WHAT IS THE THIRD SECTOR & WHY IS IT SO IMPORTANT FOR HOUSING?

Third-sector organisations differ in nature within each sector but exhibit common characteristics. In particular, they operate independently from the state (but can receive state support and/or funding), the objective is not to make profits with operating surpluses typically reinvested in the entity or sector, and they are guided by specific social or environmental values and objectives. These characteristics make third sector organisations especially important as key stakeholders and actors representing those in lower income distributions of society ignored by the state and the market, and as advocates for change and catalysts for innovation.

The idea of organised cooperation to address a common need, notwithstanding its very long stop-start gestation through history, is no longer a fringe or fleeting one as exemplified by the cooperative sector. Today, in a multitude of forms and sectors, cooperatives are a very real contributor to economies around the world. Data from The International Cooperative Alliance indicates that ~12% of humanity is involved in ~3 million cooperatives globally employing ~280 million people, with the 300 biggest cooperatives reporting annual turnover in 2023 of ~US$2.789 trillion. Some are purely altruistic, others less so. But it’s a big deal.

Housing associations, cooperatives, collectives, charities and municipal corporations are a very visible part of the third sector and housing ecosystems within many socially-minded countries. The key characteristics of third sector housing compared with conventional home ownership are residents do not own their unit separately but own shares in a housing cooperative with a right to occupy. The equity required is far less than in the open market and occupiers also usually make a regular weekly or monthly payment to cover cooperative operations. Occupiers usually cannot mortgage their unit which gives protection against predatory tactics by funders or aggregators. There are usually rules on the re-sale process and unit pricing. Decisions are made collectively. The underlying principle is the provision of affordable housing as a common good. A key characteristic is ‘self-help’ — especially in the planning and building phases. The model by-passes the market, enabling affordable access to quality housing for low and middle income families and is very adaptable to the local context with increased socio-economic and ethnic diversity.

Some of the best and most mature examples of third sector housing can be found in Europe. As noted in ‘Here’s how to fix the housing affordability problem’, the share of all forms of not-for-profit housing in proportion to total housing stock is estimated at ~42% in Sweden (~67% in Stockholm), ~30% in Denmark (~49% in Copenhagen), ~24% in Austria (~42% in Vienna) and ~17% in Norway (~35% in Oslo). Those countries exhibit lower house price inflation, housing overburden costs and market price volatility (risk) than here in New Zealand where the share of not-for-profit housing is estimated at <4%. For example, during the period 2000-2023 OECD data indicates that real house prices (i.e. the ratio of the nominal house price index to the consumers’ expenditure deflator in each country from the OECD national accounts database) increased 61% in Austria, 71% in Denmark, 104% in Norway and 142% in Sweden, compared with 209% for New Zealand. Over the same period those countries also maintained better house price-income ratios and exhibited lower housing overburden costs than New Zealand (n.b. in the bottom pop. quintile for both private rental and owner-with-mortgage).

In addition, real house price data for New Zealand exhibits greater variance (or risk in financial terms) from the average over the period than the OECD cohort, Euro Area countries (within the OECD), or the cohort of Sweden, Denmark, Austria, Norway. Using STDEV as a risk measure, New Zealand exhibits ~2.4x the risk of the entire OECD cohort and ~3.2x the risk of OECD subset of Euro Area countries. Conceptually, assuming social housing price growth (and therefore STDEV) of zero over the time series and based on the 2000-2023 real house price data, the share of social housing to total housing stock in New Zealand would need to be ~38% to match the the cohort risk of Sweden, Denmark, Austria, Norway. Given our existing social sector housing stock comprises <4% of total housing stock, New Zealand has a lot of social sector home building to do on that metric. Of course whether a zero STDEV could be achieved within the social housing sector would depend not just on the ratio of social housing stock in the market but also on all the mechanisms used to control price growth within that market subset. However, unlike market housing, many social housing providers strictly limit price on resale, for example, by simply returning the equity on exit, or matching price to an agreed measure such as CPI or ingoing equity plus improvements value.

A 2023 study commissioned by the Vienna City Administration ‘The Price Dampening Effect of Non-Profit Housing’ indicated that as well as diversifying and hence de-risking the total housing market, the Gemeinnützige Bauvereinigungen (not-for profit housing associations or GBVs) generate spill-over beneficial effects that also permeate the for-profit sector (e.g. price-dampening on the non-regulated market and improvements in housing quality). Modelling showed that under market oligopoly conditions, a higher GBV share of the total market can democratise market power, improve competition, and lower prices through cost-based rents. It was estimated that every 10% increase in the overall housing stock share of not-for-profit housing reduces (non-regulated) private sector rents by ~5%.