ARPA: Affordable rental housing

Lack of affordable housing strikes at the heart of our lives, our communities, and Australia’s future prosperity. It impoverishes people, erodes families, destroys jobs, weakens the economy, and damages the environment.

Problems of unaffordable housing have worsened alarmingly during the last 10–15 years:

As a result, about three-quarters of a million lower income households are paying housing costs which exceed the commonly-used affordability benchmark of 30 per cent of household income. In addition, many households are ‘hidden victims’ who have only been able to avoid unaffordable rent or mortgage payments by living in housing which is sub-standard or a very long way from work opportunities and community services.

PURCHASERS AND RENTERS

Politicians and the media continue to concentrate overwhelmingly on the position of home purchasers and on subsidies or tax cuts which would make the situation worse by inflating house prices even further. There has been some focus on matters such as land release which could provide relatively minor improvements. ‘Negative gearing’, which typically involves landlords borrowing large amounts and deducting the interest payments against income from other sources, has attracted much attention. But the focus has been on full abolition of the practice, which would be an excessive constraint on debt-funded investment, rather than on applying restrictions of the kind which were successfully introduced twenty years ago in the United States.

There has been much less attention or support for the main two ways in which house prices could be substantially moderated, albeit over the longer term. First, the inflationary and inequitable tax exemptions for owner-occupiers from capital gains tax and land tax should be capped. This could be accompanied by reductions in stamp duty for lower-priced housing. Second, a major national program should be developed to strengthen economic and population growth in substantial regional cities. It is no coincidence that by international standards Australia has an exceptionally high proportion of its population in large cities and exceptionally high house prices relative to income. Appropriate measures include much greater public infrastructure investment in regional areas and tax reform to encourage regional investment by the private sector.

Action on these fronts should be initiated during the next term of federal government. The most important early priorities, however, are to improve the supply of affordable rental housing. This is partly because they provide the best hopes of achieving significant and relatively prompt improvements in housing affordability without risking making matters worse. But it is also because the great majority of people in unaffordable housing are renters, not purchasers.

Up to half a million lower income households already pay rents above 30 per cent of their income and the number will continue to grow rapidly because vacancy rates have reached their lowest levels in twenty years and rent levels are rising much faster than incomes. Moreover, the very large increases in the proportion of jobs which are part-time, precarious or short-term are making renting a necessary option for the growing number of people who lack sufficient job security to undertake the heavy financial commitment and relative immobility that can be involved in home purchase.

The supply of affordable housing for private renters is clearly inadequate, despite big increases in expenditure on rent assistance over the last fifteen years or so. New investment has declined, especially at the lower end of the market, as house prices have risen far more than rents. Many rents would need to rise by more than 50 per cent to provide competitive rates of return. A further problem is that most low-rent housing stock is not occupied by lower income households. This situation is likely to worsen substantially as a result of low vacancy rates and increasing competition between potential tenants.

The supply of public housing is about 100,000 less than if it had remained at the same proportion of all dwellings as it was fifteen years ago (which is equivalent to about one-quarter of all low income tenants now in unaffordable housing). Non-profit housing is very small by international standards at 0.5 per cent of our total housing stock. Yet the need for public and non-profit housing has increased greatly, especially amongst sole-parent families and people who have been ‘deinstitutionalised’ into the general community. Very few people can now obtain these kinds of housing without having very low incomes and other major problems.

Two key proposals for improving the supply of affordable rental housing are the principal focus of this paper. They are:

A NATIONAL AFFORDABLE HOUSING AGREEMENT

The first key initiative is to strengthen the effectiveness of government funding for public and non-profit housing by adopting a new National Affordable Housing Agreement to take effect when the Commonwealth State Housing Agreement (CSHA) expires in mid-2008. The new Agreement should reverse the deep funding cuts, now amounting to almost $500 million per annum, which have been made by governments from both sides of commonwealth and state politics during the last fifteen years or so. Some states have started to regenerate their funding and the commonwealth government should also do so.

Under the new Agreement, state housing agencies should no longer be effectively precluded from achieving a productive mix of tenants, including a substantial proportion of low income working people. The deteriorating supply of public housing has been accompanied by excessive targeting on the most deeply disadvantaged people that has reduced the economic and social effectiveness of public housing from the viewpoints of most tenants and the broader community. It has also sharply increased management costs at the same time as it has reduced the rent which the agencies can reasonably charge to help meet them.

Public and non-profit housing has an important role to play in enabling people of modest means to live near where work is available for them and, indeed, where labour may be in short supply. It used to be funded and managed in ways which enabled it to make this contribution to general economic development as well as to tenants’ work opportunities. It should be allowed to do so again, both within metropolitan areas and in the many regional centres where growing businesses and their workers are suffering from a severe lack of affordable housing.

The new Agreement should replace the existing CSHA funding system with separately ear-marked grants for maintaining existing stock and expanding the overall supply. A Recurrent Subsidies Program should be established for the first purpose, with the commonwealth paying housing providers the same amount as if tenants were paying market rent and receiving Rent Assistance. This would cost about $750 million, which is similar to what the commonwealth currently provides under the CSHA and unrealistically (or disingenuously) expects to generate additional stock.

A new Capital Grants Program should be established to focus solely on expanding overall stock. As $100 million would fully fund only about 500 new dwellings, large and sustained funding commitments will be needed to substantially reverse the decline of 100,000 dwellings or so in recent years. An initial commonwealth contribution of, say, $250 million per year growing quickly to at least $500 million would need to be matched by states on the same 1:2 basis as under the current CSHA.

This expansion of investment in public and non-profit housing would directly assist many households who currently experience considerable hardship. It would also provide employment opportunities in the housing construction industry, which is especially valuable in times of economic downturn, and support growing industries in areas which would lack sufficient private housing.

A NATIONAL AFFORDABLE RENTAL INCENTIVE

The second key initiative is to establish a financial incentive scheme to attract private investment into affordable rental housing for lower income households, especially from large investors. This scheme should provide developers, investors or landlords with a National Affordable Rental Incentive (NARI) of a specified annual value per dwelling for at least ten years in relation to any particular dwelling. The number of NARIs being provided each year could rise by up to 10,000 per year until a plateau of, say, 100,000 dwellings is reached.

Most of the agreed NARI value should be provided by the commonwealth as a cash grant or tax credit, with the total number of NARIs each year being allocated between states on the basis of their populations. The states would then have to contribute the remaining share and allocate the NARIs to particular providers, subject to such additional conditions as they may consider appropriate and are consistent with the national criteria. Their contribution could be provided as a grant, tax benefit, rent guarantee, or in some other form. Where appropriate, it could include local council contributions.

At least in the early years of the scheme, NARIs should be made available solely or mainly for newly-constructed dwellings which are managed by recognised non-profit housing organisations. They should be subject to national conditions about rent levels, household income, length of tenure, and some other matters. For example, it could be required that at least 80 per cent of dwellings are let to lower income households at no more than 80 per cent of market rent.

Some lower income tenants might still pay above the 30 per cent affordability benchmark despite benefiting from a NARI discount. If the commonwealth or states wish to require a larger discount, they could offer additional assistance to providers from the Capital Grants Program or elsewhere. This would be especially important for many non-profit organisations which wish to keep dwellings as permanently affordable housing, rather than only for the ten years required by the NARI scheme, or to focus on households with special needs that increase the cost of their housing or management.

The NARI scheme would increase investors’ overall rates of return as well as the proportion of those returns which comes from regular rental income rather than capital gains. (Possible impacts on investors and on rent levels for tenants are illustrated in an appendix to this article.) As well as benefiting tenants in the dwellings in question, the scheme would also exert downward pressure on general rent levels. This, in turn, would improve renters’ ability to save for home purchase and service a subsequent mortgage.

Effective development of the NARI scheme would require total commonwealth and state expenditure of about $750 million over the first five years, rising to about $1 billion per annum when fully operative. It would also require, and facilitate, the emergence of substantial non-profit housing organisations of the kinds to be found in Europe and North America. State governments, in particular, might need to stimulate and support the establishment of some new housing organisations for this purpose, building on the experience of some recent initiatives in this direction.

Some large non-profit organisations which are not currently involved in housing management could also be urged to enter the field by taking advantage of the NARI scheme. This could include organisations which already have substantial relevant experience through developing and managing accommodation for older people or other services for lower income and disadvantaged people. But these initiatives should recognise that tenant management can suffer if organisations become excessively large. They should also recognise the need for some small specialist housing organisations to be encouraged (for example, for people with disabilities).

CONCLUSION

These two initiatives would greatly improve the availability and effectiveness of affordable rental housing for lower income Australians. They would harness the resources and expertise of the business, non-profit, and government sectors. They would encourage sustained and efficient co-operation between those sectors and between commonwealth, state and local governments. They are greatly preferable to other options such as selling off public housing, boosting inflationary rent subsidies or encouraging renters into unwise home purchase commitments.

The Federal Opposition has committed itself in principle to a National Affordable Housing Agreement although it has not indicated whether it supports funding proposals of the kind outlined above. It has also promised to introduce a National Rent Affordability Scheme which is similar in general purpose and design to the NARI proposal although it differs in some important respects that may need further consideration. To date, the Coalition has not made any specific proposals but has signalled an interest in reducing the number of dwellings that are owned and managed by government.

As mentioned earlier, the proposed initiatives to boost the supply of low-rent housing over the short- and medium-term must be accompanied by major long-term reforms which address key underlying causes of house price inflation. This should include capping the tax exemptions for owner-occupied housing and restricting the scope of negative gearing. It should also include a major national program of sustained increases in public and private investment in non-metropolitan cities.

Election 2007: Affordable rental housing

PURCHASERS AND RENTERS

A NATIONAL AFFORDABLE HOUSING AGREEMENT

A NATIONAL AFFORDABLE RENTAL INCENTIVE

CONCLUSION

FURTHER READING

Housing supply, costs and affordability

Proposals for reform