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How Government investment in housing can boost the economy

Housing affordability remains front-and-center in Australia’s political debate

Few issues dominate Australian political conversation like housing affordability. Despite the modest fall in housing prices in Australia’s largest cities, for many Australians, owning their own home remains out of reach, leading to a generation of life-time renters.

There is also a shortage of affordable rental options, particularly in major cities. The Amplify Insights – Housing Affordability and Homelessness Report found that on average, private and public renters have borne more financial burden than mortgage holders over the last two decades with average weekly housing costs increasing for private renters by 56%, public renters by 64%, and mortgage holders by 36% .[i]  The number of households experiencing housing stress[1] is at record levels, with 44 per cent of all low-income households in housing stress, and households with a single mother and children at highest risk[ii]. Insecure housing has a range of detrimental impacts, and is associated with poor physical and mental health, poor education outcomes, reduced social connectedness and social participation and is both a cause and effect of insecure employment.[iii]  Taken together these factors have, in part, driven significant rises in homelessness since 2001.

Tonight around 116,000 people in Australia will be without secure accommodation.[iv]

With the aim of boosting affordable housing, in 2008, the Rudd Government rolled out the National Rental Affordability Scheme (NRAS) in partnership with state and territory governments, the business sector and community organisations.  It attracted private investment of $13 billion and delivered 37,000 affordable rental dwellings. But despite wide-ranging support from industry and the finance sector, it was closed to new investors under the Abbott Government in the 2014 Budget.

Without regulation and a government policy that incentivizes private investment, the market does not deliver affordable rental options for those on low, or even moderate, incomes with almost 80% of new housing stock priced at the upper end of the market.[vi]  A comprehensive, long-term Government commitment to address the supply of affordable rental properties is needed.

Enter the National Rental Affordability Scheme

Last year, the Labor Party announced a national affordabilty  rental strategy aimed at tackling this issue. It is essentially NRAS 2.0.

The plan establishes an environment for increased capital flows into the development of new private, affordable housing using a blended capital model.  It aims to create a bridge between crisis accommodation and public housing and private housing, for low and middle income families who have some capacity to pay rent.

The policy has been costed by the Parliamentary Budget Office at $102 Million to 2021-22 and $6.6 billion to 2028-29.

The numbers sound big. But, independent modelling undertaken by PwC highlights, this small investment in affordable housing not only has significant social but also economic benefits – and can save the State and Federal Budget up to $11 billion in the long run whilst generating up to $40 billion in GDP and up to 46,000 jobs.

How does the policy operate?

In return for investors providing eligible tenants rents set at least 20 per cent below market rates, the scheme will provide an annual incentive of $8,500 over 15 years.[vii] 

Dwellings must also be owned or managed by a registered community housing provider. The policy features a commitment to a ten-year program of construction of 250 000 dwellings – including 20,000 in the first term of government:

  • 2019-20 – 3,000 dwellings
  • 2020-21 – 5,000 dwellings
  • 2021-22 – 12,000 dwellings
  • 2022-23 – 13,000 dwellings
  • 2023-24 – 20,000 dwellings
  • 2024-25 – 27,000 dwellings
  • 2025-26 – 34,000 dwellings
  • 2026-27 – 41,000 dwellings
  • 2027-28 – 45,000 dwellings
  • 2028-29 – 50,000 dwellings.

The plan has the potential to create 46,000 jobs annually for ten years

The modelling assumes that the new dwelling construction will not displace existing plans for construction. This a reasonable expectation given that the construction:

  • is likely to commence in a period where the construction industry has come down off a high, hence allowing the new policy to absorb some likely excess capacity;
  • is likely to be spread across jurisdictions so that construction is not unduly concentrated; and
  • is spread over a decade, allowing new capacity to come into the industry over time if needed.

The modelling uses a NSW model of construction impacts and extrapolated that nationally. It’s not yet known where the new dwellings will be constructed, and there may be differences across the states and territories, but these are likely marginal.

The modelling assumes that the cost of construction will also be a national average using the Housing Industry Association (HIA) estimate of average cost for a new home (exclusive of land) of $306,000.

Construction impacts were calculated in respect of:

  • Direct Impacts (contribution to GDP and jobs created) on economic output are calculated by monetising the job impacts using the average gross value add (GVA) per worker for construction jobs.
  • Indirect impacts (contribution to GDP and jobs created) are calculated by applying multipliers to account for the supply chain effects on producers and consumers.

The results are shown in table 1. The results are presented for:

  • the first 20,000 homes (to 2021-2022)
  • the full 10 year plan (2028- 2029).

Investment in affordable housing can save Government in the long run

A lack of affordable and secure housing not only has a number of negative social impacts but it also makes individuals less financially independent.

This means there is a greater reliance on government services. Empirical evidence repeatedly demonstrates that people in crisis or in unstable accommodation are over-represented as users of government services[viii]. Individuals or family groups that are unable to adequately financially support themselves result in higher government servicing costs including through:

  • the criminal justice system;
  • human services, such as the child support services and Centrelink; and
  • in the health system[ix]

Based on this analysis, we project that moving a person from crisis accommodation to the new dwellings reduces government costs, on average, by $11,935.49 in FY19 dollars per person per year from reduced interaction with services.

Given the uncertainty around the life courses of each individual who will benefit from the scheme, a scenario analysis was applied to estimate the savings potential to Government. The scenario analysis reflects various percentages of people moving from crisis accommodation or homelessness into affordable housing and range from 50 per cent to 100 per cent.

The primary benefit and aim of the policy is a social one – providing up to 250,000 low-income renters with an affordable, secure housing option, leading to improved health and employment outcomes, a greater sense of safety, independence and social connectedness.

However, the economic co-benefit of the investment is sizeable. As this modeling demonstrates, the policy has the capacity to deliver strong economic returns for the economy: contributing up to $40B in GDP; creating an average 46,000 new jobs each year of the program; and saving the Budget between $5-11 billion in Government services by shifting those from crisis accommodation into more sustainable, secure housing.

This Ideas Forum Piece was published in partnership with PwC.

© 2018 PricewaterhouseCoopers. All rights reserved. PwC refers to the Australia member firm, and may sometimes refer to the PwC network. Each member firm is a separate legal entity. Please see www.pwc.com/structure for further details. This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors. Liability limited by a scheme approved under Professional Standards Legislation.

 


References

[1] Households paying 30 per cent or more of their income on rent are generally seen to be in housing stress. At this level, rents are of such a level that they negatively impact on a household’s ability to pay for other primary needs such as food, medical requirements and education.

[i] Muir, K., Martin, C., Liu, E., Kaleveld, L., Flatau, P., Etuk, L., and Pawson, H. 2018. Amplify Insights: Housing Affordability & Homelessness. Centre for Social Impact, UNSW Sydney.

[ii] Potter, M 2017, Reforming social housing: financing and tenant autonomy, report, The Centre for Independent Studies; National Shelter, Community Sector Banking & SGS Economics and Planning 2017, Rental Affordability Index: key findings, November 2018.

[iii] National Youth Commission 2008, Australia’s Homeless Youth: A report of the National Youth Homeless Commission Inquiry into Youth  Homelessness, https://www.theoasismovie.com.au/pdfs/Homeless_report.pdf; Desmond, M,  Gershenson, C 2016, Housing and Employment Insecurity among the Working PoorSocial Problems, Volume 63, Issue 1, February 2016, Pages 46–67.

[iv] ABS 2017 Census of Population and Housing: TableBuilder Pro. Canberra, Australian Bureau of Statistics.

[vi] Muir, K., Martin, C., Liu, E., Kaleveld, L., Flatau, P., Etuk, L., and Pawson, H. 2018. Amplify Insights: Housing Affordability & Homelessness. Centre for Social Impact, UNSW Sydney.

[vii] Australian Government, Department of Social Services 2018, National Rental Affordability Scheme: NRAS incentive (indexation), fact sheet, https://www.dss.gov.au/sites/default/files/documents/02_2018/nras_incentive_fact_sheet_2018-19_updated_0218.pdf

[viii] Parsell, C, Petersen, M, Moutou, O, Culhane, D, Lucio, E & Dick, A 2018, Brisbane Common Ground Evaluation: Final Report, https://issr.uq.edu.au/files/4003/BrisbaneCommonGroundFinalReport.pdf

[ix] Baldry, E. Dowse, L. McCausland, R. Clarence, M. (2012), Lifecourse institutional costs of homelessness for vulnerable groups, Department of Families, Housing, Community Services and Indigenous Affairs (Link) ; Parsell, C, Petersen, M, Moutou, O, Culhane, D, Lucio, E & Dick, A 2018, Brisbane Common Ground Evaluation: Final Report, https://issr.uq.edu.au/files/4003/BrisbaneCommonGroundFinalReport.pdf

For further research on the economic impacts of investing in affordable housing see: UNSW’s 2019 report “Estimating needs and costs of social and affordable housing delivery” and UQ’s 2018 report “Brisbane Common Ground Evaluation: Final Report”.