Investment Notes

Housing Affordability in Australia

January 21, 2021
Matthew Tominc By Matthew Tominc

If there is one positive to take away from the past year, it is the importance of what we do together. 2020 revealed that the adverse impacts of a pandemic fall disproportionately on the most vulnerable – people living in poverty, the working poor, women and children, persons with disabilities, and other marginalised groups around the world. Loneliness and mental health issues spiked amongst our most vulnerable, millions of children experienced a new mode of education and, of course, we were reminded that like a pandemic, climate change can have far reaching consequences for our global economy if left unchecked. The Impact Fund focuses on each of these areas through its four key investment sectors including specialist disability accommodation; social housing; community solar and social impact bonds.

Social housing is the focus of this article where we look at the sector and how to address the challenges of social housing investment in Australia.

Why is housing such a challenge?

Few would dispute that housing is a fundamental human need. Yet even in a developed economy like Australia the provision of stable housing is not guaranteed.

Housing is also an asset class and sits at the intersection of human needs and financial markets. Hence, it is an area where impact investment is uniquely suited to address the challenges society faces in providing shelter to those in need.

Housing affordability is a challenge globally, and is particularly acute in Australia, where demand and supply side factors have combined to increasingly push housing beyond the reach of many families.

In the short term, house prices increase because of demand side factors – Government policies encouraging home ownership designed to create financial security for voters, falling interest rates, and wealth inequality that drives demand for certain types of housing.

Over the longer term, house prices stay high because of supply side factors – lack of appropriate supply to address demand, NIMBYism stalling development of new housing stock at scale, and in some cases, policies designed to support housing (such as rent controls) that also deter new developments.

How big is the challenge?

On a given night in Australia, one in twenty households need to rent social housing.

Yet that statistic only captures families able to access existing social housing. It does not account for the large wait lists of people vying for shelter.

Digging into the State level provides a better understanding of some of the challenges, as all States in Australia are governed by different regimes and dynamics for social housing.

Victoria, where Conscious Investment Management is based, has the lowest level of public and community housing stock in Australia (3.2% of all housing stock).  The national average sits at 4.5% of all housing stock as social housing.  To simply maintain its social housing stock at 3.2%, Victoria will require 3,500 new social housing beds to be built every year for the next 10 years.  Similar calculations can be made for other states.

In NSW, in 2018 there were around 53,000 applicants on the social housing wait list.  Of these applicants, 23,000 were households with children.  Wait times were beyond 10 years for social housing in many areas.

What are some solutions?

Governments and various community organisations have tried different policies and approaches over the past few decades, with varying degrees of success.

Incentives and concessions for developers, planning restrictions, direct financial support of community housing charities (say through cheap debt), or cash payments directly to social housing tenants all have a role to play. A major boon for the sector was the launch of the Commonwealth’s National Housing Finance and Investment Corporation (NHFIC) in 2018 to provide an increase in low-cost financing for social and affordable housing providers.

Financial markets and institutional investors have also begun focusing on the sector over recent years, attracted by perceived scalability and stability of returns.

A challenge for these investors, however, is that investors typically require ‘market’ rate financial returns. By definition, social housing tenants cannot pay market rent.  That disconnect is difficult to solve and remains a key reason why financial investors have not entered the asset class at scale.

To address many of these challenges, Conscious Investment Management has focused on the sector from a few angles:

1. Considering build-to-rent investments. 

  • After a positive experience investing in the US ‘multifamily’, or ‘build-to-rent’ sector, which has been responsible for significantly increasing affordable housing supply in the US, we’ve sought analogous investment opportunities in Australia.
  • Build-to-rent in Australia is a new industry, and many build-to-rent developments underway are not necessarily ‘affordable’ (even if marketed as such).  We expect to continue assessing the sector.

2. Working with Community Housing Providers, often charities, to understand novel ways that our funding can play a role to support their mission.

  • For example, we have explored pairing social housing with specialist disability accommodation or other commercial real estate to obtain a ‘blended’ market rate return.

3. Direct engagement with Governments to seek a concession.

  • Analogous to our investment in specialist disability accommodation, Government support can assist in addressing the gap between what a tenant can afford and market returns.
  • By plugging the gap between market returns and social housing rents, Government can drive increased private sector engagement and investment in a sector as it matures towards institutional scale investment.
  • This is the most attractive way to structure social housing investments, but also the most challenging.

As impact investors, we are dually focused on long-term investments that drive positive change, as well as the generation of stable and strong returns for our investors.

We spend months and even years understanding an area of need and the sector that seeks to address it, to make investments that can combine both impact and financial returns.  We are confident that, with your support, our capital has a significant role to play in expanding the stock of social housing in Australia.

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