Owning a home has long been fundamental to a good quality of life, as well as a significant source of financial security, which is often passed down between generations. Unfortunately, access to affordable housing has become increasingly limited, both globally and in Norway. This has led to a concerning social challenge, where ordinary households experience financial constraints that affect their financial opportunities and future development. As a result, social inequality becomes a persistent and growing challenge in society.
However, the challenges have given rise to opportunities. Within the real estate sector, several entrepreneurs and start-ups have found inspiration to develop new ideas to address societal issues. The emergence of new solutions provides a significant increase in investment opportunities, especially for investors who are interested in impact investing, which combines a desire for financial return with an intention to create positive social and/or environmental results. Capital allocation from impact investors to innovations from entrepreneurs could prove to be the key to solving the complex puzzle of affordable housing and shaping the future of sustainable and inclusive development in the real estate sector.
The path to the housing dream in Norway
Norway is a nation of homeowners. According to the 2023/2024 report from the Norwegian Bureau of Statistics, almost 80 percent of people in Norway reside in a home owned by a household member, which makes Norway one of the countries with the highest homeownership rate in Europe. Although the proportion of homeowners in Norway has been stably high for the past 42 years, the proportion has fallen by around 5 percent from 2018 to 2023.
The housing market has indeed become less accessible to average wage earners. The Nurse Index, an index that measures the proportion of homes a single nurse with an average salary can afford to buy, shows that the housing dream has become less attainable for people with normal incomes in all cities in Norway.
The capital, Oslo, has experienced the most dramatic change in housing availability in recent decades. Between 2013 and 2023, the proportion of housing in Oslo that is available for nurses has decreased from 12.7 percent to just 1.3 percent. This means that people with average incomes today cannot afford to buy 98.7 percent of the homes in Oslo. While wages have increased, enabling higher housing budgets, housing prices have risen faster than people's ability to keep up. During the last decade, wages have increased by 31.72 percent (before inflation), while house prices in Norway have increased by a whopping 53.8 percent. In Oslo, the price increase has been even more dramatic, with an increase of 84.4 percent. At a time when the gap between house prices and income is constantly increasing, the road to the home dream for ordinary people is becoming increasingly challenging.
The hurdles to homeownership are not only due to the continuous rise in housing prices but also the current increased interest rates and high prices. The increased interest burden, now at an all-time high, and rising expenses have forced people to stay out of or exit the housing market. A tighter economy and reduced purchasing power have led to falling demand for housing, while there has been a significant increase in housing supply recently. The discrepancy between supply and demand has resulted in a decline in housing prices in recent months. Nevertheless, this may be a temporary image. Many experts are concerned about the future housing supply in Norway, as rising interest rates and prices have also negatively impacted the new housing market. In the first half of 2023, sales and starts of new homes are at their lowest level. According to the Housing Manufacturers' Association, the situation is worsening from month to month, and the number of housing starts so far this year is 42 percent lower than the corresponding period in 2022.
- The reduction in capacity in housing construction could lead to undersupply for several years to come, says managing director of Boligprodukterene Lars Jacob Hiim.
The low initiation of new housing will not be able to meet the housing needs in the coming times, and the scarcity of new homes will put significant pressure on the second-hand market. When demand increases and the supply side decreases, house prices will be pushed higher. In a situation where housing is scarce and house prices are high, the challenges associated with affordable housing will worsen. Housing market accessibility may become even more restricted for ordinary people, which can negatively influence their finances, quality of life, and health.
Living in one's own home provides people with access to sustainable living. Homeowners have the opportunity to benefit from the appreciation of home values and improve their financial situation. Rising house values can provide financial stability that can be inherited from generation to generation. At the same time, owning your own home increases a sense of security. With homeownership, individuals don't have to deal with uncertain tenancies and poor living conditions. According to Statistics Norway's living conditions surveys, tenants have worse living conditions than homeowners, such as cramped quarters and dampness and rot. Such unfavorable living conditions can cause stress and, in severe cases, harm health. In addition, Statistics Norway's quality of life surveys show that tenants have a lower quality of life than homeowners. Tenants are also found to be less satisfied with life and less socially integrated.
The decreasing accessibility to homeownership for ordinary people leads to increasing social inequality in our society. While those within the housing market can benefit from the advantages of homeownership, the left-behind individuals face unsatisfactory living conditions, poor quality of life, and limited opportunities for financial security, which can persist through generations. This results in growing social disparities and segregation in our society and cities. Rising social inequality affects everyone in society and brings social consequences such as increased crime, reduced trust in each other, and decreased social well-being. Therefore, social inequality is a serious societal challenge that must be addressed.
Reducing inequality within and between countries is Sustainable Development Goal 10 in the Sustainable Development Goals, which is the world's shared action plan to eradicate poverty, combat inequality, and halt climate change by 2030, adopted by UN member states in 2015. Norway, as a UN member state, has long worked to contribute to achieving these goals. Among the government's efforts is the national strategy for social housing policy, which is a strategy developed to prevent people from experiencing housing problems and provide assistance to those who cannot secure and maintain suitable housing on their own. The strategy aims to reduce inequality and achieve other sustainable development goals and targets.
The government's national strategy for social housing policy for the period 2021-2024 has its primary goal of enabling homeownership for more people. To achieve this, the authorities have implemented several measures, including prioritizing start-up loans as the main tool to support households with persistently low incomes in buying their own homes. Furthermore, the government will encourage more public and private rent-to-own models and other purchase options for those who, with a little extra support and time, can realize the dream of homeownership. This demonstrates that the government recognizes the need to introduce new solutions to increase access to the housing market. In recent years, new home purchase models like rent-to-own or co-ownership have been introduced to address the challenge of affordable housing. These innovative solutions create attractive investment opportunities, especially for investors committed to making investments that have a positive impact in addition to achieving financial returns. This type of investment, known as impact investing, has become a mega-trend in the investment world and is recognized as a powerful tool for necessary societal change.
Impact Investing - Beyond profitability
In an era marked by social challenges that test societal development, impact investing is highlighted as a significant driver in achieving the Sustainable Development Goals. By investing capital in solutions designed to address societal and environmental issues, impact investors contribute to promoting sustainable and inclusive societal development.
Although the term impact investing was first formally established in 2007, the practice has deep roots that stretch back in time. With impact investing, investors get positive and measurable social and/or environmental results while also achieving a financial return - the so-called double bottom line. A central objective of impact investment is to minimize the adverse consequences of business activities on the social environment. The growing impact The investment market provides the necessary capital to address some of the world's most pressing challenges, particularly in areas such as sustainable agriculture, renewable energy, nature conservation, and affordable and accessible basic services, including housing, healthcare, and education.
Impact investing challenges the longstanding perceptions that have traditionally separated social and environmental matters from business investments, with the former considered to be addressed through philanthropy while the latter solely focuses on financial returns. Impact investing allows investors to invest in and support the social and environmental causes they care about. Unlike philanthropic initiatives, impact investors expect a financial return. However, financial return is not necessarily their primary motivation.
While many remain skeptical about the returns from impact investing, surveys from the Global Impact Investing Network (GIIN) indicate that investment outcomes largely meet or exceed their expectations regarding both social and environmental impact, as well as financial returns. 20 percent of impact investors reported that the results of their investments exceeded their financial goals, while 68 percent of investors said the results met their expectations. Concerning social and environmental impact, 21 percent of investors reported that the results exceeded their expectations, and 78 percent said the results aligned with their objectives.
With the 2030 goal of achieving the Sustainable Development Goals on the horizon, several investors and asset managers have shown remarkable commitment by allocating funds to help reach these objectives. According to the estimate from the Global Impact Investing Network (GIIN), the size of the global impact investing market is USD 1.164 trillion. This figure underscores the importance and relevance of impact investing in addressing significant societal challenges.
Among the sectors that impact investors allocate capital to, the energy sector attracts the largest share of managed funds, at 17 percent, followed by financial services (13 percent), and healthcare (9 percent). The housing sector is also a significant sector within impact investing. According to GIIN's report, 30 percent of impact investors have investments in the housing sector, with 6 percent of managed funds allocated to housing. This makes the housing sector the seventh-largest in impact investing in terms of capital allocation. Furthermore, the housing sector is the fastest-growing within managed funds with social impact, with a compound annual growth rate of 44 percent over five years. The findings suggest that increasing efforts have been made to address challenges related to the housing sector, including the availability of affordable housing.
As mentioned earlier, the lack of affordable housing in Norway is a significant issue. To help more people realize the dream of homeownership, new home purchase models have been developed in recent years, including rent-to-own, co-ownership, and housing start-ups. Providing more people with the opportunity to own their own homes is a goal that we at Living Impact are deeply committed to. Therefore, we are actively participating in this effort and are committed to providing a robust solution to address this significant societal challenge.
Rent-to-Own – Bridging Dreams and Reality
To address the complex challenge of affordable housing, we at Living Impact are developing a scalable solution through a rent-to-own housing fund. Our goal is to bridge the gap in the housing market for first-time buyers and those who face challenges entering the housing market. By giving more people the opportunity to experience the joy and stability of homeownership, we actively aim to reduce social inequality and create sustainable cities and communities, which are Sustainable Development Goals 10 and 11 in the Sustainable Development Goals. We are firmly anchored in the vision of improving the quality of life and well-being for more people through the availability of affordable housing.
Through our rent-to-own solution, aspiring homeowners have the chance to enter the housing market without having to meet the down payment requirement. They have full freedom to choose their dream home from properties available for sale on finn.no. We then purchase the home for them, and they can rent it from us. Since we have the freedom to invest in properties in the used housing market, potential homeowners have the opportunity to move in and start building equity in their future homes immediately, compared to what they can achieve going for new housing projects that are usually realised two to three years in the future.
The fund's investment approach includes a key element that allows tenants to become co-owners of the homes they live in. This unique feature not only strengthens tenants' position by allocating them an ownership stake in their own homes but also aligns their interests with the fund's, fostering a mutually beneficial partnership.
Additionally, tenants also have the opportunity to acquire the home at a predetermined price adjusted in accordance with the official local housing price index published by Eiendom Norge. This arrangement ensures that tenants have a clear and fair path to homeownership, provided they wish to take advantage of this opportunity. This also provides the fund with a predictable and stable exit strategy, ensuring a satisfactory return on investment.
According to an Opinion survey, 37 percent of Oslo's population is open to exploring new approaches to the housing market, such as rent-to-own and co-ownership. This indicates a growing demand for alternative paths to enter the housing market, especially considering current high housing prices and rising interest rates. This figure reflects the challenges related to affordable housing in Oslo while also suggesting that our rent-to-own model could be a potential solution to help more people realize the dream of homeownership.
Navigating the Path Forward
New solutions to societal problems bring opportunities, as well as certain challenges. As housing purchase models are still relatively new in the market, some legal issues remain to be clarified. This includes questions about rights, duties, and the legal and financial responsibility of the involved parties. However, the government has taken steps to adapt housing legislation to these new models.
When it comes to impact investing, it's also essential to carefully assess and address the challenges and risks that come with it. As with any investment strategy, there are critical aspects that investors need to be aware of to achieve both social and economic objectives. According to GIIN's research, investors point to several potential sources of financial risk in an impact investment portfolio. The design and management of the business model is the most frequent source of risk. Other risk factors include liquidity and exit strategies, currency exposure, and macroeconomic uncertainty. However, very few investors report significant risk events in their investment portfolios.
A challenge in impact investing can be the difficulty of measuring non-financial impact. The development of the Global Impact Investing Network's Impact Reporting and Investment Standards (IRIS), a catalog of performance metrics used by impact investors to evaluate the social impact of their investments, has been a step in the right direction. These measurements constitute one of the earliest methods for investors to quantify and compare results across investments or portfolios. There are several alternatives, but there is general agreement that the existing metrics have many limitations. This is an area that requires further efforts to address, but with the growing impact investing market, there will likely be future standardization of this investment strategy.
In our context, however, these risks and challenges are likely reduced. Rent-to-own solutions have been introduced in the Norwegian housing market and have proven to be successful. We navigate the legal landscape with the help of the country's top lawyers, have developed robust contracts, and continuously monitor any changes in legislation. Moreover, our leadership is composed of experienced financial professionals with at least 12 years of experience in financial markets, business development, asset management, and ventures. With a team possessing deep expertise and broad experience, we are equipped to make informed decisions, effectively manage risk factors, and achieve stability and a long-term vision. This facilitates better business performance and paves the way for the fund's future. Regarding risk factors related to liquidity and exit, we have already outlined a reliable and well-considered exit strategy that ensures a satisfactory return on investment. Concerning the measurement of non-financial impact, we will be able to quantify our societal impact easily by counting the number of customers who ultimately realize their dream of homeownership.
Access to affordable housing is a critical challenge in today's society, and we believe that our rent-to-own solution can effectively address the pressing need for innovative housing solutions. Join us on this journey to tomorrow's housing solutions and help shape a more inclusive and sustainable future for all. Together, we can address this important societal challenge and help ensure more people have access to affordable homeownership.
Sources: Regjeringen, Investopedia, GIIN (1), GIIIN (2), Estate Media, Ferd, Cushman & Wakefield, Smarte Penger
