Feds on housing affordability: Silver bullet or unsustainable red tape nightmare?
Willow Aliento | 26 September 2017
Has the federal government found the silver bullet for housing affordability at last? You decide. It has just released a discussion paper on its proposal to establish a National Housing Finance and Investment Corporation, National Housing Infrastructure Facility and an affordable housing bond aggregator.
Now it is calling for everyone to have their say on the ideas.
At the same time, the government has also released a report prepared by EY on the affordable housing bond aggregator concept.
The bond aggregator aims to provide cheaper, long-term finance for community housing providers than they can access through traditional bank finance. EY noted in its report CHPs had generally been relying on short-term bank debt, typically with a three-to-five-year term.
It is proposing to aggregate the borrowing requirements of CHPs and issue bonds into the wholesale market.
“Longer term capital markets finance can lower interest costs and better match the sector’s asset life – a core principle of good corporate finance practice – and can therefore make a meaningful contribution to the Australian sector’s growth in scale and sophistication,” EY said.
Funding gap must be addressed
However, EY also sounded several cautionary notes, pointing out the whole bond aggregator (BA) concept may be doomed to fail without the right kind of government involvement.
“The BA will not solve the sector’s primary concern – the funding gap and level of government intervention required to make projects commercially viable – as the BA is not intended to loan to ventures or entities that cannot meet its credit requirements,” the report said.
It said drivers of the funding gap were “a function of a low margin, regulated business model largely dependent on government intervention”.
While it won’t close the gap, EY said the BA would enhance the CHP sector’s commercial viability through the provision of “more efficient” debt finance.
Internationally, where the government does not guarantee facilities, a bond aggregator’s strong credit rating can be a function of “robust and strict lending criteria which may actually be uncompetitive when compared to current bank loan covenant requirements”.
“A standalone BA is therefore considered unlikely to be successful because the need to maintain an investment grade credit standing would result in onerous credit policies which may disincentivise borrower (CHP) participation.”
EY recommended the aggregator therefore be part of the National Housing Finance and Investment Corporation.
It also said national CHP governance and financial deregulation needed to be applied consistently across all states and territories “to provide investor confidence that the regulatory safety-value is functional”.
“Government support therefore has to bridge the gap between capital markets requirements, the standalone creditworthiness and debt needs of CHPs and the unique Australian regulatory and policy environment.”
It is not clear from the government’s discussion paper that all of these recommendations have been taken onboard.
The consultation paper sets out the proposed operational, governance and financing arrangements for the three initiatives, but is heavier on motherhood statements, graphics and diagrams than concrete, nitty-gritty detail.
Currently, the plan is to have the NHFIC established as a corporate Commonwealth entity that is operational by 1 July 2018. The responsible minister would be tasked with appointing the chair and “experts” will be found for the board.
It is proposing the aggregator be a function of the NHFIC.
The NHIF proposal is similar to a program implemented by the New Zealand government earlier this year, which provides finance to local governments to deliver support infrastructure in either greenfield or urban infill sites where affordable housing shortages are acute.
$1 billion over five years is to be allocated.
While in NZ the loans are interest free, this does not appear to be what the Australian model proposes.
The types of projects the government is suggesting the NHIF would fund include roads, and water, sewerage and energy infrastructure.
There is no explicit mention of public transport, renewable energy or other sustainable infrastructure types in the outline of the NHIF.
The government is accepting written submissions on its proposals until 20 October 2017.
- Read the consultation paper and EY report