28 August 2017

Time for action on housing affordability but it is not what everyone thinks...

| Arek Drozda
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Housing affordability

“Housing affordability” can mean different things to different people. Properly defining who is most affected makes it possible to quantify the problem and to isolate the causes. This was the subject of my preceding articles. This third article in the series puts forward a simple solution that, if implemented, would deal with the housing affordability problem quickly and comprehensively.

The analysis described in my previous two articles led to quite surprising results. In particular, it appears that housing affordability potentially affects just over 10,000 families in Canberra (or 6.5% of all families in the Territory). Although this is sizeable in absolute terms, the issue is not as widespread as the media publicity surrounding housing affordability leads everybody to believe.

An even more surprising finding was that regarding the cause. As it turns out, it is not a chronic shortage of cheap housing options in Canberra that creates a housing affordability problem, but rather, it is inequitable distribution. In absolute terms, Canberra was short just around 1,500 affordable rentals at the time of the last Census.

Let’s now discuss a suitable solution to remedy the identified problem.

The option that is almost uniformly accepted as “the best and only proper solution” is to increase the supply of low cost housing.

The proponents differ as to how it is to be achieved. For example, some argue for the release of more land, others for removing stamp duties on purchases and reducing taxes on new builds. Yet another group argues for putting in place disincentives for property investors and foreigners, etc., etc. However, they all believe that bringing housing prices down is the right way to go.

Following this logic then, adding 1,500 new low cost rentals in Canberra should go a long way towards addressing housing affordability in the Territory, right? Not quite.

If those 1,500 new dwellings are added to the private rental market, guess what… only a fraction would go to the needy. Why? Because this is how the markets work.

In particular, private landlords prefer renting to tenants in stable employment and with good incomes. So, better-off families would be the main beneficiaries of lower rental prices as they would be the first choice for landlords. This is what is actually happening in Canberra. We know this from the analysis described in my previous article, which concluded that the distribution of cheap rentals is the issue, not the volume of their supply.

Therefore, building more homes is not the answer. And if supply overwhelms the market, although it could certainly bring the cost of housing down across the board, the consequences are not that desirable for the remaining 93.5% of the families (i.e. those not directly affected by the affordability issues).

Sure, some people would be able to temporarily reduce their rental expenses while improving the standard of living, or maybe even buy a property for themselves. But the majority of people would lose as property prices, the prime asset of many families, decline.

Also, as history shows, at some point building costs would go above the market value of existing dwellings so developers would wind down their operations, many would start losing jobs, and so on. So prices would fall even further and, as the result, people would no longer be willing to buy to live in or to let out.

Then the cycle would start all over again. That is, a lack of new supply in a country with a rapidly growing population can only lead to shortages of cheap housing over time. We would be back to square one.

Therefore the optimal solution to housing affordability cannot be a scatter gun approach that aims “to bring the whole market down” so a small section of the community can eventually benefit. It must be a tailored action, focused on delivering immediate benefit to the most needy.

Since we know that it is the less than optimal distribution of inexpensive housing that causes housing affordability problems, the only way to address the issue is to increase the supply of regulated housing. That is, the supply of those rentals where tenants are screened for eligibility based on disadvantage, and not employment status and financial resources as is the case with the private rental market.

Public housing is one way to solve the issue but history has shown us this can be a very expensive option to implement and it takes time given a new supply of dwellings has to be constructed. A further side issue is that concentrating the supply of public housing in selected locations is less than ideal because of the social disadvantage it tends to create.

The introduction of rental controls for private developments, similar to the initiatives implemented in the US, or various affordable housing schemes undertaken by local not-for-profit organisations are other options to consider but these also tend to take time to implement and are rather limited in scope.

Therefore, what appears to be the most logical approach is to focus on better utilising the stock of low cost rentals already in the local market, since the total available quantity is pretty close to the required number.

The main point is that these dwellings already exist and are in central locations – having good access to public transport, schools and other infrastructure. However, they are simply not accessible to the most needy under the current open-market letting arrangements. This problem could be quickly addressed by converting these properties into “regulated rentals”.

Most importantly, by focusing all available resources on this single solution, there would be a much greater chance of addressing the housing affordability problem once and for all. And in doing so, it would be possible to address the whole spectrum of related issues without distorting the dynamics of the broader housing market in Canberra.

I don’t have a ready-made template for the implementation of this solution but if it was possible to devise a scheme where the Territory and Federal governments provide funding to incentivise private landlords to sign up to a scheme and hand over management of their properties to a not-for-profit organisation administering the scheme, Canberra could gain a significant number of affordable, prime-location dwellings instantly and at reasonably low cost.

The range of incentives offered could include simple things, such as, CPI adjusted rental guarantees for 10-15 years and full property maintenance over the term of the contract with the scheme operator, concessions on land tax from the ACT Government, or even an offer of free refurbishment to a common standard at the start of the contract (which would be a particularly attractive option for landlords since the majority of the available stock of cheap rentals is quite dated, hence lifting the standard may be desirable as well as required).

The Federal government could also be brought to the table, either channelling rental subsidies directly to landlords via not-for-profits (instead of individual recipients as is currently the case) and/ or offering various tax incentives for landlords participating in the scheme (like concessional taxing of derived income or allowing to claim 150% of property related expenses since generally high yields on such properties and fully paid off mortgages due to age and low price mean negative gearing provisions are rarely applicable).

The choices are many and specific details would have to be worked out to make it a viable scheme but this private / public / not-for-profit partnership appears like quite an attractive proposition.

In this three part series, I covered in some detail what I believe is the proper scope for discussing the housing affordability issue. It allows for defining the problem more precisely and therefore addressing it with more pragmatic solutions.

My conclusions refer specifically to Canberra but may also have relevance for other population centres across Australia (although larger cities would have to factor in the spatial distribution of cheaper rentals into the equation due to the distances involved).

The sobering thought is that, despite housing affordability being a clear cut case of inequitable distribution of low cost rental housing, at least in my view, the myriad of “issues” surrounding housing affordability will be debated into infinity and ultimately no action will be taken that could really make a difference.

The ACT Government seems to be on the right track with its current approach by narrowing the focus to just a section of the community, but the real test of its commitment to address the problem will be the actions taken and the outcomes they result in over time.

As a landlord, what would entice you to sign up for an affordable housing scheme?

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5 years later…..crickets………..

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