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Public housing transfers move to a new level

Posted by on January 23rd, 2017 · Affordable housing, Government, Housing supply, Social housing

By Hal Pawson, Associate Director, City Futures Research Centre

With the New South Wales Government’s recently announced tranche of public housing transfers to not-for-profit providers, Australia’s community housing sector is set for a new growth spurt. The addition of the 14,700 former Housing NSW properties – the largest transfer program yet – will expand existing national community housing provider (CHP) holdings by almost a quarter to over 90,000. The program’s main stated motivation is the commitment to build CHP capacity – to foster a more ‘diverse’ (and therefore contestable) social housing system. However, it takes place within the context of CHP tenant satisfaction ratings substantially higher than those for public housing and is also undoubtedly inspired by financial considerations – see below. The initiative will complement recent smaller-scale transfer programs in South Australia and Tasmania completed since 2013.

Long term contracts versus title transfer

While small-scale public housing transfers are nothing new, our just-published AHURI research report on recent programs highlights a number of significant departures from previous practice. In particular, contrasting with earlier handovers which often involved 3-year leases, these generally incorporate long-term (typically 20-year) management contracts between the relevant state government and the chosen CHP. Importantly, as confirmed by banker interviewees, this type of deal has the potential to enable recipient CHPs to ‘leverage’ additional housing investment on the back of the projected long-term revenue stream. Previously it had been widely believed that such leveraging would be impossible without full transfer of title – the standard approach to UK council housing transfers, but an approach rarely adopted in Australia.

However, for potential transfer benefits to be fully realised, CHPs need adequate certainty and security in their transfer project dealings. As highlighted in our report, seeking to partner with state governments in such programs remains risky for CHPs. Even where long duration contracts are involved, the terms of recent transfer deals arguably allow these to be too easily revoked by governments. The ‘political risk’ involved in such collaborations has also been starkly highlighted by the recent Queensland Logan transfer cancellation where extensive and costly preparatory work over nearly four years consequently came to nought. Reportedly, the losses incurred by the CHP consortium bidding to take on the transfer amounted to $8–10 million.

Partly for the reasons discussed above many CHPs may well remain convinced that the ‘irreversibility’ of title transfer means that it remains a far more attractive option than a management contract of any fixed duration. And, while most governments are still reluctant to countenance this model, the report details two recent Australian instances where full ownership handovers of former public housing are currently being progressed – in Victoria and Tasmania. Notably, as far as NSW is concerned, full title transfer of the entire public housing stock is also advocated by State Opposition leader, Labor’s Luke Foley.

Transfer impacts on state government accounts

Historically, a key reason given for state government reluctance to contemplate large-scale title transfer has been the mistaken claim that the budgetary impact would imperil a state’s credit rating. This refers to the fact that, under standard accounting practice (a) public housing is valued as if it were a saleable asset unencumbered by its current use, and (b) the full value of any such asset is recorded on a state’s balance sheet and, in the event of disposal, this value is logged on the profit and loss account for the year in question. However, as demonstrated by recent transfer practice – as detailed in our report – proper accounting practice also requires that ‘long lease’ transfers are recorded on state accounts as if they are full disposals.

Thus, the Tasmanian Government’s 2012/13 financial statement recorded the state’s 10-year management transfer contract with Mission Australia Housing transfer as involving a ‘grant’ to the recipient CHP equating to the book value of the properties concerned: $62 million. This is on the stated grounds that, despite ongoing state government ownership of the homes concerned, control of the economic flows from the asset have been ceded to the recipient CHP for 10 years. Following its subsequent – and larger – transfer program similar practice was observed. The overall accounting ‘write-down’ totalled $485 million. Interviews with senior policy-makers conducted as part of the current research established that this was not of concern to the Tasmanian Treasury in terms of any credit rating implications. Credit rating agencies were understood to regard public housing portfolio as an encumbered asset due to its dedicated function as low-cost housing and therefore incapable of realising open market book value.

Scope for leveraging additional housing investment

With assistance from finance expert, Emilio Ferrer of the Sphere Company, our research also modelled four transfer scenarios to assess their long-term viability and investment leveraging potential. Factoring in CHPs’ ability to capture Commonwealth Rent Assistance (for which public housing tenants are ineligible), and subject to certain other key assumptions, this confirmed the scope for transfers to generate a modest operational surplus—sufficient to eliminate moderate maintenance shortfalls and to underpin construction of new affordable rental homes on a limited scale. For example, in a scenario involving transfer of 1,000 tenanted properties carrying a backlog maintenance liability averaging $15,000 per dwelling, the model suggests the capacity to build 113 new homes over 30 years, with 29 of the transferred properties being replaced as part of this program and the remainder being brought ‘up to standard’. However, if maintenance liability in fact averaged $30,000, new dwelling output would be cut by more than half.

Furthermore, if – as required by the NSW Government in its new program – transfer recipient CHPs are required to fund substantial non-landlord activities (e.g. assistance to housing applicants, housing register management) from rental income, then the scope to generate new affordable rental housing is quickly reduced or eliminated.

As seen by those working in the business or living in the sector, fundamental reform of public housing in Australia is long overdue; as quipped by some interviewees, the system is currently on life support. Given the lack of any indication that governments will regain the political will to directly finance the sector’s restoration, a well-designed and planned diversification of the public housing system incorporating the community housing sector has the potential to form part of the solution. In the process, this could possibly generate benefits through contestability, and a more responsive management service, while ensuring public accountability through effective national regulation.

 

The final report from the research is available to download at:

Pawson, H., Martin, C., Flanagan, K. and Phillips, R. (2016) Recent housing transfer experience in Australia: implications for affordable housing industry development, Final Report no 273; Melbourne: AHURI

 

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