Insights

Three ways local government can bolster affordable housing

Posted July 09, 2019

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SGS Economics and Planning Marcus Spiller Affordable Housing

Many factors drive housing affordability beyond any direct influence of local government: general economic conditions across the state and nation, monetary policy settings and the dynamics of the housing cycle. But local councils do have the power to bolster affordable housing in their jurisdiction and make an even bigger impact by partnering with other councils, institutions and the private sector.

Three tiers: What's your level of commitment?

Three ways local councils can bolster affordable housing:

Run an efficient planning and development control system so that the supply side of the market can respond as smoothly as possible to local demand. Arguably this is a basic obligation of all local governments to their community, but a level of focus needs to be maintained to ensure that it is achieved.
Go a step further and facilitate local affordable housing supply by, for example, using planning controls to require or encourage affordable housing provision and brokering partnership deals between local providers and community-based groups. This tier is essentially council acting in a regulatory, advocacy and facilitation role.
Spend directly to supply affordable housing. Many councils eschew direct investment in social housing, seeing this as the redistributive responsibility of other spheres of government. Others regard social mix, diversity and inclusion as part of the defining environmental characteristics of their community and are not prepared to leave their support entirely to the vagaries of policymaking at State and Federal level.

These tiers are unpacked further in the following diagram, which illustrates the specific affordable housing policies which council can pursue depending on its appetite for risk and the priority it places on this particular social issue.

Figure 1: Potential roles for councils in affordable housing

SGS Economics and Planning affordable housing local councils

Source: SGS Economics and Planning

Local council as an investor - what are the options?

If a Council were to be interested in Tier 3 programs, it will want assets and investment channelled into procuring social housing in the most efficient way possible. There is a multiplicity of joint venture, risk sharing and innovative financing models evident in the affordable housing literature and a growing record of practice in Australia.

Procurement models can be thought of as sitting on spectrum from traditional procurement (simple cash purchase or development of social housing through a Housing Association) through to public-private joint ventures where private capital is mobilised to provide the social housing by a public sector agency ‘topping up’ returns for investors, making up the difference between the yield that can be generated from the targeted lower-income tenants and a ‘commercial yield’. The latter approach is exemplified by the oft-quoted Low Income Housing Tax Credit (LIHTC) Scheme in the US and the former NRAS scheme in Australia.

It is important that a council interested in direct investment has a clear framework for evaluating these alternative models and ensure that any models or levers adopted remain aligned to the city’s underlying goals and objectives as discussed above.

Tortoise or hare?

Innovative models which induce private capital into delivering social housing have the great benefit of generating relatively large volumes of affordable housing relatively quickly. However, if the public sector ‘top up’ ceases, the housing is likely to cease to be rented at affordable rents and the stock may be lost to this sector, as is now happening with a significant proportion of NRAS stock.

Traditional procurement is characterised by a slow build up of affordable housing stock but can ultimately ‘overtake’ private leveraging schemes. It also has the merit of being more committed to social housing supply over the long term.

The following chart illustrates this dynamic. The two lines represent a notional annual outlay of $5 million on the part of a Council. It assumes the tenant group targeted pay rents that meet all operating expenses in the case of traditional procurement, and a similar group is supported with the ‘innovative’ private leveraging model.

Under traditional procurement, a $5 million outlay buys 10 social housing units per year which accumulate over time. The private financing model involves providing an annual top up subsidy of $30,000 per year to investors to induce each social housing unit. Thus the $5 million annual outlay secures an on-going stock of 167 social housing units.

Figure 2: Trajectory of social housing provision - traditional versus private capital leveraging

SGS Economics and Planning affordbale housing for local councils 2

Source: SGS Economics and Planning

After 17 years, the traditional procurement model delivers more – and more secure – affordable housing units, but in the run up to this change over point, the innovative finance strategy offers more affordable housing volume. These kinds of trade-offs need to be resolved by council when considering the alternative pathways to achievement of its social housing objectives under its Tier 3 program.

Different needs, different costs

The volume of housing generated by any given investment and procurement model, regardless of where it sits on the spectrum noted above, will be contingent on the income profile of the tenants housed. If these households are on modest incomes – around the 40th percentile – the top up to mobilise private capital to deliver a marginal social housing unit will be smaller than if households are in the very low-income 10th percentile.

Likewise, for traditional procurement, higher income households can pay rents which produce a modest surplus that can enable the social housing provider to reinvest in additional social housing assets. Alternatively, if housing predominantly very low income households, there may be a net operating loss that requires ongoing injections of funds to sustain operations.

Bringing together the parameters of ‘tenant income profile’ and ‘type of procurement strategy’ a broad menu of options for local social housing production can be identified, as illustrated in Figure 3.

Figure 3: Social housing provision models

SGS Economics and Planning affordable housing for local councils 3

Source: SGS Economics and Planning

Planning levers to provide resources

Voluntary and mandatory contributions via the planning system under ‘Tier 2’ activities in the above typology can play an important part in contributing assets to the development of social housing. In Victoria at least, using the planning system to bolster social housing delivery was once steadfastly opposed by industry peak bodies and avoided by governments of all political persuasions. Voluntary contributions are now effectively ‘institutionalised’ with several councils seeking to emulate the floor area uplift principles (additional development capacity in return for public benefit of equivalent value, including social housing) pioneered in AmC270 to the Melbourne Planning Scheme. The Fishermans Bend Framework Plan, released by the State Government in October 2018 reaffirms the application of value capture, via density uplift, as a means of securing social housing.

A move towards mandatory contributions might also be anticipated because of the great gulf between what Homes for Victorians can deliver and the level of need.

The role and potential contribution of these various planning levers need to be well defined. Risk-based scenarios might be required to establish the targets that are achievable by council action, pending changes in the external policy environment.

Key questions for local councils to consider

To develop an effective local affordable housing response, Councils typically need to address five key questions:
How will the statutory planning framework contribute to social housing?
How can this framework be applied: on major redevelopment sites, activity centres and the like; across all development in the LGA; or some combination of the two?
How should the contributions framework be calibrated to ensure that social housing is generated without dampening development investment in general?
What partnership models and blending of resources can be applied, together with planning requirements, to optimise social housing generation?
What role will State Government programs (such as the Social Housing Futures Fund in Victoria) play in both resourcing and orchestrating the optimum blending of inputs to achieve successful social housing projects?

Author(s):

Marcus Spiller

Sectors: