Institutional investors do want to invest in affordable housing in Australia. The National Rental Affordability Scheme, now axed, proved this with the latest funding rounds oversubscribed. According to leading housing research group AHURI, what’s missing is the right vehicle and quick government action, before we lose momentum.
Government needs to act swiftly to introduce an appropriate incentive scheme to deliver affordable rental housing, before the private investment sector loses interest and momentum, according to a new Australian Housing and Urban Research Institute report.
The report examined the performance and outcomes of the National Rental Affordability Scheme, which was axed by the Coalition government in 2014 and it also referred to government-directed financial incentives in countries such as the US, UK, Ireland, France and Canada.
The research, Subsidised affordable rental housing: lessons from Australia and overseas, showed that NRAS had drawn the market’s attention, with the final three funding rounds oversubscribed and a secondary market for incentives developing.
It is this momentum that is at risk, according to lead author and AHURI director, Dr Steven Rowley, from the Curtin Business School.
“I believe institutional investors do want to invest in affordable housing, and indeed they do so at scale in other countries, but the right vehicle is not available at the moment,” Dr Rowley told The Fifth Estate.
“Other countries have shown what can be achieved with the right policy settings, and importantly, policy certainty.”
He said the US Low Income Housing Tax Credit Scheme, for example, has delivered over two million units, and that the level of private investment is “incredible”. In the UK, investment institutions have been delivering low cost funding for the social housing sector and helping them deliver affordable dwellings.
“Had NRAS been retained I believe institutions would have found a way to make it work and it could have developed to deliver a significant, ongoing supply of new affordable housing desperately required,” Dr Rowley said.
“We are now in a position where we will gradually lose over 30,000 affordable subsidised rental dwellings and are increasingly reliant on an underfunded community housing sector to do the heavy lifting.”
The fact the federal government has no proposal to replace NRAS on the immediate horizon meant relying on state and local governments to deliver affordable housing.
“I think state governments are starting to understand the impact of affordability on economic, social and health outcomes.
“They understand housing as a continuum consisting of different housing tenures and how solutions need to be offered across this continuum and not just in the private market.
“The recent speech by Scott Morrison shows federal government is lagging behind. The solution to affordability is very complex. It is not simply releasing more land and hoping the private sector will deliver affordable housing because they won’t, it is simply not profitable to do so.”
He said while we may see more low cost housing in some locations catering to the bottom end of the market, those developments will be in response to demand at the lower end, not about delivering “desperately needed” affordable housing for low income households.
The principal reason housing is unaffordable for so many people is due to demand-side pressures, Dr Rowley said. New supply can relieve some of that pressure “under certain circumstances”, but ultimately prices and rents are demand driven.
“WA is a good example,” he said. “Housing supply in this state has been consistently higher per capita than any other state yet prices almost doubled in two years because of demand pressures caused by a rapidly expanding population and economy.”
Dr Rowley said NSW has been underbuilding for 30 years, but only in the last three years have prices grown strongly, fuelled by both domestic and offshore demand.
New supply adds only two to three per cent to the state’s dwelling stock each year, so it’s the established market that drives prices
He said supply has reacted to this, but prices are driven by the established property market, as new supply is only adding two to three per cent to the state’s dwelling stock each year.
Slashing stamp duty and high density not silver bullets
Property industry statements that slashing stamp duty is the solution, or increasing numbers of high density developments will deliver affordability are questionable.
“Stamp duty is part of the solution but it won’t make much difference to those on low incomes,” Dr Rowley said.
“It will make it easier for some moderate income earners to access the ownership market which may free up rental stock for those on lower incomes but it is not suddenly going to make ownership affordable for low income families.”
He said the property industry is in favour of removing stamp duty because it will increase market activity and allow households to downsize, also it will lower the deposit barrier and increase demand.
And high density development does not deliver low cost housing in the short term, he said, because the cost of building requires a certain revenue to make developments profitable. It is also only viable in locations where a one bedroom dwelling will not be affordable for a low income household.
“High density is not conducive to delivering low cost housing. Ironically, low quality, high density developments may well prove to be the low cost housing of the future as they get older, the maintenance bill increases and rental returns fall.”
Policy interventions are key. For example, if developers are permitted to deliver high density development and there is an affordable housing requirement attached to it, this will have a positive impact on affordable housing supply, he said.
“This may well mean granting development bonuses to the private sector in return for the delivery of affordable housing, most likely in the form of subsidised market rental housing or shared ownership products where the subsidy required is shallowest.”
He said that in the UK, affordable housing requirements as part of planning policy have been successful.
However, to introduce them in Australia at any significant scale on market sites, it will require “strong leadership, policy clarity and certainty and a long lead time to bed in”.
Other ways the government can subsidise affordable housing include directly providing public housing, funding for the community housing sector or through the use of public land.
“At the very least, government of all levels should maximise the delivery of affordable housing contributions on its own land,” Dr Rowley said.
The institutional investment sector can also play a role in delivering affordable housing, he said.
“There is some momentum in this space and I believe institutions have an appetite for such investment.”
He said the forms this investment might take could include social impact bond schemes to deliver low cost funding to the community housing sector. Direct investment in housing, however, is less likely, because the current tax settings mean returns are too low.
It all comes back to the policy settings.
According to the report, any government-driven program would need clear and measurable targets and objectives, and must demonstrate a long-term commitment from the government to secure the confidence of the investment sector.
It should also run alongside alternative affordable housing investment options, such as a financial intermediary designed to secure low-cost funding for the community housing sector.
“A subsidised affordable rental scheme, combined with planning mechanisms to deliver land for affordable housing and measures to build the capacity of the community housing sector, could deliver a significant supply of dwellings to help tenants transition from social housing into the private rental market,” the report said.
Currently, the only support generally available to low income working households is Commonwealth Rental Assistance, Dr Rowley said. Public housing is now only for households with high-level needs.
“There is just not enough community housing available,” he said.
“We desperately need to expand the community housing sector and that requires funding, be it from government or from private sector investors seeking impact investment.”
This is also important in light of the trend of a growing proportion of households relying on the private rental market, as ownership becomes out of reach even for households in median incomes in some locations. This is set to continue, Dr Rowley said.
That in turn means an increase in the cost of CRA to the federal coffers.
“Tenants in the private rental sector are already paying significant proportions of their income on rent in order to secure appropriate housing in appropriate locations. The competition for quality rentals is fierce in many areas and households on decent incomes looking for something affordable to help them save for a deposit are competing with households on low incomes,” Dr Rowley said.
“Cheaper rentals are not necessarily going to those households on lower incomes. Many households on low incomes are in a very precarious position and in significant danger of falling into a position of homelessness.”
- Read the full AHURI report here