The Hidden Failures of Social Housing in 'Red Vienna'

The century-old social housing program in Vienna, Austria, has gotten a lot of glowing press in the U.S. as of late. Through a mixture of direct government ownership and heavy government subsidization, the Austrian capital has managed to create an affordable, amenity-rich "renter's utopia," as one New York Times dispatch recently described it. The U.S. could have this too if only we stopped relying on the private, for-profit provision of shelter.

But a new report argues the sterling reputation of "Red Vienna" is largely a mirage—a product of bad accounting, opaque bureaucracy, and the failure of social housing boosters to consider the extensive German-language literature examining the program's failures.

"While progressives may wax eloquent about the Vienna social housing model—particularly its low rents and ample supply—the merits for this system are far overblown," writes Tobias Peter, co-director of the American Enterprise Institute's Housing Center, in a brief published earlier this month.

Instead, says Peter, Viennese social housing is riven by rising costs, deteriorating quality, and the unfair allocation of units.

On the surface, the city's housing scheme seems to work well.

The government directly owns a quarter of all homes in the city. Tenants are selected by the government, and rent increases are held at the rate of inflation. Another 20 percent of homes are provided by city-subsidized nonprofits where rents are capped at the costs of operation. Purely private housing makes up only a third of rentals in the city, and most of those private units are rent-controlled.

The prevalence of below-market rents makes Vienna's housing appear far more affordable than comparable cities in Europe and the United States.

But unlike German tenants, Viennese social housing residents must pay a 10 percent tax on their rent. They're also responsible for most maintenance and upkeep expenses, which aren't included in the base rent.

Once those expenses are accounted for, monthly housing costs per meter of floor space in Vienna are only slightly lower than in cities like Berlin and Hamburg.

The ability to hand down social units and their low rents do mean that many tenants in Vienna still do get screaming deals on their housing costs. That's contributed to a shortage of social units. Some 21,000 households are on the waiting list for subsidized housing.

When new tenants do find a new unit, they are often left paying much higher prices on identical units to make up for those grandfathered below-market rents. They must also pay move-in fees that can be as high as $38,250, and compensate the former occupant for any improvements they paid for. Those costs also typically run between $2,100 and $3,200.

Lower-income tenants who can't afford these high upfront costs are left renting on the private market, where rents are higher.

These results aren't all that different from those of legacy rent control programs in the U.S. that gift incumbent tenants with rents well below market rates while restricting supply and increasing costs for new entrants.

Viennese social housing hasn't avoided the liquidity problems created by U.S. rent control programs either.

While the city doesn't report even rudimentary data on social housing's financial performance, Peter cites one 2016 study finding that annual operating costs are 60 percent higher than annual rent incomes. The city makes up the difference with a mix of taxes, deferred maintenance, and antiquated amenities. The deteriorating quality of units has seen vacancy rates in government-owned units rise to 7 percent.

This, again, is not dissimilar to the problems arising in New York City's stock of rent-stabilized housing. The city has held allowable rent increases below the rate of rising operating costs for years, resulting in deteriorating housing quality and a rising number of vacant units in need of serious repairs.

Supporters of the Viennese model make a lot of hay out of the fact that social housing is economically integrated. Most city residents qualify for social housing and many middle- and high-income renters live in social housing units.

But Peter argues that Viennese social housing is trending more toward the concentrated poverty of U.S. public housing. "Due to the high cost of entry for [social housing], yet the low quality of [social housing], observers are seeing an increasing bifurcation along income for these types of buildings, which will likely only worsen," he writes.

In sum, Peter cites the results of a 2020 German academic study, which found that Viennese social housing was "expensive, insecure, conflict-prone, bureaucratic, not transparent, [and] socially unjust….Rents [are] not lower [in Vienna] than in German big cities."

The report reinforces the truism that there's no cheat code for affordable housing.

Vienna's system of subsidies and below-market rents suffers many of the same distortions and problems of subsidized and rent-controlled housing in the U.S., where subsidized rents for incumbent renters result in higher costs for new market entrants. The suppression of rent growth has created operating shortfalls that can only be closed by higher taxes or deferred maintenance (which results in declining housing quality.)

Missing from most of the American hagiographies written about social housing is how closely some U.S. cities' housing policy resembles the Vienna model.

In both San Francisco and New York, over half of rental housing stock is covered by rent control or deed restrictions that hold prices below market rates. About half of New York's new housing construction is subsidized social housing.

Housing affordability in these cities remains bleak regardless. The prevalence of price controls and subsidies hasn't made up for anemic rates of housing construction born of restrictive zoning codes, yearslong permitting processes, high impact fees, and endless other forms of municipal overregulation.

Rather than try to further replicate Vienna's socialist approach to housing, Peter argues the U.S. should embrace free enterprise by removing zoning regulations that restrict housing production.

Interestingly enough, Vienna seems to be trending in a freer market direction. As liberal blogger Matt Yglesias noted recently, Vienna builds housing at a rate comparable to an American Sunbelt boomtown. In recent years, two-thirds of that new housing has been private, market-rate housing as well.

Social housing supporters in the U.S. should consider emulating the parts of Vienna's housing policies that actually work, instead of importing the failing parts of the "Red Vienna" model.