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New report maps the route to affordable housing expansion

Posted by on October 4th, 2017 · Affordable housing, Finance, Government, Housing supply, Social housing, Uncategorized

By Hal Pawson, City Futures Research Centre.

Important new steps towards expanding Australia’s affordable housing were mapped out in a hard-hitting official report, published last week. The paper, by the Affordable Housing Working Group reporting to the Council for Federal Financial Relations, draws substantially on recent City Futures Research Centre findings. Its main purpose is in spelling out the ‘complementary reforms’ needed to support Scott Morrison’s affordable housing bond aggregator as first announced in the May 2017 budget. This vehicle, as the report reminds readers, is a mechanism to ‘lower the operational and capital costs for [community housing] providers, with these efficiencies available for reinvestment into further social and affordable housing’ (p1).

Citing statistics drawn from our AHURI-funded research on affordable housing industry capacity, the report opens by acknowledging the recent growth of Australia’s not for profit housing sector. Nevertheless, as emphasized NFP-provided social housing still accounts for under 1% of national housing stock within a total social housing provision of only 4.3%.

Factoring in projected population growth and average household size, the report estimates that five million additional dwellings will be needed across Australia between now and 2055. Maintaining social housing at its current share of all housing calls for a net increase of 230,000 social rental dwellings over that period – or 6,000 per year (p8).

While it is no more than a simple statement of fact, recognition of this reality in an official report puts down a useful marker. This is especially true since current rates of social and affordable housebuilding are probably running at only around 3,000 (statistics for public housing construction can be deduced from ABS Cat8752 Table 33). And, with much of this output involving redevelopment and replacement of existing estates, net growth under prevailing investment approaches will be even lower than this – as indicated by Productivity Commission figures (Table 18A.3) showing 2013-2016 annual growth in social housing averaging less than 1,500 homes.

The case for the bond aggregator and the funding gap challenge

As in its inaugural report from late 2016, the Working Group stresses that the proposed bond aggregator is only a necessary and not a sufficient condition for affordable rental housing growth:

Since the bond aggregator is simply a vehicle for achieving cheaper and longer tenor financing, the bond aggregator by itself will not lead to substantial growth in affordable housing (p1)

Fundamental here is the affordable housing provision funding gap defined in the report as the gap between the operating cost and revenue associated with social and affordable rental housing provision. The report therefore recommends that governments ‘examin[e] the levels of direct subsidy needed for affordable low-income rental housing…’ (p2). Moreover, it argues that no single tier of government can be relied upon to bridge the funding gap. Rather, this ‘will require greater contributions from all levels of government …. or the private sector’ (p14). As argued in the report, developer contributions (dwellings or levies in lieu) mandated through the planning system should be given specific consideration.

Building on its initial paper, the Working Group’s report draws on evidence from recent mixed tenure redevelopment projects by the Western Australian Government to illustrate the funding gap. For affordable housing rented at 75 per cent of local market rents, the estimated revenue shortfall in relation to costs is $3,100 p.a. For social housing where rents are income-limited the shortfall, after available subsidies are applied, is $8,850 p.a. However, although a useful contribution to the debate, these figures need to be ground-truthed to reflect a greater diversity of development locations and financing options. Forthcoming CFRC research, due for publication later in 2017 or in early 2018, will do just that.

Utilising the bond aggregator to fund estate renewal

The Working Group’s report advocates that funds accessed via the bond aggregator be utilised in the renewal of existing public housing estates. It argues that this could be one important means of ‘ensur[ing] the scale [of debt issuance] sought by institutional investors’ (p15).

The report’s proposal here would be different from the NSW Government’s Communities Plus model of large scale estate renewal because in that instance the renewed social housing within a mixed tenure redevelopment is funded entirely from land sale for private housing with the social homes being owned directly by the NSW State Government (although CHP-managed). No debt is raised.

Under the AHWG model, by contrast, this replacement social housing would be CHP-developed and owned. The cost would be partly supported by CHP debt accessed through the bond aggregator, with the funding gap being bridged through land sale receipts (e.g. passed on to the CHP by the state government in the form of capital grant).

Enhancing community housing regulation

Again citing our recent AHURI report on affordable housing industry capacity, the Working Group declares in much more explicit terms than previously the importance of stronger community housing regulation, particularly for those CHPs wishing to access funds through the new mechanism:

To facilitate the successful introduction of the bond aggregator, there is a need to strengthen and achieve national consistency of the regulatory framework for community housing. [This] will provide a stronger signal to institutional investors of the viability of the sector and promote the expansion of CHP activities in Australia (p1).

Similarly, the Working Group echoes our research findings in concluding that:

‘for larger CHPs that are involved in property development and ventures beyond tenancy management, the NRSCH [National Regulatory System Community Housing]is unable to offer either governments or potential investors with the confidence they require’ (p22).

Once more consistent with our argument it is noted that – given their growing scale and importance – the dearth of published CHP performance data constitutes an ‘accountability gap’ (p23). Thus, the publication of such data ‘provides an opportunity for enhancing the current system’ (p23).

Noting that ‘the bond aggregator’s first issuance may occur as soon as late 2018’, the report emphasizes the urgency of regulatory reform to ‘ensure stronger financial reporting and risk management from CHPs, as well as oversight of governance arrangements’ (p24).

More broadly, and again endorsing our findings, the officials’ note a need for reforms to enhance consistency in regulatory application of the National Law across jurisdictions within the NRSCH. This is about enhancing the regulation of community housing more generally, not limited to provisions relating to CHPs wishing to access private finance via the bond aggregator.

The Working Group sees scope for enhancing the current NRSCH through negotiation between the Commonwealth, states and territories, so as to ‘build stronger standards around CHPs’ finances into the National Regulatory Code’ (p24). The NRSCH is in any case due for a five-yearly review in 2018 and this process could prove especially timely.
In considering reform options, the report also floats the possibility of establishing a new national regulator at Commonwealth level. It is acknowledged that this could be at variance with state and territory preference to retain the significant degree of control they have under the current system as administered through registrar offices in each jurisdiction. It is also recognised that such a proposal would pose challenges given that it would:

‘represent a substantial expansion of the Commonwealth’s role in the sector, including into aspects where it has traditionally had no role (such as the management of CHPs’ tenancy activities, tenancy support services and complaints management)’ (p25).

Ultimately, the report recommends that efforts should be initially focused on enhancing the current NRSCH since this will be ‘less resource and time intensive’ than creating a completely new framework. This should be progressed through a collaborative process involving the community housing sector itself, as well as Commonwealth, state and territory governments. For consistency with the planned launch date for the bond aggregator itself, resulting measures should be implemented by 1 July 2018.

It must be hoped that this collaborative process is kicked off without delay.

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