First home buyers are slipping in the ranks of Australians purchasing a home, and once again negative gearing and supply issues are back in the spotlight.
Even Aussie Home Loans founder John Symond has acknowledged negative gearing is skewed towards high income earners and should be addressed as part of a tax system review.
There is also growing concern from the Reserve Bank that highly geared property investments by Self Managed Super Funds (SMSF) are pushing up prices, with the potential to drive home ownership further from the reach of ordinary households.
In his first major speech on housing since the election, Social Services Minister Kevin Andrews referred to a national housing shortfall which the National Housing Supply Council expects will grow to nearly 370,000 dwellings by 2016. Minister Andrews stressed the economic imperative of attracting a variety of investors into housing, and specifically towards private rental.
Willing and able contenders include Australia’s rapidly growing superannuation funds. Yet as SMSFs have shown, they can also drive up the price of existing dwellings. Much more efficient and effective investment pathways are required to boost housing supply and improve affordability.
Obviously, to attract the right kind of super funds, Australian governments need to be conscious of what drives their investment strategies. Risks, returns, liquidity and scale are all variables which cannot be ignored. Driven by tax incentives, highly geared speculative investment is not only costly for governments but also damaging to rental security.
Industry fund managers are actively learning about Australia’s emerging affordable rental housing providers, such as housing associations and rental co-operatives, and trying to define the terms and conditions under which they would be willing to invest. Australian Super, our largest industry super fund, recently hosted an international think tank to design an investment mechanism.
Currently, bank lending terms are stymieing the growth of the affordable housing industry. The cost and conditions of lending can be improved by rerouting the financing pathway, matching super funds risk/return appetite with the secure rent revenue of well-regulated community housing organisations.
Recently published research by RMIT and UNSW for the Australian Housing and Urban Research Institute (AHURI) has explored how governments can attract institutional investment to this new asset class, by supporting the establishment of a specialist financial intermediary to pool borrowing demands and providing a conditional government guarantee.
Housing associations and co-operatives aim to grow the supply of affordable rental housing for a range of low and middle income households where needed across Australia. Yet they remain small as optimum public-private financing arrangements lag behind.
RMIT research has found commercial borrowing by housing associations has expanded considerably in the past five years, but the variation in terms offered and the length of the debt-raising process suggests such borrowing is still immature with a limited number of engaged lenders.
Loan tenures are extremely short, often less than three years, imposing significant refinancing risks. Many loan facilities are interest-only, preventing organisations from amortising debt and building up any equity. Research strongly suggests commercial banks are unlikely to provide the considerable financing required to expand affordable rental housing in the future.
Luring the super sector
According to the RMIT AHURI report, a new financing option could attract investment from Australia’s rapidly growing superannuation sector. Australian funds invest heavily in more risky equity investments as well as infrastructure such as toll roads, rail and airports. But they also invest and hold lower yield, fixed income securities as a hedge against inflation and to ensure greater diversity alongside more risky equity investments.
To help establish a new market, governments can guarantee investment in well regulated not-for-profit landlords, such as community housing organisations. This would enable long term rental housing providers to attract lower cost, longer term investment.
The RMIT AHURI research has analysed seven schemes in Europe and the US detailing how guarantees and intermediaries channel longer term, lower cost investment to increase the supply of social and affordable housing. One of the most important findings of this review is the minimal impact that guarantees have had on government budgets.
Through appropriate revenue support and regulation, sound business management practices and carefully structured guarantees, there has been a zero default rate among many European housing providers receiving guaranteed loans.
A stable and supportive policy environment could deliver the same result for Australia.