$109M Package for Homelessness Is Only a Band-Aid

While the Victorian Government is to be applauded for directing funds towards homelessness, Australia needs a paradigm shift to create innovative funding mechanisms similar to those adopted in the US, writes philanthropist and property expert Robert Pradolin.

It is pleasing to see the Victorian Government is directing $109 million towards addressing Melbourne’s homeless issue. But let’s be clear. It is only a band-aid solution.

Homelessness is the canary in the coal mine to the lack of investment by successive governments, both federal and state, in social and affordable housing. We all read about Australia being in a housing crisis; and we are. Too many Australians are one paycheck away from being defined as homeless. Too many people, especially the young, cannot afford to buy a home.

The crisis can be resolved, but it requires brave governments prepared to adopt a radical approach to housing finance and management that has never before been tried in this country.

We need to build much more housing across the spectrum – not only the private housing which is market driven, but public and social housing for disadvantaged and low-income Australians.

Last year the Australian Housing and Urban Research Institute estimated the current shortage in affordable and low-income housing is at nearly 200,000 dwellings.The number increases further if you add the demand for homes required under the National Disability Insurance Scheme. Building so much housing sounds like a dream, but our historically low interest rates make it possible to invest in creating these assets.

In an interview in September, the incoming Reserve Bank chief Philip Lowe was quoted as saying, “can the government, can any of us, find assets to build that can generate a return for society?” Yes, we can, by investing in a new infrastructure asset class consisting of social, public and affordable housing.

In the United States this asset class already exists. All levels of government recognise that to involve the private sector in providing below-market housing, they need to “top up” or subsidise the uneconomic portion of construction, in order to enable the private sector to participate and invest funds. The US federal government has developed a Low Income Housing Tax Credit to create the additional funds needed to stimulate private sector delivery.

As a result of these and other initiatives, a new property sector has emerged in the US to provide affordable and low-income housing. Large pension funds develop, own and manage about 80 per cent of this type of housing stock, with the not-for-profit sector managing 20 per cent.

In Australia this sector does not even exist, yet its potential is huge. Consider that shortfall of 200,000 dwellings. At an average total cost (including land) of $500,000 per dwelling, the potential size of this market is in the order of $100 billion.

The benefits would flow not just to new occupants of this housing, but to the entire economy. Analysis by SGS Economics indicates that for every dollar invested in the right kinds of public, social and affordable housing, the community benefits by $7 through savings in health, welfare and justice, productivity improvements and reduced demand for social housing services.

In US cities such as New York, Chicago and San Francisco, both sides of politics understand that investing in social and affordable housing makes good economic sense. It brings workers close to their jobs and lowers the overall cost to government of providing services. It generates jobs. Having a home of our own reduces rates of depression, suicide and crime. It makes for more productive workers and happier people.  

To produce more housing, Australia needs a paradigm shift to create innovative funding mechanisms similar to those adopted in the US. Governments alone cannot find enough money. They must encourage the use of private capital, recognising that such capital will need to achieve market returns that are proportionate to the risk of the investment.

To achieve these returns, government will need to offer some form of subsidy to encourage private investment in below market housing. This subsidy will be more than offset by the savings to the economy over time, even excluding the huge benefits that will come from more productive workers who find homes closer to their jobs. We must start to see this type of housing as economic infrastructure, the same as roads, hospitals and schools, all of which receive some form of government subsidy.

To kickstart change, Infrastructure Australia should lead a national discussion and engage the federal government through a considered strategy and business case. We need to create an environment in which large superannuation funds find it viable to own and manage a large number of apartment buildings and rent them to qualifying tenants at below market rates.

Once the right level of subsidy or “top up” is provided to make the returns (relative to risk) commensurate with other investment classes, the market will compete and deliver the desired outcome in an efficient manner.

The size of the subsidy or incentive required would be based on the maximum rental that tenants can be charged (normally capped at 30 per cent of income). The obligation to ensure that tenants fit the income profile in order to qualify for subsidised housing can then be placed on the building title for its economic life. In other words, if the building is sold, the new owner incurs the obligation to ensure that tenants fit into the income criteria to qualify for the subsidy.

Such a national housing strategy must have bipartisan support, to give the private sector confidence to invest for the long term.

The 2016 Infrastructure Victoria Draft Strategy recognises social and affordable housing as key infrastructure. It now highlights that there are economic and social consequences of not addressing the significant shortage of below market housing.

Infrastructure Victoria is the independent statutory body that advises on the state’s infrastructure needs. It envisages a state in which “everyone can access good jobs, education and services regardless of where they live, where communities are held together by strong bonds, and where industries and businesses thrive”. It’s a noble vision. To realise it, we must start with a sustainable housing strategy for all; rich or poor. That’s the only way to eventually reduce the homelessness we see on our streets today.

About the author: Robert Pradolin is the former general manager for Frasers Property Australia (formally Australand) and is currently engaging with the not-for-profit sector to establish pop-up homeless shelters within empty CBD buildings.