Sunday, 18 May 2014

Farewell, National Rental Affordability Scheme

There's so much carnage in this week's Commonwealth Budget that small things are apt to slip by.  So I'm going to tell you about something from my professional life that has just become a casualty of Abbott and Hockey's slash and burn exercise.  It's a scheme called the National Rental Affordability Scheme.

Back in 2004 National Shelter, the Community Housing Federation of Australia, the Australian Council of Social Services, the Australian Council of Trade Unions and the Housing Industry Association, supported by a wide range of other organisations with an interest in housing, convened a National Affordable Housing Summit.  It came up with a simple but ambitious plan of action aimed at improving Australia's housing system, and set up a working party under the leadership of Julian Disney to promote this plan around the country.  They were very successful, and large parts of their agenda were adopted by the Labor government on its election in 2007.

One of the most significant initiatives championed by the Summit group was a program aimed at attracting private investment into affordable housing.  This concept was adopted by the government, with modifications of their own, as the National Rental Affordability Scheme (NRAS).  This scheme provides a tax incentive (or grant for not-for-profit organisations) each year for ten years to fund the provision of rental housing to be rented at no more than 80% of market rent. Properties are rented to low income tenants on a long term basis, but the subsidy cuts out at the end of 10 years and the owner gets to keep the property and do whatever they want with it.  The scheme aimed to provide 50,000 new affordable housing dwellings in its first five years, with a further 50,000 tentatively flagged after that "if needed" - as if they wouldn't be!

This scheme was a radical break from the way affordable housing has previously been delivered in Australia.  The Australian model of affordable rental provision has always been driven by 100% funding from government capital grants, with the ongoing costs of managing and maintaining the housing coming from rents.  The result is a system limited by the amount of capital governments are prepared to put in up-front, and the small amounts of housing produced by it are heavily rationed to those on the lowest incomes.

NRAS reverses this - the capital cost of the housing has to be privately funded, but the difference between the below-market rent and the cost of provision is made up by an annual subsidy.  This subsidy makes the scheme a viable commercial proposition but significantly less costly to government.  To make it work, it needs to target a different tier of renters - those who struggle to afford market rents, but could afford something a little less and never get to the top of the public housing waiting lists because their need is not dire enough.

 NRAS is an attempt to find one of the Holy Grails of housing policy: a way to get the private sector to fund and build affordable rental housing.  Ever since the advent of compulsory superannuation in the 1990s , housing policy makers have pondered over how to get some of this superannuation money into rental housing.  The problem is, the structure of the private rental market in Australia just doesn't suit superannuation funds.  It is driven by small investors who use operating losses to minimise tax and make up for it later through capital gain.  Superannuation funds can't do this so rental investment isn't attractive to them.  It's also too small-scale - the big superannuation funds aren't interested in investing half a million dollars into a house, they only invest in chunks of $50m or more.

Early on some attempts were made to interest these big investors in the scheme.  However, while they nibbled at the bait they didn't swallow the hook.  The returns were still not good enough for them.  There was still no way to invest in big enough chunks to satisfy them.  And it was not flexible enough - it was too hard to sell out of if they wanted to down the track.

This failure to land the big fish, plus the fact that the scheme was launched in the middle of a credit squeeze, meant the scheme struggled to achieve its targets.  Other problems didn't help.  The cumbersome Commonwealth-State approval system and the insistence on detailed, site-specific applications meant that plenty of opportunities were lost.  Time is literally money in the property industry, and as NRAS approvals were delayed many developers elected to sell on the open market rather than wait, sending proposals back to Square 1.

Nonetheless the program has succeeded in delivering a substantial amount of affordable rental housing.  By June 2013, the date of the most recent published update, over 14,000 dwellings were tenanted under the scheme and another 24,000 were in progress.  This is well short of the 50,000 target but the pace has been steadily picking up after the slow start.

Of all the Australian Government's housing programs, this is the one which is most closely aligned with Liberal Party values.  It is a social program but largely funded by the private sector.  Commercial and not-for-profit providers compete on an equal footing.  There is a large element of "user-pays" in its charging regime.  It is built around the expectation that assistance will be temporary.  These are all things the Liberals love in a welfare measure.

Yet in the lead-up to this month's Budget, the ground started to be laid for its abolition.  In March and April News Ltd's The Australian ran a series of articles on it, echoed in other News papers.  These articles used "un-named sources" to identify a set of supposed "rorts" or failings in the scheme and some of its individual projects.  Aside from the fact that the scheme hadn't achieved its targets, the articles focused on its use to build housing for students and the fact that some of it was rented to students from overseas.  It is no surprise that once the abolition of the scheme was announced in the Budget, these were the very reasons cited by the responsible Minister, Kevin Andrews.  His press release says:

From the beginning, the previous government’s scheme was poorly designed, with multiple flaws, ambiguous legal requirements and red tape.

The National Rental Affordability Scheme has fallen well short of expectations—it has simply failed to deliver for low and moderate income Australians.

The scheme has been plagued by the late delivery of dwellings, trading of incentives, multiple changes to agreed locations, leasing to international students and rorting.

There is just enough truth in this to make it plausible.  There were problems in the scheme's design and it has not delivered all that was hoped.  Yet it was hardly the monumental failure Andrews' statement implies.  Even Andrews' Queensland LNP counterpart Tim Mander is happy to spruik the success of the program in delivering affordable rental housing in regional Queensland and getting people off the public housing waiting list.  The trading of incentives is hardly a problem - tradeability is an essential element of a successful investment product.  Nor is the student housing issue the killer it is made out to be.  Students are among the population groups who most struggle to find affordable rental housing, and university towns and suburbs are plagued by problems in their rental market as a result.  The Commonwealth guidelines for the scheme don't currently require Australian residency so there is no bar to overseas students occupying NRAS housing if they meet the income guidelines.  If this is a problem it is easy to fix by adding a dot point to the guidelines.

No, all these "reasons" sound like excuses, and for anyone who knows the scheme they are lame ones.  NRAS was always going to be experimental.  Nothing like this had been tried in Australia before.  Investors are conservative and it takes them a while to warm to new products.  Government housing departments have never dealt with private investors in this way, and they needed to learn how to do it.  What this scheme needed was not abolition but a proper evaluation and redesign to build on the experiences of this first tentative effort.

That we got abolition is symptomatic both of this budget and of the state of housing policy in Australia.

As far as the budget goes, it is simply another program aimed at helping people on low incomes which has got the chop.  There are so many of them that this one has had very little airplay in the mainstream media, although the Australian made use of one last anonymous leak in the budget lead-up to trumpet its expected axing.  The Abbott government has shown it cares nothing for social equity and has no interest in programs that promote it.

In housing policy, the situation has been dire for a long time.  Despite huge tax subsidies (or perhaps because of them) private home ownership and private rental are out the reach of increasing numbers of Australian households.  Meanwhile, public housing, the safety valve which provides housing for low-income households, is labouring under an outdated financial model and State housing authorities are leaking funds, forced to gradually sell down their housing portfolios to stay afloat.  This is creating a vicious spiral in which shortage of housing leads to increased rationing to the most highly disadvantaged, lowering the potential income of the system and deepening the spiral.

Housing researchers and government policy-makers have known about these problems for a long time.  The financial viability of the public housing system has been a subject for discussion for the past 25 years.  Housing researchers have described, modeled and advocated various solutions repeatedly and at length.  For a brief moment in 2007 it looked like a meaningful response might be in the offing, but in the end the Rudd and Gillard governments never quite got there, putting the architecture in place but failing to put their money where their mouth was after an initial burst of post-GFC spending.  There seems no chance whatsoever that the Abbott government will get anywhere near this close - the best guess is that they will just delegate the whole mess to the States and Territories as suggested by the Commission of Audit.

NRAS was the single lasting benefit to come out of Labor's hopeful beginning, a program that continued to grow when other housing funds dried up, that provided a meaningful growth option for housing providers, a source of income beyond the hugely welfarised social housing system and affordable housing for low income Australians.  Now it's gone.  It makes me feel a bit like Macbeth:

Out, out, brief candle!
Life's but a walking shadow, a poor player
That struts and frets his hour upon the stage
And then is heard no more: it is a tale
Told by an idiot, full of sound and fury,
Signifying nothing.

(Bangs head against wall.  Lights fade...)


Brad McCoy said...

Thanks for sharing this, Jon. Interesting turn of events, and one that I missed in all of the budget hoopla.

Karen Drimer said...

Oh no! I did not realise this till now. It is hard to not be overwhelmed by despair in the face of the absolute awfulness of this government.

Lee Shipley said...

I would like to dispute your assertion that there has been too much politics in your blog of late. A good definition of politics is that it is an art of compromise. I don't see any compromise being done by the Abbot Government only implementation of doctrine. Extremism in any form, Left or Right, is not politics; it springs from a misguided trust that your personal belief is infallibly correct and compromise is not worth the time.

Jon Eastgate said...

Ha Lee, of course having made that assertion I then reviewed a book that reads Paul's letter in a very political way. :) I agree entirely with you on the question of negotiation and compromise. I suspect what we are seeing in politics at the moment is a group of people on both sides who have been promoted to their level of incompetence, and there doesn't seem to be anyone waiting to take their places. Whatever you thought of Peter Costello (and I am definitely not a fan) at least he is very intelligent and makes cogent arguments for his ideas. When I listened to Joe Hockey defending the budget I thought "how did someone who talks so much nonsense get to be Treasurer?"