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‘Scott Morrison’s Finest Achievement (to date)’?

Posted by on December 12th, 2016 · Finance, Government, Housing


By Professor Hal Pawson, Associate Director, City Futures Research Centre

The SMH’s star economics correspondent, Jessica Irvine appeared to be heaping high praise on the nation’s Treasurer in her recent commentary. Her ‘finest achievement’ assessment commended Mr Morrison’s backing for proposals to open up access to more cost-effective private finance for affordable rental housing, as announced earlier this month.

All of this stems from the Treasurer’s late 2015 decision to initiate a high-powered group to investigate ‘ways to boost the supply of affordable rental housing through innovative financing models’. The significant event that took place on 2 December this year was Mr Morrison’s decision to publish his Affordable Housing Working Group’s report and recommendations.

For affordable housing advocates, the Working Group’s report certainly makes for encouraging reading. Squarely reflecting the conclusions of numerous AHURI studies and industry reports, its central finding is that ‘the establishment of a financial intermediary to aggregate the borrowing requirements of affordable housing providers and issue bonds on their behalf (‘the bond aggregator model’) offers the best chance of facilitating institutional investment into affordable housing at scale, subject to the provision of additional government funding’ (p1).

The purpose of such an entity would be to act as a ‘clearing house’ for loan finance provided by institutional investors to part-fund the capital cost of affordable housing projects. More specifically, the intermediary agency would ‘liaise with affordable housing providers to determine the amount of debt they are seeking to raise …[and] source these funds in aggregate from wholesale markets by issuing bonds to investors. The funds generated would then be loaned to the relevant housing providers in return for ongoing interest payments’ (p24).

As the AHWG report makes clear, the Group’s financial intermediary proposal is strongly inspired by UK experience with The Housing Finance Corporation (THFC), a body established back in the 1980s and which has subsequently channelled billions of pounds in private finance into UK social and affordable housing.

Like THFC, the proposed Australian equivalent organisation should enable community housing providers (CHPs) to borrow funds at lower rates of interest and over longer terms than has been possible through reliance on bank loans, as at present.

In terms of concrete benefits, the report notes that the refinancing of currently outstanding CHP loans is likely to constitute the ‘lowest hanging fruit’ for a newly-established intermediary body. In other words, through sourcing cost-effective finance via the new entity, CHPs could pay off expensive existing debt, thereby freeing up capital for new affordable housing construction. With existing CHP debt totalling around $1 billion this ‘could result in an increase in [CHPs’] borrowing capacity by over 65 per cent or an additional $765 million’, potentially funding the (one-off) construction of ‘up to 2,200 new dwellings’ (p39).

The main game, however, is expanding the sector’s financial capacity to fund the ongoing expansion of affordable housing provision. Crucially, the report does not pretend that sourcing cheaper private finance will – of itself – enable this. It recognises that, given the income profile of the tenant population, the rental revenue that can be generated by social and affordable housing is inherently insufficient to fully underpin management and maintenance costs, even when financed at the most cost-effective rates. Thus ‘…the Working Group finds that the major barrier to the supply of affordable housing is the “financing gap” – that is, the difference between the rates of return available in affordable housing compared with the market rates of return available in other private developments’ (p2).

Following from this, as the report states quite bluntly, ‘No innovative financing model will close this gap and a sustained increase in the investment by governments is required to stimulate affordable housing production and attract private and institutional investment’ (p2).

In moving this agenda forward, the AHWG’s main recommendation was the setting up of an expert Task Force mandated to report on more specific proposals for the financial intermediary – its form, constitution, and governance – by mid-2017. To his credit, the Treasurer has backed this plan. But the inescapable implication is that he also recognises that creating such an entity is a worthwhile enterprise only if governments commit to co-funding the social and affordable housing projects that are envisaged as being enabled through the intermediary’s input.

State and territory governments could potentially make an effective contribution to bridging the financing gap through mandating private developer contributions via the land-use planning system. While arguably incorporating rather unambitious targets, the NSW government (via the Greater Sydney Commission) may have already pointed the way forward here.

As the AHWG suggests, there could also be some scope for states and territories to leverage new affordable housing investment via public housing transfers. The handover of state-built homes funded through the 2008 Nation Building Economic Stimulus package in NSW, for example, resulted in recipient CHPs leveraging additional affordable housing equating to around 20 per cent of the transferred portfolios. However, it is unlikely that the handover of run-down existing public housing properties will yield substantial gains in this respect – especially if governments (e.g. as in the current NSW transfer program) also require recipient CHPs to fund extensive non-landlord services as part of the package.

Going beyond these limited forms of effective subsidy, the NSW Government has also put itself out ahead of the other states and territories by funding the Social and Affordable Housing Fund – a creditable initiative which properly allows for ‘financing gap’ revenue payments. However, the SAHF has so far been bankrolled through electricity privatisation proceeds, inherently a one-off source of funds. And while further SAHF rounds have been intimated, making these a reality will present a major challenge for government if they can be funded only through dipping into general revenue.

At the national level, and considering the Federal Government’s anxiety about constraining its spending, it seems realistic to imagine that public funding to bridge the affordable housing financing gap can be made available only through the re-direction of existing housing subsidies. And where would one look for the lowest hanging fruit in that regard? Surely, no further than the current annual private landlord subsidy of $11.7 billion on negative gearing and Capital Gains Tax concessions. If the Treasurer can possibly find a way to live down his recent stonewalling rhetoric on this topic and channel released funds into affordable housing, he really will deserve Jessica Irvine’s accolade.

One Comment so far ↓

  • Garry Ellender

    Nailed it. Without a financing incentive scheme (eg. an Affordable Housing Tax Credit scheme, or revamped NRAS) a financing aggregation vehicle will have limited life. Negative gearing and CGT are the obvious financing sources, and even a redirection of just $1.5b to $2.0b pr annum (capped) would result in a dramatic increase in supply.

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