Fostering a Climate to Attract Institutional Investment into Affordable Housing
Posted: Tuesday 20 November, 2018
- Facilitating and co-ordinating investment in social housing
- Role of a housing bond aggregator in enabling attractive returns
- How might a new institutional investment market emerge and what costs are involved in delivering tax credits
Thanks very much Karen Walsh (Chairperson) and to Marcus Evans for organising this event. This is such an important issue.
Housing has been in the news quite a lot lately.
At long last the market has started to slow.
Latest figures show declines in every capital city but Hobart.
Even Canberra, artificially buoyed by diplomats, pollies and defense personnel, has started to dip.
…First-home-buyers are watching with bated breath, waiting, wanting, to also be part of the Australian dream.
It’s the glamourous side of the housing issue – easy headlines, fiery debates, young versus old…all reduced to avocados.
The not-so-glamourous story is the one the public doesn’t really hear.
Sub market rentals and emergency housing for people (single mums left destitute in divorce, retirees dudded out of their life savings) on the brink of homelessness or seeking basic shelter….
Basic shelter, whose national shortage we estimate sits fatly, still, at 350,000 dwellings.
Two thirds of those in NSW and Victoria.
Australia stands on the precipice of a social crisis, and it’s going largely unnoticed.
Housing policy was once about getting families into decent homes.
Unfortunately, it has become about providing subsidies to mum-and-dad investors who collect real estate using debt via their self‑managed super funds….and pass their wealth on to their kids....
There’s a generational legacy too for those other families for whom having a roof, however rudimentary, is an impossible luxury.
The chance of their kids getting a good job or a full education will always be undermined by the fact that their shelter, their little home, is always under threat of being taken away.
For them, the Now, the Insecurity, more often than not, leads to family stress, domestic violence, wage stagnation, welfare dependency and even lead to mental illness, ….
But the cost is not borne by these families alone.
It’s a cost borne by all of society, and every level of government.
Housing stress is a mainstream economic problem.
It wastes human resources and destroys productivity.
And yet none of these costs are measured.
But why? What aren’t they included in our Intergenerational Reports and Productivity Commission reviews?
The dividends from fixing this problem would far exceed any other economic or fiscal reform because it deals with the fabric or "infrastructure" of social cohesion.
And it’s do-able! All we need is a plan. And political will. At every level of government.
How did we get here?
The affordable-housing shortage is the result of 30 years of poor regional and national planning.
It’s also the result of short-term thinking.
Governments of all colours have spent their time spurring demand for existing property.
Not building new homes for the most needy – as they should have.
Fixing it now will take governments at EVERY level WORKING TOGETHER… putting politics aside… co-ordinating across moving parts.
NOW is the time – before a trickle of homelessness becomes a flood.
So here’s my plan for fixing the affordable-housing shortfall
First, we identify greatest need by local government area, remembering some regions are cheaper because they are remote, rundown or sub-standard.
This job we’d give to an Office of National Housing, operating within the Productivity Commission to monitor and measure trends and generate analysis… hold all of us to account…keep the pollies on their toes.
Second, we pool housing subsidies at every level, and re-prioritise them for one purpose: to build and operate housing for the disadvantaged.
Third, we scan underused public and private landholdings. And provide incentives to recycle assets…and for charities, churches and community groups to offer long-term leases on excess landholdings.
Finally, our government would lever the balance sheets of long-term investors… like overseas pension funds, Australian superannuation funds, insurance companies and family offices, to invest in affordable housing.
Right now, low rental yields (below 3%) and the prospect of falling prices in Sydney and Melbourne have seen long‑term investor interest wane.
Prospective returns are simply too low for superannuation funds that benchmark inflation plus 4 to 6 per cent.
Sub-market rental units return are even lower and their tenants are often considered too risky.
Some of the more innovative industry super funds are developing direct-investment proposals in affordable housing.
They’re targeting key workers and identifying the most reliable sub-market renters.
That’s great - but these projects are a drop in the bucket.
So too are government experiments in inclusionary zoning, town-planning, and bond aggregators.
They barely touch the edges.
Put simply, the affordable-housing sector simply doesn’t have the scale of capital required to fix these shortages.
Sure, banks will lend debt finance. But on commercial terms.
Sustainable projects employ 70 per cent or more equity finance. Who will provide that capital?
Affordable housing tax credits
The big question is: How do we deliver equity capital to affordable-housing providers.
And the answer is tax credits.
Tax credits would allow institutional investors to write down or off every dollar invested in affordable housing, with no adverse impact on rate-of-return benchmarks.
Here’s how it would work.
Remember the Office of Housing we set up in the Productivity Commission?
Well, it would use its analytics to pin point an area of a material housing shortage.
The federal government would then authorise a statutory corporation to tender for the construction of houses.
The successful developer/operator would then structure financing based on receipt of tradeable tax credits (the funding source for the equity capital), which they would sell to long-term portfolio investors.
The investors who bought the tax credits could use them to immediately write off their tax liabilities.
Federal or state authorities would ensure projects were delivered as promised.
And investors would entrust the management of developments to qualified community-housing entities.
Over time, tax credits should trade at close to face value. The goal would be to ensure that 90 per cent of tax credits went to direct-housing investment.
By embedding an affordable-housing tax credit into the tax code (like negative gearing), the program would be a self-perpetuating funding stream regulated via a statutory body to eliminate fraud and waste.
In a nutshell, the program would attract the private-sector equity capital required to build affordable, privately-owned and managed affordable-housing developments as community resources.
So has something like this operated anywhere else in the world?
The answer is yes, very successfully, in - of all places - the United States.
Across thirty-plus years, its low-income housing tax credit program has generated over three million units in 45,900 projects.
It now creates about 110,000 units a year worth about $US8 billion a year.
In 2016, operators achieved a 97.8 per cent occupancy rate and a 0.7 per cent cumulative foreclosure rate.
The scheme has a long, successful pedigree.
Australia’s now defunct national rental-assistance scheme would be a good foundation from which to build this tax-credit scheme.
But the new scheme must incentivise and guide state-based effort.
It would also call for expressions of interest for very large tranches of support to attract institutions.
The cynics amongst you might view this proposal as super-sector rent-seeking.
Super funds might access these tax credits.
But, it’s the portfolio investors and non-financial corporations with higher effective tax rates who will find these housing tax credits most attractive.
We can fix the affordable housing crisis.
Right now, up to $20 billion in tax subsidies is directed to housing each year with little affordable housing benefit generated.
IF we remove market distortions that muddy incentives for new building.
IF we build assisted housing in the right places.
IF government, via long-term institutional investors, allocates big pools of capital to assisted housing.
Put simply…if our governments refuse to deliver affordable housing directly via public balance sheets (i.e. public housing)…..they must do it via private balance sheets - through not-for-profit community-housing providers.
We have a plan. Now we need the promise.
Thanks so much for your interest.
Stephen Anthony is Industry Super Australia’s chief economist. Follow Stephen on Twitter @SAnthonyMacro