At the National Housing Conference last week, there was considerable optimism about the newly appointed federal minister for cities, Jamie Briggs, whose infrastructure mandate includes housing. New energy is coming from the states with the largest affordable housing deficits – a social housing initiative from the New South Wales government and a “refreshed” metropolitan planning strategy in Melbourne with a stronger emphasis on affordable housing.
It is now possible to imagine Australia having a national affordable housing strategy, backed by funding, by the end of 2016.
Australia certainly needs such a strategy. The population is projected to reach 38 million in the next 35 years. Sydney and Melbourne are each expected to grow by at least three million people. The proportion of older people will be higher, with a lower proportion in the paid workforce.
This means we need at least six million new housing units in the next three decades. There is increasing impetus to locate these dwellings close to public transport, employment clusters and health and social services.
Cost pressures are intensifying
Rising housing demand and prices affect everyone, but low-income renters have fared worst in recent years. Capital city rents rose by twice the level of inflation from 2005 to 2010. By 2011, the shortage of suitable rental properties exceeded 500,000.
As a result, even most households that receive Commonwealth Rent Assistance (projected to cost A$6.6 billion in 2015-16) pay well over the recommended maximum rent. Some 55% of the A$7.7 billion annual cost to the government of capital gains exemptions and negative gearing goes to the top 10% of income earners. Only 4% goes to the bottom 20% of households by income.
Existing programs are not accomplishing policy aims. The Abbott government discontinued two small national programs, the Social Housing Initiative co-funding construction of non-profit housing and the National Rental Affordability Scheme subsidising below-market rental housing. No national strategy or infrastructure funding program has replaced those small but important initiatives.
Key steps towards affordability
What would be the basic elements of a national affordable housing strategy? Economist David Rosen led a review of the US$7 trillion spent in the US on federal finance, tax, lending, spending and regulatory programs and policies. According to Rosen, the place to start is a standard definition of “affordable housing”.
The next step would be to calculate current and projected need for affordable housing by subtracting housing need from the available stock. There are local efforts to calculate this in cities like Melbourne, but it would need to be done in a consistent way across the country.
The cost of owning or renting a home includes rent or mortgage payments, property taxes and unit maintenance. A household can also incur onerous transport costs, if living far from employment and good public transport. Internationally, affordability is usually defined as housing that costs no more than 30-35% of household income, adjusted for household size.
For households earning less than 30% of their area’s median income, private market housing will almost certainly be out of reach without some form of subsidy.
In metropolitan Melbourne, for instance, the average weekly income is A$1333. A little over 11% of households in the city (159,000 households) earn less than A$400 a week, which is 30% of the median income. These households could only afford to pay a maximum of A$133 a week on the rent or mortgage. Less than 1% of rentals in Melbourne are available at those prices.
Social housing constitutes less than 3% of total housing stock. Most of it is occupied by these low-income households. So, at the most basic level, affordable housing would seek to fill that shortfall of more than 150,000 units in one major city alone, as well as building for future affordable housing needs.
How do we fund affordable housing?
After calculating need, the next requirement for a national affordable housing strategy would be to identify all potential revenue sources to fund it. These could be direct funding from national, state and local governments, but also indirect funding through tax rebates, low- or no-cost land, or mechanisms like reduced parking requirements or expedited planning approvals (which cuts land-holding costs and uncertainties).
A plethora of mechanisms used in other countries could be adopted here. For instance, in the US the Low Income Housing Tax Credit has, since 1986, allowed private investors to obtain tax credits in return for a ten-year investment in constructing or rehabilitating low-income rental housing. The stable and bipartisan program injects about US$6 billion a year in capital into affordable housing.
If a small proportion of the negative gearing tax credit were re-allocated towards investment in social housing, a similarly scaled program could be instituted in Australia. Similarly, if the Commonwealth guaranteed a 6% return on social housing investment, how much of the A$2 trillion held in superannuation funds could be unlocked?
For the past two years, the Transforming Housing project has brought together state and local government, private developers, community housing providers and commercial and philanthropic investors to identify barriers to scaling up affordable housing in metropolitan Melbourne and how to overcome them.
Much of the emphasis has been on mechanisms at a state and local level, ranging from value capture financing to innovative design and construction. However, there is growing consensus that a Commonwealth affordable housing strategy is essential to enable integrated action by other levels of government and the private and charitable sectors.
With a clear sense of the numbers around affordable housing need and a stable financing and renewal model, the Turnbull government could reap multiple co-benefits. A national strategy could make cities more liveable, stimulate the property and construction sector, and reduce healthcare costs. The private and charitable sectors are waiting to swing into action.
This article was co-authored by: Dr David Rosen, principal of DRA Associates and an advisor on development, finance and policy; Rob Pradolin, general manager of business development for Frasers Property Australia; Catherine Brown, CEO of the Lord Mayor’s Charitable Foundation; and Dr Heather Holst, deputy CEO and director of services and housing for Launch Housing.