Tackling housing unaffordability: a 10-point national plan

From The Conversation

The widening cracks in Australia’s housing system can no longer be concealed. The extraordinary recent debate has laid bare both the depth of public concern and the vacuum of coherent policy to promote housing affordability. The community is clamouring for leadership and change.

Especially as it affects our major cities, housing unaffordability is not just a problem for those priced out of a decent place to live. It also damages the efficiency of the entire urban economy as lower paid workers are forced further from jobs, adding to costly traffic congestion and pushing up unemployment.

There have recently been some positive developments at the state level, such as Western Australia’s ten year commitment to supply 20,000 affordable homes for low and moderate income earners. Meanwhile, following South Australia’s lead, Victoria plans to mandate affordable housing targets for developments on public land. And in March the NSW State Premier announced a fund to generate $1bn in affordable housing investment.

But although welcome, these initiatives will not turn the affordability problem around while tax settings continue to support existing homeowners and investors at the expense of first time buyers and renters. Moreover, apart from a brief interruption 2008-2012, the Commonwealth has been steadily winding back its explicit housing role for more than 20 years.

The post of housing minister was deleted in 2013, and just last month Government senators dismissed calls for renewed Commonwealth housing policy leadership recommended by the Senate’s extensive (2013-2015) Affordable Housing Inquiry. This complacency cannot go unchallenged.

Challenging the “best left to the market” mantra

The mantra adopted by Australian governments since the 1980s that housing provision is “best left to the market” will not wash. Government intervention already influences the housing market on a huge scale, especially through tax concessions to existing property owners, such as negative gearing. Unfortunately, these interventions largely contribute to the housing unaffordability problem rather than its solution.

But first we need to define what exactly constitutes the housing affordability challenge. In reality, it’s not a single problem, but several interrelated issues and any strategic housing plan must specifically address each of these.

Firstly, there is the problem faced by aspiring first home buyers contending with house prices escalating ahead of income growth in hot urban housing markets. The intensification of this issue is clear from the reduced home ownership rate among young adults from 53% in 1990 to just 34% in 2011 – a decline only minimally offset by the entry of well-off young households into the housing market as first-time investors.

Secondly, there is the problem of unaffordability in the private rental market affecting tenants able to keep arrears at bay only by going without basic essentials, or by tolerating unacceptable conditions such as overcrowding or disrepair. Newly published research shows that, by 2011, more than half of Australia’s low income tenants – nearly 400,000 households – were in this way being pushed into poverty by unaffordable rents.

Thirdly, there is the long-term decline in public housing and the public finance affordability challenge posed by the need to tackle this. In NSW, for example, 30-40% of all public housing is officially sub-standard.

“Why the “build more houses” approach won’t work

A factor underlying all these issues is the long-running tendency of housing construction numbers to lag behind household growth. But while action to maximise supply is unquestionably part of the required strategy, it is a lazy fallacy to claim that the solution is simply to ‘build more homes’.

Even if you could somehow double new construction in (say) 2016, this would expand overall supply of properties being put up for sale in that year only very slightly. More importantly, the growing inequality in the way housing is occupied (more and more second homes and underutilised homes) blunts any potential impact of extra supply in moderating house prices. Re-balancing demand and supply must surely therefore involve countering inefficient housing occupancy by re-tuning tax and social security settings.

Where maximising housing supply can directly ease housing unaffordability is through expanding the stock of affordable rental housing for lower income earners. Not-for-profit community housing providers – the entities best placed to help here – have expanded fast in recent years. But their potential remains constrained by the cost and terms of loan finance and by their ability to secure development sites.

Housing is different to other investment assets

Fundamentally, one of the reasons we’ve ended up in our current predicament is that the prime function of housing has transitioned from “usable facility” to “tradeable commodity and investment asset”. Policies designed to promote home ownership and rental housing provision have morphed into subsidies expanding property asset values.

Along with pro-speculative tax settings, this changed perception about the primary purpose of housing has inflated the entire urban property market. The OECD rates Australia as the fourth or fifth most “over-valued” housing market in the developed world. Property values have become detached from economic fundamentals; a longer term problem exaggerated by the boom of the past three years. As well as pushing prices beyond the reach of first home buyers, this also undermines possible market-based solutions by swelling land values which damage rental yields, undermining the scope for affordable housing. Moreover, this places Australia among those economies which, in OECD-speak, are “most vulnerable to a price correction”.

While moderated property prices could benefit national welfare, no one wants to trigger a price crash. Rather, governments need to face up to the challenge of managing a “soft landing” by phasing out the tax system’s economically and socially unjustifiable market distortions and re-directing housing subsidies to progressive effect.

A 10-point plan for improved housing affordability

Underpinned by a decade’s research on fixing Australia’s housing problems, we therefore propose the following priority actions for Commonwealth, State and Territory governments acting in concert:

  • Moderate speculative investment in housing by a phased reduction of existing tax incentives favouring rental investors (concessional treatment of negative gearing and capital gains tax liability)
  • Redirect the additional tax receipts accruing from reduced concessions to support provision of affordable rental housing at a range of price points and to offer appropriate incentives for prospective home buyers with limited means.
  • By developing structured financing arrangements (such as housing supply bonds backed by a government guarantee), actively engage with the super funds and other institutional players who have shown interest in investing in rental housing
  • Replace stamp duty (an inefficient tax on mobility) with a broad-based property value tax (a healthy incentive to fully utilise property assets)
  • Expand availability of more affordable hybrid ‘partial ownership’ tenures such as shared equity – to provide ‘another rung on the ladder’
  • Implement the Henry Tax Review recommendations on enhancing Rent Assistance to improve affordability for low income tenants especially in the capital city housing markets where rising rents have far outstripped the value of RA payments.
  • Reduce urban land price gradients (compounding housing inequity and economic segregation) by improving mass transit infrastructure and encouraging targeted regional development to redirect growth
  • Continue to simplify landuse planning processes to facilitate housing supply while retaining scope for community involvement and proper controls on inappropriate development
  • Require local authorities to develop local housing needs assessments and equip them with the means to secure mandated affordable housing targets within private housing development projects over a certain size
  • Develop a costed and funded plan for existing public housing to see it upgraded to a decent standard and placed on a firm financial footing within 10 years.

While not every interest group would endorse all of our proposals, most are widely supported by policymakers, academics and advocacy communities, as well as throughout the affordable housing industry. As the Senate Inquiry demonstrated beyond doubt, an increasingly dysfunctional housing system is exacting a growing toll on national welfare. This a policy area crying out for responsible bipartisan reform.

States drag feet on affordable housing, with Victoria the worst

From The Conversation.

Moral panic over recent increases in visibly homeless people in central Melbourne has brought to the fore the critical shortage of affordable housing across the metropolitan areas of Australia’s wealthiest cities. But living on the street is only the tip of the iceberg. Many more households are living in insecure and/or overpriced accommodation. Their plight is due to an undersupply of appropriately priced, sized and situated rental housing.

The Commonwealth government is reportedly planning to scrap the National Affordable Housing Agreement with the states. Without a clear alternative, the weakness of state policies, which lack clear targets and mechanisms for providing more and better affordable housing, adds to the problem. One state, Victoria, still doesn’t have an affordable housing strategy.

South Australia’s strategy has 15% inclusionary zoning as one of several mechanisms to achieve affordable housing targets. Western Australia provides regular progress updates on the regional targets of its Affordable Housing Strategy 2010-2020. Tasmania adopted a ten-year strategy in 2015.

New South Wales has had affordable housing policies in place since 2009. The NSW government has a new plan to build more social housing and improve existing stock. Queensland released a draft strategy in March 2016.

While these state policies vary in their success, Victoria does not even have a strategy to critique.

Victoria’s toxic planning legacy

No doubt Premier Daniel Andrews inherited several industrial-strength cans of toxic planning waste when Victorian Labor won office in November 2014. This legacy came not only from the Liberals, but from the earlier Bracks-Brumby Labor government.

Under the 2000s Labor government, the fourth new metropolitan strategy in four decades, Melbourne 2030, largely failed to stop sprawl. The main excuse for sprawl – that increased and largely unregulated housing supply would magically enable affordability – had become a sad joke.

As former Labor adviser Joel Deane’s book Catch and Kill shows, inability to respond to basic public concerns about planning and transport was perhaps the most significant factor in Labor’s 2010 election defeat.

If Labor had been ineffective in creating new affordable housing, the Liberals’ planning decisions between 2010 and 2014 were disastrous. Australia’s largest urban renewal site – Fishermans Bend – was drastically up-zoned from Industrial to Capital City (also known as “Anything Goes”). They did this without extracting a cent in added value from landowners towards affordable housing – or any other infrastructure.

Huge parts of the southeastern suburbs – Liberal strongholds – were essentially walled off from new housing, even though these had some of the best school and transport infrastructure to serve a rapidly growing population. Hundreds of job cuts meant the civil service lost experience and capacity to do better.

A long wait for action on affordable housing

The Victorian Labor 2014 election platform stated:

All Victorians have a right to safe, affordable and secure housing.

Yet in more than two years since its election, the Labor government has not completed any of the major reforms that would enable affordable housing.

Plan Melbourne’s “refresh” has not been published in its final form. The Residential Tenancies Act still has to be strengthened. The residential zone review hasn’t been completed.

Perhaps most disturbingly, we are still waiting for the results of the early announcement that the state treasurer was going to work with the planning and housing ministers to develop an integrated affordable housing strategy.

A new advisory body, Infrastructure Victoria, published a 30-Year Infrastructure Strategy in December 2016. “Social housing” (public and non-profit) was one of its top three priorities. However, compared with principles of “a good plan”, the affordable housing section of this strategy does not pass the test.

According to the literature on plan analysis, good plans should have seven elements: a clear vision; specific goals; a fact base informing alternatives; a spatialised sense of what goes where; a very specific implementation plan, with costs, timelines and responsible authorities; a monitoring and evaluation plan; and specific horizontal (across all parts of government, the private sector and civil society) and vertical (alignment between national, state and local government) integration.

Vancouver shows how to do it

The City of Vancouver’s Housing and Homelessness Strategy 2012-2021 is an example of an affordable housing plan that ticks the boxes. It has a clear vision embodied in the strategy’s subtitle:

A home for everyone.

The strategy sets specific numeric housing targets. These cover everything from supportive housing for homeless people with mental disabilities, to social housing, market rental and home-ownership options.

These targets are based on a robust and transparent analysis of housing trends across the city. While all subsequent neighbourhood plans are intended to achieve a mix of dwelling cost and size, there is a particular emphasis on locating supportive housing near areas with significant homeless populations.

Vancouver has shown what a comprehensive affordable housing strategy can achieve. Kenny Louie/flickr, CC BY

The partnerships with other levels of government, private developers and non-profit providers are comprehensive. A new Vancouver Affordable Housing Authority has been established to coordinate these efforts. Since the report’s adoption, further mechanisms such as a community land trust have been established. Annual reporting against the targets is available on the City of Vancouver’s website.

In contrast, Infrastructure Victoria is an advisory body to state government, not an implementation agency. Its vision of a “thriving, connected and sustainable Victoria where everyone can access good jobs, education and services” begs the question of how progress towards these attributes would be measured.

Infrastructure Victoria does estimate an extra 30,000 affordable homes are needed over the next ten years. But it admits this figure is not well justified, due to a lack of good information on affordable housing deficits.

It recommends further work on an affordable housing plan with specific funding streams. However, this cannot really be expected to be the plan that “tackles [the] affordable housing shortage”, as its own website boasted of the draft report.

At best, Infrastructure Victoria’s plan is a baby step. It does clearly state the importance of social housing as critical infrastructure. It also begins to justify mechanisms that could achieve some scaling up of affordable housing outcomes.

But the public housing waiting list now has more than 35,000 names. About 120,000 households receiving Commonwealth Rent Assistance are still unable to afford living where they do. That includes 50,000 households in the lowest income bracket. And another one million new households are expected to move into Victoria within the 30-year timeframe of the infrastructure strategy.

This all means that baby steps will not be enough to prevent rapidly increasing homelessness.

Author: Carolyn Whitzman , Professor of Urban Planning, University of Melbourne

Why housing supply shouldn’t be the only policy tool politicians cling to

From The Conversation.

The most popular government policy at the moment for solving housing affordability continues to be increasing housing supply. After a visit to the UK to look at this very problem, Treasurer Scott Morrison said:

The issue here fundamentally is about supply.

And it’s little wonder the government dwells so much on this argument. Rising house prices are very popular amongst Australian households, the majority of which are owners. And stamp duties on housing transactions are key sources of income for state governments. Our research found the default position for politicians is to sound concerned about housing affordability, but do nothing.

The supply refrain has all the hallmarks of a good policy for a politician. Increasing housing supply – rather than reducing the tax breaks that stimulate excessive demand – is a popular policy with peak property groups. The Property Council has been saying the same thing for years, so the supply solution has come to sound like fact.

If the supply doesn’t flow or, as is occurring now, doesn’t cool prices, the federal government can blame the states for sluggish planning and land supply without having to put their money where their mouth is. States in turn can blame recalcitrant local governments for blocking housing development and “gold-plating” infrastructure requirements. Since the private sector almost wholly funds and delivers new housing, calling for more of it has been a pretty cheap strategy for government.

It’s true that increasing the supply of new homes in line with population and economic growth is a fundamental part of maintaining a healthy housing system. But to tout new housing production as the only policy lever without examining the question of demand is clearly an ineffective policy position.

The supply argument sounds believable – increasing supply will actually reduce prices in markets for most types of goods, like bananas, cars or televisions. Unfortunately, the housing market is different.

Why are housing markets different?

So why is it that despite record supply levels in Australia in recent years, prices have continued to rise in Sydney and Melbourne? We think there are a number of reasons.

New supply is a small fraction of the total stock of dwellings (about 2% in Australia). Prices are set by the total housing market – most of which already exists in the form of established homes.

Also housing is an unusual good in that as prices increase, demand in the short term actually increases (it’s an asset market). This makes it much more difficult for supply increases to reduce prices.

Increasing prices feeds demand

In most other markets increasing prices both encourage extra supply and reduce demand, so these two key forces are working together – prices in these markets come down sharply when supply increases. In housing markets these two forces are working against each other – the growth of investor demand is simply swamping new supply.

The very low interest rates on offer at the moment are exacerbating this trend.

Developers manage supply

Developers, and the banks that fund development, simply won’t allow supply to get ahead of demand in a way that would put significant downward pressure on prices. Dwelling approvals in Sydney and Melbourne are running way ahead of building starts, but housing projects are released in stages to avoid swamping the market. Since our major banks have the majority of their loan books in retail mortgages, it’s no wonder they avoid funding enough supply to increase their own risk levels.

How much new supply would improve affordability anyway?

Even if Australia’s developers and financiers were less cautious, it’s probably not feasible to produce enough supply to really knock prices around when demand is very strong.

For example, prior to the global financial crisis, Ireland – which is about the same size as Sydney, increased supply to 90,000 dwellings per year (Sydney does about 30,000 dwellings per year) and prices still kept rising. It wasn’t the over-supply of homes that caused Irish house prices to fall dramatically but rather the sudden contraction of demand when the global financial crisis hit.

Under more stable conditions, the problem of generating additional housing supply remains. Australia’s prime minister has encouraged the states to fix their planning laws to make it easier get housing approvals and building to flow.

But there has been a continuous wave of planning reform over the last 10 years in Australia, and Sydney and Melbourne dwelling approvals are at long-term highs. For example, in 2015-16, Sydney recorded over 56,000 new dwelling approvals and Melbourne over 57,000.

In fact, approvals are running at about double the actual dwelling construction levels, so “fixing” the planning system is unlikely to have much impact on dwelling supply levels.

High-density supply fuels land speculation

Much new supply is in apartments. In the rush to create new supply, some local councils and state governments have provided bonuses to developers by allowing, at no charge, more apartments on a site. Land owners have seen this behaviour and are likely to increase land prices on the assumption that this will always happen. So, in this case, more supply (through additional apartments) may have actually increased prices not reduced them.

The global ‘financialisation’ of housing

Demand has increased because the focus for many housing investors is now not the cash flow generated by rents but the value of a house as a financial product. For example, at the moment there is continued strong demand for housing by investors despite the fact that apartment rents have started to decrease in Sydney and are flat in Melbourne.

The internet, and the global real estate market it helps support, enables national and international investors to be an increasingly important part of the market. They increase demand pressures in the best-performing (in terms of price growth) cities of Sydney and Melbourne by “soaking” up the new supply.

If politicians were serious about the affordability crisis, they would be trying to support the important but underfunded affordable housing sector. Better targeting tax breaks towards new and affordable rental housing, rather than fuelling demand for existing homes, would also help. But until our politicians can see past supply slogans we can expect very little policy change.

Authors: Chair of Urban Planning and Policy, University of Sydney;Professor – Urban and Regional Planning, University of Sydney

 

How renting can fix the UK’s broken housing market

From The Conversation.

How to fix the UK’s housing crisis has been the subject of national debate for decades. Universal home ownership is a popular goal, which successive governments have failed to achieve. This is largely because they have been faced with the paradox of increasing the supply of affordable housing while not encouraging house prices to fall, as this is widely regarded as political suicide.

One solution has been to promote policies that make it easier to get a mortgage or boost disposable income so that it rises faster than house prices. In fact, nearly ten years after a global financial crisis caused by the ready availability of mortgages to households with no ability to repay them, the UK government maintains its “Help to Buy” initiatives. These focus on helping people to borrow the large sums necessary to pay for unaffordable homes.

What has been missing from the debate is the role that renting can play in solving the UK’s housing problems. The government’s latest white paper is significant in that it features policies to help renters. But ownership remains the ultimate goal.

In the UK there is social and political pressure for people to “get a foot on the housing ladder” – even when, in many cases, it is financially preferable for households to rent. Although the benefits of home ownership are many, one should ask whether it is wise for governments to encourage – and subsidise – people to take on debt that they would otherwise not be able to afford, in order for them to place all of their financial resources into an asset that may be overvalued or unsuitable.

Must you get on the ladder? shutterstock.com

Eggs in one basket

One of the most basic rules of investment is “don’t put all your eggs in one basket”. Yet most households do just that when they buy a home and then they leverage this investment by borrowing money.

This is much riskier than placing all of your money in a fund that tracks the global stock market. Not only is it difficult to sell a house when you urgently need the money, if house prices fall – even by a not unusual 10% – your losses will be multiplied by the gearing effect of the mortgage. For example, if all of your savings amount to £20,000 and you use this as a 10% deposit to buy a £200,000 home, then you borrow the remaining £180,000, a 10% price fall will leave you with no savings and owing money to the bank if you then try to sell.

For previous generations, from the late 1970s onwards, the risk of homeownership has paid a commensurately high return because inflation has been generally positive but benign. And, at the same time, interest rates have trended down from double digits towards zero.

For those contemplating buying their first home today, however, the outlook for both interest rates and inflation is more uncertain. For example, Japan and more recently some eurozone countries have experienced prolonged periods of deflation. In the UK, despite efforts to keep inflation positive, actual realised inflation has been consistently below the Bank of England’s forecasts from the second quarter of 2013 until January.

Don’t bet on inexorable rises. shutterstock.com

House prices vary substantially over time relative to both GDP and household income – confirming that housing is a risky investment. Furthermore, in markets where building land is in short supply (such as Japan and many parts of the UK), this variability is greater than in markets such as the US where it is more readily available to meet demand.

When renting is better

In a recent paper I demonstrate that renting can be a better financial option than buying in a number of circumstances. These include: if you do not plan to live in the same house for at least five to ten years; or if inflation is negative (deflation); or if the net rent saved by owning is less than your mortgage interest or the return you could have achieved by putting your money in other investments with a similar level of risk.

This is because rent typically includes substantial ownership costs such as building insurance, property maintenance and furnishing. So the money saved by owning a house is considerably less than the rent not paid. Another reason is that buying and selling houses incurs substantial transaction costs in the form of legal fees, transaction tax (stamp duty) and selling agents’ fees. These are much higher than rental transaction costs. So unless you plan to stay in the new home for a considerable time, the chances are that these higher costs will not be recouped by savings from rent or price appreciation.

Plus, although prices have tended to drift up in the long term, prices can and do fluctuate substantially in the medium term (five to ten years). So if you plan to relocate within a few years there is a greater risk of being unlucky in your timing and suffering a price loss.

Finally, purchasing a home fixes your housing costs and often incurs a substantial mortgage liability. This is good if prices and wages are generally rising – because the mortgage payments become more affordable as incomes rise. But, in a world of low inflation or deflation, mortgage liabilities remain fixed, but incomes, prices and rents tend to decline making it harder to sustain mortgage payments and harder to recoup the capital invested in buying.

There are many ways that governments can influence the affordability of housing besides helping financially constrained households to concentrate all of their savings into risky assets that they would not otherwise be able to afford. Allowing house prices to drop will always be politically difficult – homeowners tend to make up the bulk of the electorate that turns out to vote. But they could do much more to encourage renting, even if it does require a radical rethink in the British mindset when it comes to home ownership.

Author: Isaac Tabner, Senior Lecturer in Finance, Director of the MSc in Finance, University of Stirling

 

 

Rates on hold, but housing affordability remains ‘hotly debated’

From The Real Estate Conversation.

The Reserve Bank has left interest rates at historic lows as economic conditions improve, but the property industry says other measures are required to improve housing affordability.

The Reserve Bank of Australia left interest rates on hold at its first meeting of 2017, with rates held at a record low of 1.50 per cent.

Governor Philip Lowe noted in his statement that growth in China was stronger in the second half of 2016, that global business and consumer confidence is improving, and that global inflation is rising. He also said recent rises in commodity prices are increasing Australia’s national income.

Lowe said the RBA expects Australian economic growth in the final quarter of 2016 to firm, and re-affirmed the RBA is forecasting growth to pick up to “around 3% over the next couple years”. Lowe said Australian inflation is heading back towards the target range.

In his November 2016 statement, Lowe said cutting rates further may not be in the “public interest” if it further increased household debt.

Real Estate Institute of New South Wales President John Cunningham said the central bank’s decision was no surprise, but said he expects housing affordability to be “hotly debated” this year.

“An emphasis will again be placed on first homebuyers and there will be much debate this year on ways to improve their plight,” he said.

“A review of stamp duty is urgently required and should focus on first homebuyers and older Australians,” said Cunningham.

The RBA cut interest rates twice in 2016, first in May and then in August. However, banks are independently increasing interest rates for investors as increased global economic uncertainty raises their borrowing costs.

Laing+Simmons managing director and REINSW president-elect Leanne Pilkington echoed Cunningham’s sentiment, saying rate cuts are not the answer to improving housing affordability. Further rate cuts are not required in the current housing cycle, she said.

“Obtaining housing finance at attractive terms is already possible for those with the means,” said Pilkington.

“It’s those without the means – stuck in the rental cycle or unable to accumulate a suitable deposit – that face the greatest challenge in the market,” Pilkington said.

“Further rate cuts are not a solution to the problem. Between government and the industry, we need to table some alternative solutions to help people buy their first home,” she said.

“From a housing industry perspective,” said Pilkington, “rates are already low and have been for some time, so that piece of the affordability puzzle is in place.”

Like Cunningham, Pilkington believes changes to stamp duty are necessary to address housing affordability problems. “It’s through other avenues like stamp duty reform that improvements in affordability need to be addressed,” she said.

Pilkington also said making downsizing more viable for older Australians, introducing a Government-backed savings scheme to help people save for a deposit, and minimising the cost of mortgage insurance could all alleviate housing affordability problems in Australia.

The Property Council of Australia welcomed the statement by Lowe on interest rates, saying it was a sober assessment of housing markets.

The governor’s statement said “conditions in the housing market vary considerably around the country”.

Ken Morrison, chief executive of the Property Council of Australia, said the statement confirms the current situation of “prudent lending practices and the best environment for renters in a generation with consistent low rental growth.”

“The deterioration in housing affordability is a serious problem in a number of our major cities, but is not an Australia-wide problem,” said Morrison.

1300 HomeLoan managing director John Kolenda said the RBA will remain on the sidelines until uncertainty about the economic impact of US president Trump becomes clearer.

“The RBA will stay on the sidelines and assess the impact on the global economy although our domestic economy appears stable with no need to adjust interest rates,” said Kolenda.

Kolenda said while the RBA’s cash rate is unlikely to change in the short term, confusion could arise from varying mortgage rates, and reinforced his recommendation to use a mortgage broker.

Sensible reform to finance affordable housing deserves cross-party support

From The Conversation.

Treasurer Scott Morrison’s visit to cold old London last week in the middle of the Australia summer was time well spent. Morrison made time in his hectic schedule for a lengthy meeting with the UK’s Housing Finance Corporation (THFC) to discuss an affordable housing financial intermediary with its chief executive, Piers Williamson.

Founded in 1987 to make up for the shortfall in public funding, THFC is a finance aggregator and intermediary that co-funds affordable housing for rent and ownership. And Williamson is no stranger to Australia’s housing problems. He has been a source of advice and advocate for policy reform in various Australian industry and government forums. He also has the ear of our largest superannuation funds.

And, much like Australia, the UK has a serious problem with housing affordability and supply, made worse by policy and market settings that fuel instability rental housing. In this context, channelling investment via a specialist financial intermediary towards newaffordable housing provided by landlords with a social purpose makes good sense.

The idea just needs an effective champion in Australia. In fact, it needs a bipartisan team of champions.

How does this financing model work?

Long identified as a glaring gap in Australia’s affordable housing system, bonds issued via a specialist intermediary would steer investment to where it is sorely needed. If combined with appropriate incentives and public programs, it would go a very long way towards producing more affordable housing choices, as in the UK.

International research found the UK’s Housing Finance Corporation to be one of the world’s leading examples of good practice. It funds not only affordable housing but also ensures that investment flows towards registered landlords meeting real accommodation needs.

Researchers have adapted this model in proposals for an Australian Affordable Housing Finance Corporation. Combined with a well-designed guarantee and revolving capital loans program, it’s a feasible approach, as a New South Wales government-funded study found in 2016.

In the UK, THFC combines the borrowing demands from small social landlords with committed public assistance to source the most favourable financing terms available from capital markets. With a guarantee, these enabled housing associations to borrow at a cheaper rate than the UK government.

THFC acts as the landlords’ principal. It issues mortgage bonds on their behalf, raising and passing on funds at a lower cost than would be individually possible.

Public funds on both the supply and demand side are also an important part of the equation. The NSW feasibility study makes it clear that a stable government co-investment strategy is required to ensure affordable supply.

Such a strategy was well established in the UK. But in recent years it has become less generous and stable, which has affected both supply and affordability. The UK experience demonstrates that the greater the share of public investment and stability of revenue settings, the lower the cost of private finance and the more affordable dwellings can be.

Over the past 30 years, THFC co-financed more than 2.4 million dwellings through well-regulated landlords with a commitment to secure affordable housing. These registered social landlords allocate dwellings on the basis of need rather than to the highest bidder. Renting affordable homes to those who need them is their business focus, not capital gains.

These landlords are well regulated for this purpose. In return, they have access to favourable public loans, tax incentives and direct revenue support via the UK’s Housing Benefit.

With detailed knowledge of providing sustainable social housing, THFC is able to assess the financing needs and credit risks of the housing assistance sector. Large institutional investors have little time for this. THFC’s hands-on scrutiny has ensured a zero-default record and stable A credit rating from Standard and Poor’s.

When an intermediary like THFC is combined with a government guarantee it can be even more effective in reducing perceived risks and thus financing costs, as our international research shows. Since 1991, the Swiss government helped to build, then backed, a thriving bond-issuing co-operative. This created a new market for bonds and drove down mortgage interest rates for affordable rental housing.

The UK’s Affordable Housing Guarantee delivered A$4.15 billion at or below the rate of government bonds in its three-year existence. The not-for-profit Housing Finance Corporation was licensed to manage this scheme. With the UK Treasury guarantee, it was able to obtain and pass through funds from the European Investment Bank below government gilts.

What conditions are needed for success?

The longest-term and lowest-cost investment flows to where the risks are known and predictable. In the UK, these risks have been reduced by four key conditions:

  • On the revenue side, rents have been underpinned by adequate levels of assistance for those who need it.
  • Landlords are registered and regulated in England and Scotland to ensure they are not only financially sound but also socially responsible and thus eligible for government support and tax incentives.
  • On the supply side, government funding instruments provides subordinated loans, guarantees and equity.
  • Planning mechanisms provided well-located land for affordable housing development.

These conditions have been in place throughout successive governments, Conservative and Labour. More recently, the emphasis has shifted from social rental dwellings towards affordable home ownership.

The situation in Australia is different. The small community housing sector offers long-term tenancies and shared-ownership housing in a supportive context. However, the sector needs a more sustainable business model to grow.

Current policy settings affecting supply (capital investment, planning provisions) and rent assistance are too weak and uncertain. This can change; it’s all a matter for policy reform. Other countries have moved ahead and Australia needs to catch up.

With an intermediary and appropriate government support behind them, Australian community housing organisations will have the potential to grow, as they have in the UK, US, Switzerland and Austria.

By now Morrison and his team should be well informed, having spoken to the UK experts, boned up on international evidence and consulted Australian industry.

Following the recommendations of the Senate inquiry into affordable housing and Treasury’s own Affordable Housing Working Group, sensible policy reforms such as these are likely to attract cross-party support. They not only draw on proven best practice elsewhere but can be adapted to Australian market conditions and growing needs.

Author: Julie Lawson, Honorary Associate Professor, RMIT University

Building Approvals Past Peak – HIA

The December 2016 update for ABS Building Approvals confirms we are well passed the peak for the cycle, said the Housing Industry Association.

In December 2016 total seasonally adjusted building approvals fell by 1.2 per cent with detached houses down by 2.2 per cent and ‘other dwellings’ sitting flat at +0.1 per cent. On a three month annualised basis total approvals remain above the 200,000 threshold at 204,692.

In December 2016, seasonally-adjusted building approvals increased by 19.5 per cent in Tasmania and 17.0 per cent in Victoria, while in trend terms there was an increase of 1.2 per cent in the Northern Territory. Building approvals fell in Western Australia (-16.3 per cent), New South Wales (-13.2 per cent), South Australia (-5.4 per cent), and Queensland (-0.1 per cent). In trend terms approvals fell by 2.1 per cent in the Australian Capital Territory.

“While a downward trend in building approvals is firmly entrenched, residential construction activity itself will hold up well throughout 2016/17,” said HIA Chief Economist, Dr Harley Dale. “From 2017/18 we will see a sharper decline in new home building activity, primarily due to the medium/high density segment of the market.”

“Building approvals peaked in July 2016, but by December last year were only 18 per cent lower than that peak. Given approvals reached an all-time high last year that’s a modest fall – we can take that away and bank it as a good outcome for the Australian economy.”

“This has been an extraordinary cycle for new home building – the biggest and longest in history. A long tail to the cycle will be helpful for the Australian economy.”

“It is important to focus in 2017 on ensuring Australia has the correct longer term policy settings to ensure we adequately house our growing and ageing population. The recent appointment of Michael Sukkar as Assistant Minister to the Treasurer, with a focus on housing affordability allows the Federal Government to lead from the front in meeting this crucial national objective.”

Social Impact Investing

The Treasury has release a discussion paper to explore ways the Australian Government can develop the social impact investing market. It is potentially linked to the question of housing affordability.

The Treasurer’s media release said:

There are currently over 180,000 people on social housing wait lists across Australia. The number of social housing dwellings would need to grow by almost 50 per cent in order to accommodate this number of people.

We need to create an investment environment to make a meaningful increase to the available stock of affordable housing, one where the involvement of private investment can contribute to increasing supply as demand grows.

One of the challenges faced by all countries developing affordable housing is access to longer-term, low-cost finance. Access to capital is a critical issue for the affordable housing sector and the ability to leverage private sector investment is required to boost the supply of affordable housing.

While in the UK, I am meeting with leading institutions and entities that have been developing more innovative forms of investment. This includes institutions involved with the £1 billion “build to rent” policy that leverages public spending to encourage large private investors into providing more affordable housing.

This week, I visited the Lendlease Elephant Park site in London, UK. The visit provided an opportunity to view first-hand the affordable housing being offered by the project.

The UK Government has been successfully implementing innovative forms of finance to provide additional sources of funding for social infrastructure, including affordable housing.

The Elephant Park project in London offers 25 per cent affordable housing. Half of the 550 affordable homes will be available as a mix of affordable and social rent, with the other half available under shared ownership. The L&Q Group will take ownership and manage the affordable housing to be built at Elephant Park by Lendlease.

Housing affordability is an important issue for Australia. The Turnbull Government is continually looking at ways to improve supply in the area of affordable housing.

At present, the Commonwealth and state and territory governments combined are spending over $10 billion a year on housing, but it is failing to improve outcomes, particularly for those with low-moderate incomes.

The discussion paper proposes that the Australian Government could primarily support social impact investing by creating an enabling environment for private sector-led social impact investing and by funding (or co-funding with State and Territory Governments) investments which generate savings or avoided future costs to fund reforms and deliver better outcomes for Australians.

Taking a social impact investment approach provides the Australian Government with an opportunity to fund ‘what works’ and reinvest spending that would otherwise not achieve beneficial outcomes.

In many policy areas relevant to social impact investing, the Australian Government is a funder or regulator. For example, the Australian Government has funded social impact investments in the Indo-Pacific region as part of a move towards innovative financing across the whole Australian aid program. The Australian Government is also responsible for financial market regulation, including the regulatory settings that affect social impact investing.

State and Territory Governments are leading on social impact investing, consistent with their responsibility for the delivery of many services which could be delivered through social impact investing, including justice, homelessness and out of home care services. The discussion paper also seeks views on areas where the Australian Government has direct policy responsibility.

The Australian Government could form partnerships with other levels of government to develop social impact investments. Such partnerships could involve sharing data critical to determining the outcomes of interventions. The split of roles and responsibilities between the Commonwealth, State and Territory and local governments shapes the role each level of government could effectively play in developing the social impact investing market.

Two reports have recommended the Government consider moving towards a social impact investment model for funding some social services. The 2015 review of Australia’s welfare system, A New System for Better Employment and Social Outcomes (known as the McClure Report), recommended that the Government consider expanding outcomes based social impact investment models to target financial investments towards addressing social problems.

In 2014, the final report of the Financial System Inquiry recommended that the Australian Government ‘explore ways to facilitate development of the impact investment market and encourage innovation in funding social service delivery’. As part of the Australian Government’s response to the Financial System Inquiry, the Australian Government agreed to prepare a discussion paper to explore ways to facilitate the development of the social impact investment market in Australia.

Social impact investments are investments made with the intention of generating measurable social and/or environmental outcomes in addition to a financial return. Social impact investing is an emerging, outcomes based approach that brings together governments, service providers, investors and communities to tackle a range of social issues.

This discussion paper seeks comments on issues that are relevant to the role of the Australian Government in developing the social impact investing market in Australia.

This discussion paper invites consultation on the Australian Government’s role in developing the social impact investing market. We encourage participants from the community, charitable and private sectors, State and Territory Governments and the public to consider the issues set out in this paper and make a submission.

There are three key components for consultation in this discussion paper:

1. The role the Australian Government should play in the social impact investing market. This discussion paper proposes that the Australian Government could primarily support social impact investing by (i) creating an enabling environment and (ii) by funding (or co-funding with State and Territory Governments) investments which would likely achieve savings to fund the intervention and deliver better outcomes for Australians.

2. The principles for social impact investing have been developed by looking internationally and at the State and Territory level to identify the key principles for effective social impact investments. The principles have also been informed by the Australian Government’s experience in this field to date and consultation with stakeholders. We seek feedback on these principles from interested parties before they are finalised. Once the consultation closes, we will create a revised version of the principles that takes into account submissions.

3. This discussion paper also outlines potential regulatory barriers to the growth of the social impact investment market identified by stakeholders and research on the sector. It seeks views on potential ways that the Australian Government can act to address these barriers, with the aim of facilitating social impact investing.

The submission is open until 27 February 2017.

Housing Affordability Takes Another Dive

The latest Housing Industry Association (HIA) Affordability Report shows how further gains in dwelling prices have caused housing affordability to deteriorate sharply during the December 2016 quarter.

Affordability worsened in six of the eight capital cities during the December 2016 quarter. The biggest deterioration was in Melbourne (-11.6 per cent), followed by Canberra (-10.7 per cent) and Sydney (-7.3 per cent). Affordability has also become more difficult in Darwin (-3.8 per cent), Brisbane (-2.9 per cent) and Adelaide (-2.3 per cent) during the December 2016 quarter. Only Perth (+2.1 per cent) and Hobart (+1.2 per cent) saw affordability improve during the quarter.

Based on the HIA Affordability Index scores for December 2016, affordability conditions are the most challenging in Sydney (54.7), followed by Melbourne (66.0), Canberra (76.6), Brisbane (85.3) and Darwin (85.3). By some margin, Hobart (117.8) is the most affordable capital city. Perth (96.6) is the second most affordable capital, followed by Adelaide (93.0).

“During the December 2016 quarter, housing affordability across Australia worsened by some 7.3 per cent due to the recent uplift in dwelling prices,” explained HIA Senior Economist, Shane Garrett.

“However, Perth experienced a further improvement in affordability and today’s report also shows how home purchase remains particularly accessible in markets like Tasmania, regional South Australia, regional Western Australia and regional parts of the Northern Territory,” added Shane Garrett.

“Nationally, housing affordability has managed to move in the wrong direction in many major cities despite the fact that interest rates are at very low levels. The sluggish pace of earnings growth in the economy has been an impediment to better affordability,” Shane Garrett pointed out.

“Achieving sustained improvements in affordability requires stepping back and looking at the big picture.

Housing affordability is front and centre in everyone’s mind once more. Whilst there is no single solution, there are some key policy levers that governments could use to provide some relief,” concluded Shane Garrett.

 

Government slammed for lip service on affordability

From Australian Broker.

The national discussion about housing affordability and boosting supply is how politicians make the public think they care without acting, one leading academic has said.

“People have been pushing this line that new supply is going to suddenly generate housing affordability outcomes for five or six years, but if you draw a graph of supply and prices they’re going up together,” the chair of urban and regional planning and policy at the University of Sydney, Peter Phibbs, told News.com.au.

“If politicians were really interested in putting downward pressure on property prices, there are other things they could do.”

Scrapping federally-controlled negative gearing concessions – which Phibbs said was the “single most important” method for combating affordability issues – has been rejected by the new NSW Premier Gladys Berekilian.

As well as this, the government could also adjust tax settings by doing away with stamp duty or introduce a more efficient land tax, he said.

By focusing on fixing supply, politicians could be seen as taking action while in fact doing nothing at all, Phibbs said.

“If you leave it to the market, it’s an incredibly blunt tool. It’s like trying to put a bushfire out with a garden hose.”

While the government knows the topic of housing affordability is important for voters, the issue will never be seriously prioritised, he said, especially while politicians act in the interests of owner occupiers and property investors.

“What will probably change in Australia is a lot of people that in previous generations would be homeowners, are no longer going to be. We’ll end up with more renters than homeowners and that’s probably when we’ll see some real change from governments,” he said.

“But until then, the politics just don’t work.”