Introduction

   Affordable housing is crucial to a country and its people. Without it, people are impoverished, families and communities eroded, jobs lost, the economy weakened, and the environment damaged.

   What is affordable housing ? It can be broadly defined as housing of an adequate basic standard that provides reasonable access to work opportunities and community services and that is available at a cost which does not cause substantial hardship to the occupants.

   That definition is inevitably rather vague and subjective. But there is widespread agreement amongst housing experts that for households in the lower half of the income scale affordable housing should not cost more than 25-30% of their income. This applies especially to renters, who do not receive the compensating benefit of full or partial ownership.

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

average house prices relative to household income have almost doubled;

average monthly payments on new loans have risen by more than 50%;

the proportion of first homebuyers has fallen by about 20%;

the proportion of low-rent homes has fallen by at least 15%;

opportunities to rent public housing have fallen by at least 30%.

   As a result, at least ¾ million lower-income households now have housing costs above the common affordability benchmark of 30% of income. The majority of them are private renters, many of whom actually pay more than 50% of their incomes on housing.

   But some of the greatest problems arising from housing costs are not captured by these statistics. An increasing proportion of people have only found affordable housing by living long distances from urban centres in which most work opportunities and community services are located. Severe social isolation, family stress, unemployment and welfare dependency are amongst the common consequences.

   Housing problems are especially severe amongst indigenous people. Their home ownership rate is about half as high, and their rate of homelessness about four times higher, by comparison with other Australians. Other groups amongst which housing problems are particularly widespread include sole parents, long-term unemployed people and people with disabilities.

   The severe shortage of affordable housing is not just cyclical and is worse than in many other developed countries. It is likely to be increased by further interest rate rises. Failure to reduce it would badly damage long-term economic development and competitiveness, urban development and transport, birth rates and family cohesion, retirement security and intergenerational equity, and the economic and social strength of local communities.

Home ownership

   House prices are still rising in many areas and in others have fallen very little. Even a substantial fall would not restore adequate affordability and would create other severe problems. If recent trends continue, the level of home ownership may fall by 20% or so over the next few decades and a much greater proportion of "home owners" will still be paying off large mortgages. The distance of affordable housing from major employment locations and public transport routes will continue to increase considerably.

   Substantial price increases have occurred in other developed countries, but our increase has been about 50% higher than the average. Some of the price rise may be due to increases in the average size of new homes. But against that factor must be weighed the tendency towards smaller block sizes, more apartments and, for most new homes, greater distances from urban centres.

   Discussion about house prices often focuses on the situation in and around Sydney. Certainly its prices are very substantially higher than elsewhere and some of its problems are more acute. In recent years, however, prices have risen proportionately as much or more in other parts of Australia. Moreover, average incomes are considerably lower in other States.

   Over the last decade or so, there has been an increase of about 50% ($6,000 per year) in average payments on new loans for housing. For an average household, this increase alone represents about 10% of their take-home pay, the equivalent of losing more than $200 per fortnight. It is hardly surprising, therefore, that the proportion of first-time buyers has fallen considerably and the overall proportion of home ownership in the community is dropping.

   The high level of housing debt is especially worrying when one considers the probability of further increases in interest rates. Also, during the last few years there has been a strong growth in loans that involve little or no deposit and few if any checks on the alleged property value and ability to repay. The potential for disaster in a falling market or struggling economy is very high.

Rental housing

   The overall supply of affordable rental housing in the private market is clearly inadequate, despite large increases in expenditure on Commonwealth Rent Assistance (CRA) during the last 15 years or so. Vacancy rates are at historically low levels, rent levels are rising substantially and investment in new rental housing has declined, especially at the lower end of the market.

   A further problem is that much of the low-rent housing stock is not occupied by lower-income households - partly, perhaps, because some landlords and estate agents may discriminate against them when selecting tenants. The situation is likely to worsen substantially as a result of low vacancy rates and increasing competition between potential tenants.

   The supply of government housing is at least 100,000 lower than if it comprised the same share of the total housing supply as it did a decade or so ago. Yet demand for it has increased as a result of growing numbers of vulnerable sole-parent families and people who have been discharged into the general community through the "deinstitutionalisation" process.

   In most States, very few people can obtain public housing now unless they have very low incomes and/or other major problems. This adversely affects the quality of life and opportunity in many estates, the cost of managing tenancies and the rent which public housing authorities can reasonably charge. Most authorities are incurring substantial operating deficits and owe large amounts to the Federal government.

   Despite growing government enthusiasm and support, the overall supply of non-profit housing remains about 0.5% of total housing stock. Concerns have been expressed about the need to improve cost-effectiveness and transparency amongst community housing organisations and to develop some much larger non-profit providers. Efforts to develop joint ventures with private investors have met with very limited success.

Patterns of employment

   The growth of two-income households has brought benefits for many women and often their families, in both material and other respects. It has substantially increased the amount of income in many households that can be devoted to housing costs. But it has also helped to fuel competitive bidding-up of price levels, leaving many couples under acute pressure to undertake more paid work (often two full-time jobs) than would otherwise be in their own interests or those of their children.

   One of the most common impacts of these pressures is severe stress on household relationships which in turn can trigger family breakdown, inadequate parenting, welfare dependency and other major problems. Another likely impact of great importance is that many young people decide they cannot afford to marry and have children (at least until they are in their late thirties, but perhaps for ever).

   Over the last twenty years or so, the proportions of jobs that are part-time or casual have risen to higher levels than in almost every other industrialised country. For many people, especially many women, this has provided new and welcome opportunities. For many others, however, these jobs are very poor substitutes for full-term and secure work, especially if they involve long and expensive travel to and from home. They often mean insufficient job and income security to take out a housing loan (or even perhaps a rental bond) or to incur the expense of moving closer to work.

   There has also been a major increase in average working hours amongst people in full time work, reaching one of the highest levels amongst developed countries, and in hours worked at evenings and weekends. These changes have further increased the impact on families of long travel times, especially where both parents have jobs, and the difficulties of combining work with responsible parenting.

Urban development and infrastructure

   By comparison with most other developed countries, Australia has a very high proportion of its population in large low-density cities. The cities have a relatively heavy dependence on private cars and congested roads rather than, for example, having adequate rail and freeway networks.

   Substantial population growth has continued to fuel urban sprawl but governments have generally failed to ensure provision of adequate infrastructure, especially for rail transport. Yet house price inflation in older suburbs means that many of the new outer suburbs have an especially high concentration of low- or middle-income families with young children and long trips to work.

   In many countries, at least one-third of the population lives in medium-sized cities (defined by the UN as those with between ½ and one million people). We have no such cities in Australia. Yet, especially if linked with rapid transport systems, they could provide greater economic, social and environmental efficiency than further relentless metropolitan expansion.

   Some governments have sought to limit urban sprawl but generally they have provided little practical encouragement for development in provincial centres. Indeed, they have retained key policies that actively discriminate against it. Instead, the main response of governments in the last decade or two has been increasing urban consolidation, especially in the form of smaller block sizes and more high- and medium-rise apartments.

   This approach partly responds to the decreasing size of families and the continuing growth in sole-person households as a result of later marriages and longer lives. For many families, however, highly compressed housing without open space is becoming the only affordable alternative to the relative isolation of outer suburbs.

   Acute shortages of appropriate child care and reliable public transport, especially out of standard hours, greatly aggravate the difficulties for many working parents. The practical necessity in outer suburbs of having two or more cars per household substantially increases the flow-on costs for families of living in outer areas without adequate public infrastructure and services.

Developments in the general economy

   Despite much triumphalism in political and media circles, it has become increasingly clear over recent years that the Australian economy is dangerously over-extended and vulnerable. This applies especially to the levels of household debt and the overseas trade deficit, both of which are now much higher than in all but one or two other developed countries.

   Competitive bidding-up of house prices has been a major contributor to both of these problems. It has led to excessive borrowing for home purchases and, especially, for speculative investment in rental properties. It has also fuelled excessive consumption of luxury imports by people borrowing on the inflated value of their homes and has diverted an undue share of investment resources away from export-generating industries.

   Interest rates have now been belatedly increased to combat some of these impacts. But this may have an adverse effect on other sectors of the economy and community that did not need to be "cooled down". It is notable that each of the major housing price peaks during the last forty years has been followed immediately by one of the three periods of greatest economic difficulty.

   The general efficiency and competitiveness of the economy may also suffer from the need for wage rises to compensate workers for the huge increases in housing costs. This is one of several ways in which Sydney's problems may come to have an even greater impact on national policy-making and the economic fortunes of other States than currently applies.

SOME DIRECTIONS FOR ACTION

Purchasers and renters

   Politicians and the media continue to concentrate overwhelmingly on the position of home purchasers and on proposing subsidies or tax cuts which would make the situation worse by inflating house prices even further. This applies, for example, to increasing the First Home Owners Grant. There has also been excessive concentration on matters such as land release which could provide relatively minor improvements but also aggravate problems of urban sprawl.

   "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 US.

   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. The overall effect would be to help low-income purchasers, reduce windfall gains for wealthy people, and restrain further growth in house prices.

   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 Commonwealth 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% of their income. This number will continue to grow rapidly because vacancy rates have reached historic lows and rent levels are rising much faster than incomes. Moreover, 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. 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% to provide competitive rates of return for investors. 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.

   Two key proposals for improving the supply of affordable rental housing are amongst the most important priorities for action.

They are
- a National Affordable Housing Agreement ;
- a National Affordable Rental Incentive.

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 $½ billion per annum, which have been made by governments from both sides of Commonwealth and State politics during the last 15 years or so. Some States have started to regenerate their funding and the Commonwealth should also do so.

   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. Under the new Agreement, State housing agencies should no longer be precluded from achieving a productive mix of tenants, including a substantial proportion of low-income working people.

   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 (a) maintaining existing stock and (b) 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 $3/4 billion 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 a commitment of $100 million would fully fund only about 500 new dwellings, larger and sustained 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 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% of dwellings are let to lower-income households at no more than 80% of market rent.

   Some lower-income tenants might still have to pay rent above the 30% 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. 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 (eg, 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 cooperation 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.

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

   The last decade has been a housing boom for many people, especially those who were already relatively wealthy. But their windfall gains have come at a heavy price for many other Australians who are less fortunate or materialistic. Ignorance, greed and hypocrisy have been regrettable hallmarks of public and political discussion about affordable housing during this period. The lasting damage to genuine economic development and social justice will become even more unpardonable if principled and long-sighted reforms are further delayed.