Republished on The Asian Executive. Originally published 18 September 2015. Authored by Robert Pradolin.
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 turning a blind eye to what has begun to take root and instead of addressing the issue, we are failing to recognise its root cause. 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. I personally feel that our crime rate is increasing along with our rate of suicide especially in our youth. Violence, and more particularly family violence, is more prevalent within our community and the level of depression is causing grave concern. But we don’t really relate it back to any one specific issue. It’s all muddled up in the hectic pace of our own individual lives. Unless we are one of the few people in the world that are enlightened individuals (and there are some), we will always see things from our own perspective. It doesn’t matter if you’re the Prime Minister or the street sweeper, we always view the world through the glasses of our own life experiences. I believe (and this is only my view) that one of the major factors causing these issues mentioned above relates back to the simple and fundamental human desire/need (please note I have not said human right) of having a place to call home.
While the above opinions are a generalisation of our society and the issues mentioned are not specific to any demographic group, 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. (See Bentley, R. and Baker, E. (2015) Moving beyond association: Developing causal explanations of housing and health, paper presented to the Australian Housing Researchers Conference, Hobart, 19 February 2015).
The cold economic fact is that it also costs taxpayers a significant amount of money annually in helping these people. AHURI research suggests that for every high risk young person (< 25 years old) that is diverted from homelessness saves government (and consequently tax payers – that’s us) around $120,000 per year. (Baldry, Dowse, McCausland and Clarence, Lifecourse institutional costs of homelessness for vulnerable groups, National Homelessness Research Agenda 2009-2013, University of New South Wales, 2012). And yet we, perhaps unintentionally, 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 6 years, we at 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. The Carlton Housing Estate is nearing completion and Westmeadows has just started. They are a mix of both private and public housing. Yet both projects have been done via the traditional development model. Australand 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 which they will own in full.
But the more that we at Australand get involved with this unloved sector of the property market, the more we are learning about how important it is to our economic and social wellbeing as a community as well 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 respected economists SGS Economics indicates a cost benefit ratio of 7:1 in respect to the economic benefit to the community of providing public, social and affordable housing in the right locations (Spiller, M. and Anderson-Oliver, M (2015) Revisiting the economics of inclusionary zoning, Paper presented to the Australian Housing Researchers Conference, Hobart, February 2015).
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 (if we can fix them by then). That’s where the second analogy of the frog comes in. The inclusive, multicultural, safe and tolerant society we have loved is unintentionally and unknowingly dying (I am giving the governments that govern us the benefit of the doubt that they just don’t see it). Slowly simmering itself in the heated temperatures of our growing housing crisis, and it will only become blatantly obvious after it’s too late.
We can fix it. But we need to start fixing it now. We cannot wait for another set of reports or more and 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. 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 made 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 for them 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. You don’t need to be a rocket scientist to understand and therefore conclude that housing stress is increasing. And what happens when a person’s or families stress increases? Well, I am sure that most of you have experienced the debilitating and paralysing effects of stress. You become less productive, your decisions become erratic and irrational and if you become desperate, you start making stupid decisions.
And to compound what I have said above, through nation building we have had 25,666 NRAS licences issued to build homes for key workers that are rented at 80% of market rent. (National Rental Affordability Scheme Quarterly Performance Report As at 31 March 2015).
Putting aside the Community Housing Sector that will probably renew the rental at 80% of market (and I say probably), what happens in Year 10 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. Another reason for the stress levels to increase for some families.
And to compound this even further, 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% of the stock is nearing obsolescence! (Victorian Auditor General Report, Access to Public Housing, 28 March 2012).
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 as it will, in the long term, affect our economy and then everyone will suffer the consequences of not addressing this issue. 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. It does not make sense to allow this to continue.
So what’s the solution?
What is the long term strategy for Victoria? For Australia? I have come to the view that the current approach by both the State and Federal Governments needs to change. Recent research suggests that 6,000 social housing units per annum would be needed just to maintain the proportion of social housing in Victoria (3.4%), and more like 9,000 to achieve 5% – a proportion that is still significantly below current demand estimates (Presentation by Professor Terry Burke at the Community Housing Victoria Federation Conference 2015. Battling the Headwinds or Flowing with them). It’s a similar story in most other states.
To actually make inroads into this problem, we need significant supply created in this sector 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 Melbourne University where international speakers were invited to explain the rationale behind what happens in their countries. 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.
Using the United States as the example, their starting point and guiding principle is that the provision of public, social and affordable housing within a city makes good business sense. It’s good for the economy, it brings workers close to their jobs, it lowers the overall cost to government (and ultimately tax payers) of providing services to the people that need them. It generates jobs. It makes for a happier society and this leads to increase in productivity: it’s just good business.
Secondly, both sides of politics recognise that on a stand-alone 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 etc, all of which receive some form of government subsidy.
Thirdly, it recognised that government capital is scarce and they needed to create a system that encourages private capital and private industry to participate. As the example of one of their incentive mechanisms, since the Housing Credit system was passed into legislation back in 1986, a whole private sector led industry has developed that now specialise in the delivery of public, social and affordable housing as ‘Key Public Infrastructure’. Over 2.1 million such 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 superfunds will provide the remaining capital because it will then meet their financial hurdles. Just like they did when they invested in CityLink for example. All that the Federal and State Governments would then need to do (yes, unfortunately it will require the Federal Government and States to work together) is to work out the areas of our country where we need the public, social and affordable housing located, work out what rental profile they want and the consequent viability gap (as every area is different), and then let the private sector 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 – it is tax revenue that will be forgone and from an accounting perspective, becomes a contingent liability in the forward estimates – it’s the sale today of a future tax credit – eg $10 million tax deduction PA for 10 years – 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.
Now, I wasn’t always as aware of the economic benefits of providing public, social and affordable housing. I, probably similarly to you, thought that people who received a free home should be grateful they have a roof over their heads (and generally they are by the way). I thought that I too would like the government to provide me a new home in Carlton for below market rent. But the realities are that not everyone is as fortunate as the people reading this article. As a society, we have an obligation to look after those that need a helping hand (not that I have ever really questioned this aspect by the way).
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 business and economic sense to locate them near facilities such as train stations and shops; near possible job opportunities and, when it comes to teachers, nurses, police officers, fire fighters etc, they need to be located near the community that requires their services. The firefighter or nurse is good enough to save your life but not good enough (in layman’s terms, paid enough) to be able to live close to you. If you accept the SGS figures, the cost benefit ratio is 7:1. It makes perfect business sense to locate these people where the overall cost to the community is less. Or to put it another way, where the cost benefit is greatest.
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 stand-alone 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 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 explore innovative approaches such as those in which I have described above. They see it making sense.
This type of incentive will attract the superfunds 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 which, unlike 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 Superfunds (or similar vehicles) are the best placed as holders of the assets.
- The Not-for-Profit sector are 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 think differently and look at new ways to create supply by unlocking private capital, and allow it to deliver this ‘Key Public Infrastructure’ being guided by where the Government allocate these 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 bring everyone onto the same page. It is not housing that we are now 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