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How governments can ensure more affordable housing

The upcoming renewal of Waterloo could be used to prototype and deliver a new approach to affordable housing.
The upcoming renewal of Waterloo could be used to prototype and deliver a new approach to affordable housing.

Government can ensure more sub-market homes on its own land, and incentivise the private sector to do so through better policies.

Sydney’s housing market is cooling. Between 2012 and 2017 housing delivery went up from an anaemic 13,000 a year to a super-charged 35,000-plus a year.

Of course those who know about the business of housing development as contrasted with ideologues of rational markets will not be surprised to learn that house prices went up significantly in that period and now stand about two-thirds higher compared with five years ago.

Also of no surprise is that while house prices have come off certainly five per cent and perhaps more – which is what Meriton’s Harry Triguboff says (and he should know) – since the peak in the third quarter of last year, Sydney’s population growth has not declined. The city’s population is still advancing at just under 100,000 a year – about the same as London but in a city with just over half London’s population.

Dr-Tim-Williams

Dr Tim Williams

Housing markets do not reflect a simple relationship between supply and demand, rather better reflect the effective demand for housing in the context of the supply of credit than they do demographic pressures. Indeed housing supply tends to go up when prices go up and supply falls when prices go down.

My purpose in raising this is not just to make a point – though I always like to make this point. It is to suggest that if there is a housing shortage in either Australia or the UK it is unlikely to be filled by the conventional housing providers.

Their business model – of homes for outright sale – puts a natural limit on supply in the specific local markets in which they operate. Theirs is not a manufacturing process in which supply can be increased but with lower margins. They will not build a brick – internationally this is true – unless they can be assured they will secure their 22 per cent (or so) return on capital employed. Banks won’t lend to them on lower margins.

Mine is not a moral judgement of this model. Housing developers take big land and planning risks and the model has defended them well over the years. The point is that if society is to get the housing numbers and choices – the types and tenures – needed, we will need to attract other entrants, with different business models, to the market to add to what developers can offer.

Encouraging build-to-rent, including in the public sector

That means encouraging build-to-rent providers. While I support policy and tax changes that will enable private sector rental supply providers and social housing bodies to get into this market, I see no reason why we should not also encourage the public sector to get back into being providers. Yes, that means a new generation of public housing in Sydney, either directly by the government or more likely in the current climate by incentivising the private sector in partnership with community housing providers to provide sub-market rental units.

The most obvious way to do this is for government to partner with developers and CHPs in housing projects on public land – and to do so by disposing of such land at less than top dollar. Currently, the NSW Treasury insists that public land must not be sold at less then best value for the highest use. That means it’s valued at the maximum number of private housing units that can be built and sold on that land.

But when developers buy the land at that level it squeezes out the achievement of any other public policy objective such as the provision of units for rental at less than market rates. This is actually in no one’s interests except the narrow government interest of making money.

Developers are demonised for failing to deliver “affordable units” or indeed other public benefits when in fact the Treasury or a specific government department want cash before other benefits.

High percentage affordable? The secret’s in the land deal

If you have ever wondered how it’s possible for a developer in London to make their 22 per cent when the public sector there requires as much as 40 per cent of units to be sub-market or affordable, the secret lies in the land deal.

If it’s government land, the government will trade a lower price for the land in exchange for more homes for people on the housing waiting list. If it’s private land, knowing that such levels of “inclusionary zoning” will be required by the planning system, developers still retain acceptable margins by effectively paying less for the land to the private land-owner.

The problem in NSW is not the developers: it’s the government acting as a rent-seeking land-owner unwilling to accept less cash in exchange for more public benefits or private land-owners seeking to maximise unearned income from increased land values unconstrained by public policy obligations such as inclusionary zoning. Political will is missing for the government to seek better policy outcomes from its land bank other than cash or to seek to share some of the windfalls enjoyed by landowners in the public interest.

Something needs to change as current approaches will not lead to a return to the housing affordability levels of the 1980s when almost 70 per cent of Australians in their thirties could afford their own place. Nor will we be able to house a Sydney growing at 100,000 a year.

We need to see more diverse housing providers enter the market with different business models to the only one we have at the moment – developers taking all the land risk for a homes-for-sale product.

Government is key to this by policy and regulatory innovation. We need tax reforms, for example, as current approaches favour multiple home ownership over rental. We definitely need inclusionary zoning to ensure each development of, say, more than 10 units contains some sub-market units, and we also need to see government partnering with the private sector on its own land in a shared risk/shared return model. Why not use the upcoming renewal of Waterloo to prototype and deliver this new approach?

For those who think there can only be one housing model, I suggest looking to London or a Singapore. The Singapore housing system, for example, provides everyone with public housing as a right and then over time enables all tenants to become owners. This model not only meets the need for shelter, it also has successfully suppressed the financialisation and land-trading excess of the conventional homes-for-sale market, which has fuelled house price rises.

Market homes in Singapore currently require mortgages amounting to six times median salaries. In Sydney and London the multiple is 12 times. I am not saying the Singaporean model should be copied wholesale in NSW. I am saying that it shows that we need new models and providers in the housing market in Australia if we are to have different outcomes – and pretty soon.

Tim Williams is head of cities and urban renewal at Arup and adjunct professor at Western Sydney University.

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Comments

5 Responses to “How governments can ensure more affordable housing”

  • Fred says:

    The big problem with affordable or subsidised housing, that never gets a mention, is deciding who gets it and for how long. Getting a housing commission place in Sydney is like winning the lottery. The market pricing of houses takes away this problem. Leave it to councils and we wind up with horrendous rorts.
    Sorry to say developers don’t make 22%. Just look at the results for public companies.
    But totally agree that any development that results from rezoning should contribute to infrastructure. A tax on fsr when developed seems the best option.

  • Steven – I think you may like to look at The Interlace, Singapore, 2013, by Buro Ole Scheeren & OMA. Has a lot of what you wish for. 1040 apartments and lots of communal amenities. Its a game changer, according to Sir Peter Cook

  • John Delac says:

    Value capturing regular folk affected by inclusionary zoning provides an excellent incentive to not to go to market. Legislation that sees tens of thousands of home owners at risk of losing their family home – good luck with that.

    Regular people are holding the nuts while developers together with all levels of government are attempting to drive the screw! Yeah that will work.

  • We also need new ownership models, like community land trusts. We need new development models, such as the Nightingale model. Fully agree that the secret is in the land deal… when land is rezoned for residential uses, the land value uplift needs to be captured to pay for the public infrastructure.

    Yet even when all of this is done, we still have other problems such as congestion. We must acknowledge that affordability and congestion are simply symptoms of the broader problem that we want everyone located in a few major centres. As a result we have congested and unaffordable cities and deprived rural and regional townships. We need, as Ebenezer Howard said over a century ago, “alternative attractors” to draw people out of the city…

    Garden Cities of the 21st Century, powered by renewable energy micro-grids, irrigated by water micro-grids and fed by integrated, diverse agricultural systems. High-tech work campuses with high-speed internet with living and work spaces, passively designed to minimise energy demand…

  • Phillip O'Neill says:

    “The problem in NSW is not the developers”
    Discuss.

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