Why affordable housing is “key public infrastructure”

Have you heard the story about the frog who was dropped in a pot of hot water? It jumped out and saved its own life. The frog couldn’t ignore its situation. Action had to be taken. Its life depended on it.

Have you heard the story about the other frog who was dropped in a pot of cold water that was slowly brought to a boil? The frog died.

The second story about the frog is the way our society is heading if we are not careful. We are becoming complacent and desensitised to the subtle erosion of the ties that bind our community. We are the frog in the pot and little do we realise how very warm the water has already become.

Why am I being so dramatic? Well, because I want people to wake up and take notice. Crime, suicide, domestic violence and depression are huge problems for our society, but we don’t relate them back to any specific issues. I believe (and this is only my view) one of the major factors causing these issues relates to the simple and fundamental human desire/need to have a place to call home.

There is a body of evidence that suggests people in less fortunate positions when it comes to having appropriately located living arrangements are at a greater risk of falling into the categories mentioned above. Scientific evidence clearly shows that if people are poorly housed, they are much more likely to develop mental illnesses.

The cold economic fact is that it also costs taxpayers a significant amount of money annually in helping these people. AHURI research suggests that every high risk young person (under 25 years old) diverted from homelessness saves government (and consequently taxpayers) around $120,000 a year. And yet we ignore these unintended consequences of members of our community not having a place to call home. Our public housing waiting list is growing, but neither federal nor state governments have the funds to build the additional accommodation that is now so badly needed.

Over the last six years, we at Frasers Property (formally Australand) have been involved in the delivery of two social/private housing projects in Melbourne – the redevelopment of the Carlton Housing Estate and the Westmeadows project. Yet both projects have been done via the traditional development model. Frasers Property bids for the project through a competitive tender process based on what we believe we can sell the private homes/apartments for and we pay a land value to the state, while building social housing for government at an agreed cost that they will own in full.

But the more we get involved with this unloved sector of the property market, the more we are learning how important it is to our economic and social wellbeing as a community, and as a country. To have key workers such as firefighters, nurses and police officers located in areas where society needs their services, and from a public housing perspective having these members of our community located where they have ready access to existing infrastructure and services (which from an overall government perspective is the lowest cost to taxpayers), makes good business sense.

Analysis by SGS Economics indicates a benefit–cost ratio of 7:1 in respect to the economic benefit to the community of providing public, social and affordable housing in the right locations. Our concern should be that if we allow this lack of housing to continue, the dislocation of our community is only going to grow and the above issues will become magnified and then take decades to fix. That’s where the second analogy of the frog comes in.

We can fix it. But we need to start fixing it now. We cannot wait for another set of reports or further investigations and feasibility studies. We need to learn from other countries around the world and see what their governments have done for their cities; see and learn about the benefits of the investment they have made in this type of housing; and learn how we can adapt some of their techniques to the Australian context. The economic benefits generated are significant and the ripple effects are intangible but real. It makes good business sense.

However, we can’t rely solely on government money to solve this problem, as it is also needed for other important infrastructure. We need to mobilise private capital by making it economically viable to invest in this type of housing. To do that requires a recognition by government of the market realities that will enable capital to flow naturally into that space.

Given that we are currently going through a housing boom, and with all other things being equal, we would expect to be building a level of public, social and affordable housing that keeps pace with the percentage increase in the private market stock. Except we are not doing that. Astonishingly, we have actually gone backwards in terms of both supply numbers and percentage, and to make things worse, prices are continually going up.

To compound what I have said above we have had 25,666 National Rental Affordability Scheme licences issued to build homes for key workers that are rented at 80 per cent of market rent. Putting aside the community housing sector that will probably renew the rental at 80 per cent of market, what happens in Year 10 (the end of the scheme) with the private investors? They will want market rent. So we have this “bubble” of families that are going to be pushed back out to the private rental market very shortly.

And as well as both of the above issues, the Auditor General’s investigation into the Victorian stock of public housing (which sits at around 65,000 dwellings) has identified that 14 per cent of the stock is nearing obsolescence.

So I believe we are already beyond the crisis point when it comes to the provision of public, social and affordable housing. It does not make good business sense to allow this to continue because it will, in the long term, affect our economy and then everyone will suffer. Even if we had the money available today, just to bring what we currently need back into some form of balance will take decades due to the time lag involved with procuring, planning and development.

So what’s the solution?

The current approach by both the state and federal governments needs to change. At the Community Housing Federation of Victoria Conference earlier this year, Professor Terry Burke from Swinburne University highlighted that 6000 social housing units a year would be needed just to maintain the proportion of social housing in Victoria (3.4 per cent), and more like 9000 a year to achieve five per cent – a proportion that is still significantly below current demand estimates. It’s a similar story in most other states.

To actually make inroads into this problem, we need significant supply and the only way we will be able to achieve this is to get the private sector on the job.

I took part in a recent Housing Summit run by the University of Melbourne where international speakers were invited to speak on their countries’ solutions. I came away with a different perspective and started to better understand and appreciate the long-term economic value of proper and continual investment in public, social and affordable housing.

The US and tax credits: something for Australia to consider

In many US cities including New York, Los Angeles and San Francisco, both sides of politics believes investing in social and affordable housing makes good business sense. It is seen as good for the economy, it brings workers close to their jobs and lowers the overall cost to government (and ultimately taxpayers) of providing services. It generates jobs and makes for a happier society, and this leads to an increase in productivity. It’s just good business.

Second, both sides of politics recognise that on a standalone basis, this type of housing is below market and therefore is not economically viable for the private sector to deliver without a government subsidy. They see it as “key public infrastructure” – just like privately funded roads, tunnels, hospitals and schools, all of which receive some form of government subsidy.

Third, it recognises that government capital is scarce and a system that encourages private capital and private industry to participate is needed. As an example of one incentive mechanism used in the US, since the Low Income Housing Tax Credit system was passed into legislation back in 1986, a whole private sector-led industry has developed that specialises in the delivery of public, social and affordable housing as key public infrastructure. Over 2.1 million homes have been built using this tax credit system.

In simple terms, the gap to make investment in a rental property with a specific affordability profile economically viable is “topped up” by the sale of future tax credits. Once it is made economically viable (and we now need to be talking about substantial scale) then groups such as super funds can provide the remaining capital because it will then meet their financial hurdles – just like they did when they invested in Melbourne’s CityLink, for example.

All that the federal and state governments would then need to do is work out the areas of our country where we need the public, social and affordable housing located, work out what rental profile they wanted and the consequent viability gap. The private sector could then develop and ultimately own the asset with the rental profile locked into that property for the operating life of the building.

Rather than own the asset and fund the entire construction cost, the government has leveraged its capital (and in fact it is actually a future tax receipt – tax revenue that will be forgone, for example a $10 million tax deduction a year for 10 years, with total value $100 million but discounted back to effect a sale today) and used the private market to top up the difference. They would then have created a new sector of the property industry where private capital delivers this new key public infrastructure, which happens to be housing.

Why it makes sense

Now, I wasn’t always as aware of the economic benefits of providing public, social and affordable housing. I thought that people who received a free home should be grateful they had a roof over their heads (and generally they are by the way). But not everyone is fortunate, and as a society we have an obligation to look after those that need a helping hand.

What I didn’t know is rather than locating these community members in what I thought would be cheaper housing out on the urban fringe, it makes good economic sense to locate them near facilities such as train stations and shops, near possible job opportunities – and when it comes to essential workers like teachers, nurses, police officers and firefighters, they need to be located near the community that requires their services.

If you accept the SGS figures, the benefit–cost ratio is 7:1. It makes perfect business sense to locate these people where the overall cost to the community is less. In fact, if you were running the government as a business, wouldn’t you locate your workers in a place that suited your objectives, as you would need them to be as productive as possible so as to contribute to the betterment of your business as government? And when you think about it, what is one of the first things a mining company does when it wants to establish a new mine? They provide housing for their workers. On a standalone basis, it wouldn’t make economic sense but without housing in the right location (near the mine) they wouldn’t attract any workers. What do the universities do in today’s competitive education environment? They have recognised that appropriate student accommodation is needed close to the universities that want to sell their education, and therefore the provision of student housing becomes a key part of their strategy.

But with a metropolis, the housing segmentation is too blurred. Most people think the market will solve any housing shortfall. It won’t. It will only provide the housing that is economically viable for it to deliver. We need to recognise that to have economic prosperity we need a well-functioning metropolis. And for a well-functioning metropolis, it makes good business sense to provide public, social and affordable housing in areas where the community will get the best value.

The federal government currently seems to be open to exploring innovative approaches such as those I have described. They see it making sense.

This type of incentive will attract the super funds into this space and I see them as the ideal holders of this asset class. This is potentially a new sector of the property industry that, unlike in the US, does not currently exist in Australia. The asset owners, once the initial subsidy has made the project viable and it is delivered, can trade the asset in the market but the obligation to keep the affordable/social rental profile will stay with the property for the life of the building.

I also believe that if we are going to create this new property sector, we should make sure we allocate the risks to the parties best placed to manage that risk.

In simplistic terms:

  • The super funds (or similar vehicles) are the best placed as holders of the assets
  • The not-for-profit sector is best placed to be the property managers and services providers
  • The developers are best placed to put the deals together and take the risks

So what I am suggesting to governments, both state and federal, is to look at new ways to create supply by unlocking private capital and allow it to deliver this key public infrastructure, guided by where the government allocates housing tax credits.

I have perhaps oversimplified the process but I think we need to keep it simple, clear and transparent.

But first we need to get everyone using the same terminology and on the same page. It is not housing we are talking about anymore. This is “key public infrastructure”. Let’s move away from the traditional discussion and look at the problem differently. Let’s be the frog that realised it was in the hot water and jumped out. Let’s take action and change the conversation. Let’s make it happen.

This article was published in The Fifth Estate. Click below for the original article.

Why affordable housing is “key public infrastructure”

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