Government guarantee opens investment highway to affordable housing

Australian governments have stepped into the market at critical times since the late 19th century to encourage and channel investment in affordable housing. With rising housing stress in Sydney, Melbourne and other areas, the Australian government has now done just that.

On Friday, Assistant Treasurer Michael Sukkar slipped into the National Housing Conference in Sydney to announce a government guarantee on investment in affordable housing.

The announcement went largely unreported, but it was significant. The guarantee is a crucial piece of the affordable housing policy architecture, complementing the “bond aggregator” (or intermediary) mechanism announced in the budget. Treasurer Scott Morrison and Treasury officials have been working on this intermediary, a National Housing Finance and Investment Corporation, over the past 18 months.

Further reading: Bond aggregator helps build a more virtuous circle of housing investment

These combined measures should create an efficient private investment pathway into social and affordable housing for super funds, insurance companies and other entities hungry for low-risk returns.

The government’s Affordable Housing Working Group outlined this approach, drawing on a number of our reports commissioned through the Australian Housing and Urban Research Institute (AHURI). These assembled powerful evidence from a range of countries of the proven record of government-backed financial intermediaries and debt guarantees in affordable housing finance systems.

Judging from responses to the Treasury consultation paper, the guarantee enjoys strong industry and political support.

This development could also catalyse efforts to build a national housing accord backed by industry, civil society and welfare groups to expand affordable housing for the growing number of Australians in need. A campaign in support of this, Everybody’s Home, was foreshadowed at last week’s conference.

New model based on an old principle

A government guarantee to back bonds issued by the new NHFIC marks a welcome return to the Commonwealth’s former role of actively enabling investment in housing for low and moderate-income households. Historically, this involved reshaping circuits of investment to increase supply, improve quality, deliver better-planned suburbs, ensure returning soldiers were housed, broaden access to home ownership and provide security for households not served by a failing market.

The government support for investment will guarantee access to cost-effective private finance for community housing providers. It will be backed by a secure cash flow from rental income supported by Commonwealth Rent Assistance.

Affordable housing includes not only rental housing geared to income but also below-market-rate rental housing and home ownership. This offers a refuge for households unable to afford housing at market rates.

Coupled with dedicated public funding, the guarantee could turn what has been a trickle of short-term and costly bank debt into a hugely increased flow of longer-term and lower-risk investment.

Further reading: Budget 2017 charts new social and affordable housing agenda

Why invest in social housing?

Our AHURI-funded international research has found that long-term and patient capital makes an ideal partner for affordable rental housing. Instead of capital gains from sales, the steady cash flows from rent revenue offer secure returns. This is what makes it attractive to pension funds.

Combined with public co-investment and not-for-profit management, secure affordable housing outcomes are more assured.

This investment ultimately saves us all money. Too many Australian households are one step from homelessness, which is devastating for any family. The costs of homelessness to the nation are also huge.

But it’s not just a matter of cost. Homelessness is an affront to the Australian values of compassion and a fair go, often underestimated by political leaders.

Lessons from overseas are clear

The government’s re-engagement with efforts to boost affordable rental housing is in tune with moves in other similar countries.

Just last month Canada released its first national housing strategy, highlighting housing as a human right. The aim is to increase the supply of moderate rent and supportive housing by at least 100,000 homes over 11 years. A National Housing Co-investment Fund will provide A$16.5 billion to repair and expand the affordable housing stock.

Also last month, the UK government announced a new round of debt guarantees for “build to rent” development, alongside A$15.7 billion in direct investment and increased borrowing caps for social housing.

Further reading: ‘Build to rent’ could be the missing piece of the affordable housing puzzle

It is true the most effective affordable housing policy levers available to governments are land supply and direct public investment. This was the approach taken in early postwar Australia.

But since the 1990s Australian governments have shown no inclination to re-adopt this model. As an alternative, international best practice combines the most cost-effective long-term investment with strategic public investment in well-regulated not-for-profit landlords.

Finland offers an example. In a country one-fifth the size of Australia, 9,000 social housing dwellings are built each year. This is financed by low-cost government-guaranteed loans via a public intermediary, with interest subsidies and conditional grants to not-for-profit providers.

Finland has the lowest rate of homelessness in Europe. Young Finns leave their parental home and become independent earlier than anywhere else in the European Union. It’s a clever housing system, not based on the luck of the market or family fortune.

Now to tackle the public funding gap

Australian governments have long talked the talk of decent homes for all. But they have struggled to align policy on land development, property taxation and social security accordingly. Our political leaders have simply failed to reform our planning and tax systems to favour affordable housing.

The social housing investment guarantee represents an important return by the Commonwealth to leadership in housing policy and investment. It will bring in a large and willing industry super sector, delivering not only returns for policy holders but also real gains for society at large.

However, enabling more cost-effective private finance can narrow but not eliminate the shortfall in funding for social and affordable housing so that the books balance. As the government’s own advisory body made clear, this policy framework can realise its potential only when government commits the funding needed to bridge this gap.

Further reading: Australia needs to reboot affordable housing funding, not scrap it