Usefulness of the article: This article looks back at a pillar of French housing policy over the past 25 years: rental investment assistance schemes. It examines their effectiveness in relation to their stated objectives and highlights the economic and budgetary issues at stake in the context of discussions about the post-Pinel era.
Summary:
• The data corroborates the support for activity in the construction sector resulting from these policies. However, the number of constructions in areas suffering most from a supply deficit is less sensitive to the schemes, which raises questions about the adequacy of the supply of housing built as a result of these policies in relation to housing demand.
• This pitfall was partly resolved by the strengthening of zoning policy in 2009. However, the scheme appears relatively unsuitable for supporting housing construction in areas under severe pressure, where it tends to fuel price increases.
• The cumulative budgetary cost of this policy between 2012 and 2020 was more than €14 billion. However, the phasing out of the scheme poses a political economy problem inherent in the tax credit system: an immediate cyclical effect for future budgetary savings.
When announcing the 2021 finance bill, the government indicated that a new rental investment aid scheme will replace the Pinel law from the end of 2021, the announced date of the scheme’s expiry after its refocusing in 2018. In addition to the obvious challenges of economic recovery, this announcement once again raises the question of the validity and effectiveness of tax incentives for rental investment.
This note analyzes the effects of these schemes and highlights their limitations. The cumulative budgetary cost of this policy between 2012 and 2020 was more than €14 billion. The tax credit available to investor households increases the supply of housing by channeling a greater share of their savings into the financing of new housing construction. As the tax benefit can represent a significant portion of the profitability of the operation, the balance between the supply of housing produced and the demand for housing, which determines profitability in an undistorted market, has in some cases been relegated to the background. This pitfall of the scheme was partly resolved by the strengthening of zoning policy in 2009. However, the scheme remains unsuitable for supporting housing construction in very tight areas and in several tight areas, where it tends to fuel price increases. In these areas, where housing supply is relatively inelastic to prices due to land constraints, any increase in demand primarily leads to higher prices.
However, the phasing out of the scheme poses a political economy problem inherent in the tax credit system: an immediate cyclical effect for a future economy. In this regard, the coincidence between the planned end of the Pinel scheme and the necessary stimulus effort could force the introduction of a more tightly controlled scheme, as called for by the General Inspectorate of Finance in its recent report on the scheme.
1. Rental investment assistance: a single principle but schemes that have evolved over time
Since the late 1980s, there have been a series of tax incentive schemes for rental investment, which allow individuals to deduct a portion of the amount invested from their personal income tax (IRPP) in return for a commitment to rent out the property acquired. The main types, in chronological order, are: Méhaignerie and Méhaignerie-Quilès (1987-1997); Périssol (1996-1999); Besson (1993-2003); Robien and Robien-Borloo (2003-2006); Scellier (2009-2013); Duflot (2013-2014); Pinel since September 2014.
The main objectives of this policy are:
i. Providing short-term support for activity and employment in the construction sector;
ii. Increasing the supply of private rental housing, with a refocusing of the latest measures on the so-called « intermediate » supply;
iii. Returning vacant housing to the market and improving the quality of available rental housing;
iv. And, for the latest measures, promoting the latest environmental standards.
Changes to the measures have led to:
i. Cyclical shifts in the construction sector: the percentage of investment deductible from income tax (IR) rose from 8% to 25% with the Scellier scheme in 2009;
ii. The adverse effects of the scheme to be taken into account by targeting the supply produced: (a) zoning of the scheme refocused on relatively tense areas from 2009 onwards to combat the geographical mismatch between supply and demand;
(b) greening of the scheme (taking into account the « low energy consumption building » label from 2010 onwards);
(c) adjustment of rent ceilings and tenant income levels to refocus the scheme on intermediate housing.
The « Pinel » scheme currently in force is characterized by:
i. A high income tax reduction rate (up to 21% compared to 18% for the previous Duflot scheme);
ii. Its focus on the production of intermediate housing, on average 20% below market price;
iii. A stronger refocusing, with the exclusion of zones B2 and C since 2018, and demanding energy performance standards. Zoning of the scheme targeting tight markets existed previously, but some municipalities in zone B2 were eligible (nearly 800 of the 3,200 municipalities classified in zone B2).
It is important to note that while tax incentives for rental investment are a housing policy tool, they are primarily used as a means of stabilizing the economy in order to preserve jobs in the construction sector, which is closely correlated with the number of homes built. This was particularly the case in 2009, with the Scellier scheme being the most generous measure implemented to date (Figure 1). However, the tax expenditure per dwelling, which is an estimate of the tax cost for a standardized case that allows for comparison of the generosity of the schemes over time (see details of the calculation method in the appendix), does not fully reflect the attractiveness of the scheme as it does not take into account certain conditions (zoning, rent caps, etc.).
Graph 1 – Construction dynamics and generosity of the current program
2. Budgetary impact: cumulative cost of past commitments
These tax incentive schemes are based on tax credits that can be claimed over a period of up to 12 years. This means that:
i. The tax expenditure of a new measure, which corresponds to the income tax deductions claimed, is non-existent in the year of its implementation, then follows a bell curve with a ramp-up phase that extends over the average duration of the tax exemption (between 6 and 10 years); there is therefore a significant temporary lag between the immediate economic effect of the measure and its budgetary impact;
ii. The uninterrupted succession of schemes results in a budgetary burden attributable to several programs for the same year. In 2020, tax expenditure under the Scellier scheme amounted to €700 million; under the Scellier intermédiaire scheme, €350 million; and under the Duflot/Pinel scheme, €1,009 million (see Figure 2).
iii. Abolishing the scheme would have no immediate budgetary impact (temporary one-year delay) and would then lead to savings which, although increasing, would initially be relatively small (between €80 million and €110 million for 2023 if the scheme were abolished in 2022) compared with the cost of past commitments (€2.1 billion in 2020), but would have a significant immediate impact on the economy.
Graph 2 – Tax expenditures in millions of euros: Robien, Scellier, and Duflot/Pinel
3. Effects on housing construction: an undeniable impact on sales to investors but no apparent effect in areas where demand is very high
The generosity of the scheme has had an undeniable effect on the number of homes sold to investors (Figure 3). We can see that sales to first-time buyers, i.e., transactions that do not involve individual rental investors, are relatively stable in volume (between 40,000 and 60,000 sales per year) and pro-cyclical, while sales to investors are more volatile (between 35,000 and 70,000 sales per year) and are very positively correlated with the generosity of the scheme, which is counter-cyclical. For example, there is a difference in sales to investors of nearly 30,000 homes between 2009-2010 and 2013-2014.
Graph 3 – Sales to investors/first-time buyers and generosity of the current program
To better understand the effectiveness of the schemes in terms of their assigned objectives, particularly in terms of economic support and increasing the private rental supply, it is instructive to observe the evolution of the geographical distribution of new housing sales over time and to compare these changes with the tax exemption schemes in force at different dates (Figure 4). It appears that:
i. The stricter zoning policy introduced in 2009 has had a significant impact on the marketing of housing in areas where there is no pressure on the housing market (divided by more than 2), suggesting that the simple zoning of the rental investment support measure explains a significant part of the difference in the number of homes built between the mid-2000s and today.
ii. The two areas that benefit most from tax exemption schemes are zones B1 and A;
iii. Construction in Paris and the inner suburbs (Abis) is evolving independently of the scheme.
In addition to the direct effects on the number of constructions, support for rental investment has an inflationary effect on land prices: Pierre-Henri Bono and Alain Trannoy have shown the inflationary effect of the Scellier scheme on building land prices, particularly in the most tense regions.
Figure 4 – Geographical distribution of housing sold and program in force
Conclusion
The cumulative cost of rental investment assistance schemes between 2012 and 2020 was more than €14 billion. The commercial success of the Pinel scheme suggests that the budgetary burden is unlikely to decrease in the short term. While the massive mismatch between housing production and demand caused by this tax distortion was partly resolved by the 2009 zoning, the scheme is unable to trigger housing construction in very tight areas (Abis) and in several tight areas (A) due to rent caps and prices per square meter (intermediate housing development strategy).
The phasing out of the scheme poses a political economy problem, due to its clear immediate negative impact on future budgetary finances. The economic impact appears particularly untimely in the context of the current crisis. This situation raises questions about the government’s room for maneuver in redesigning a scheme that, according to various assessments, only partially fulfills its public policy objectives.
Appendices:
Method for calculating tax expenditure per dwelling:
(sources: appendices to the draft finance bill and French documentation report)
« The tax expenditure per dwelling is calculated on the basis of the following microeconomic parameters:
The dwelling in question is a standard dwelling, unchanged over the period, with a living area of 65 m². Its price is determined on the basis of the average price per square meter of new apartments sold by developers, as given by the « marketing of new dwellings » (ECLN) survey for the year in question. This is the average price for the Ile-de-France region in the case of Ile-de-France, and the average price for all other regions (weighted by production) in the case of the provinces. The investor in question is an investor with a marginal tax rate of 28% (before the 2006 tax reform) and 22% (after the 2006 tax reform). For reference, this situation corresponds to the marginal tax rate of a married person with one child and an income of approximately €60,000. It is assumed that the investor has no other property income other than that from the scheme in question, and that he borrows 90% of the price at an interest rate equal to the « 10-year OAT » rate over fifteen years. In addition, the investor is assumed to resell their property after nine years, repaying the outstanding capital with an early repayment penalty set at 3% of the outstanding capital. The initial rent (used to calculate the specific flat-rate deduction) is equal to the maximum rent for the scheme for the area in question, or, if lower, the average re-letting rent given by the OLAP rent survey, increased by a flat rate of 10% to take into account the newness of the property. The rent growth rate is set at 1.8% per year. Finally, the annual tax expenditure flows are discounted at the 10-year OAT rate in effect at the time the investment is made.
Intermediate housing:
(source: Ministry of Housing)
Intermediate housing is characterized either by rent levels between those of social housing and private housing, or by a purchase price below the market price. The status of intermediate housing was created by an order presented on February 19, 2014.
A financial framework promoting the production of intermediate rental housing:
– for individuals, with the rental investment assistance scheme, which offers a tax reduction in return for a commitment to rent for 6, 9, or 12 years at a rent 20% below market prices;
– for institutional investors, with the 2014 Finance Act scheme offering a reduced VAT rate of 10% and exemption from property tax on the building for a maximum of 20 years, in return for a commitment to rent for a minimum of 15 years at rents that are also 20% below market prices.
Intermediate housing, whether rented or purchased, is defined according to three conditions:
– It must be located in a high-demand area: the housing must be built in an area where it is difficult to find accommodation, thus meeting a real demand. These high-demand areas, such as Paris and its inner suburbs or the Alpes-Maritimes coastline, are defined by law.
– it is subject to direct or indirect assistance from the State or a local authority, granted in return for a commitment to moderate prices;
– It is intended for the middle classes, i.e., those below a certain income threshold, which will be identical to that for tenants under the rental investment support scheme.
– its price or rent is capped at an intermediate level defined by decree. For rental housing, the rent cap will be identical to that of the rental investment support scheme.
