient to pay its debts. The first layer is the fund’s own risk capital, which can be supplemented by selling off some of the housing association’s assets. The second layer of the guarantee is a mutual fund that all member housing associations pay into. The third layer of the guarantee is an agreement between the guarantee fund and the national and municipal governments that, if needed, the government will issue zero-interest loans to cover the repayment. The ultimate backing of the national government gives the fund a AAA credit rating, allowing housing associations to borrow at rates only slightly higher than the government itself. 

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So, what do these loans look like? In 2023, the social housing sector had €88.6 billion in outstanding loans, with a blended interest rate of 2.79%. Interest rates for new loans fluctuate: averaging 3.15% in 2023, 1.88% in 2022, and 0.46% in 2021.⁷ Loan terms are generally long, with 33% extending 30 years or more (up to 50 years), and 30% having terms between 20 and 30 years.⁸ 

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Critically, 90% of new loans in 2023 were interest-only, with the principal due in a balloon payments at the end of the term. When the payment comes due, housing associations can refinance through the guarantee fund and maintain the balance. As of 2023, 63.8% of all outstanding loans were interest-only, while the rest were amortizing loans, including annuity (10.6%), linear (4.8%), and simple interest loans (12.5%).⁹ Because the loans are mostly interest-only and carry low rates, annual financing costs are significantly lower than those in U.S. affordable housing developments, where the cash flow must support the payment of both principal and interest over the course of the loan. This enables housing associations to sustain their projects on lower rents. 

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Risk

 

Of course, interest-only loans carry more risk, because the fateful day will come when the principal is due. In the U.S., where loans are issued on a project-by-project basis, this risk is typically deemed untenable. However, in the Netherlands, the guarantee fund helps protect housing associations from some of this risk. While housing associations are still exposed to interest rate fluctuations—if rates are high when the balloon payment comes due, the housing association would have to refinance with higher annual interest payments to carry the debt— they have quick access to favorable capital through the guarantee fund. Essentially, housing associations have a flexible line of credit based on the value of their housing portfolios, which they can freely tap for new loans.

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The guarantee fund sets the parameters for its guarantee to manage individual and sector-wide risk.¹⁰ The primary borrowing limit is the loan-to-value ratio, which is limited to 85% of the portfolio’s value.¹¹ As housing associations use debt to build new housing and their portfolios grow in value, their borrowing capacity also increases. However, if the portfolio’s value drops due to disaster, neglect, or market shock, the borrowing capacity would be restricted. The direct connection between the value of a housing association’s portfolio and their financial sustainability creates the existential imperative to maintain the quality and value of their housing stock. 

 

As of 2023, housing associations were well below their borrowing limit—with an average loan to value ratio of just 40%.¹² With €88.6 billion in outstanding loans, the sector could borrow up to approximately €188 billion through the guarantee fund.¹³ This additional borrowing capacity is being mobilized to address the national housing need, with housing associations expected to borrow an additional €57 billion by 2028 for new construction and renovation. 

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Possibilities

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Beyond initial seed funding, the affordable housing subsidy provided through the Guarantee Fund has come at no cost to the government. By standing as the third and final guarantee against default, the government gives significant interest rate advantage to the developers of affordable housing. What could publicly-backed, low-cost debt mean for affordable housing development in the U.S.? Given our broader and largely for-profit affordable housing ecosystem, what guardrails would be needed? While the guarantee fund is just one element of the Dutch social housing system, it demonstrates how powerful easy access to low-cost capital is. What would it take to give affordable housing developers in the U.S. access to this kind of cost-neutral leg up?