Could private capital resolve our housing crisis?

Could property investment capital be redirected to offer new solutions to Australia’s housing crises? Why aren’t existing solutions gaining traction? A summary of the PEXA / LongView housing whitepaper, Mobilising Private Capital for New Housing Solutions.

Property settlement group PEXA and residential property business LongView recently published the last instalment of three whitepapers on Australia’s housing crises: Mobilising Private Capital for New Housing Solutions. The first two, which we’ve also blogged about, focused on defining the crises; this final looks at what might be done to relieve or resolve these issues.

You can read the full paper via the link at the end of this article.

Australia is facing concurrent housing crises

The first whitepaper focused on purchase affordability and the economics behind our ever-increasing housing prices. The key drivers were found to be our high rate of population growth coupled with the way our population concentrates on a small number of cities, all with dense CBDs and expansive low-density suburbs, making well-located land in increasingly short supply.

The second focused on two issues: rental affordability and the rental experience. Rents are increasingly unaffordable for lower-income households, disproportionately affecting those most vulnerable in our communities. Those same people are the least likely to obtain accommodation, with higher-income applicants being preferenced. Record low rental vacancy rates in Sydney, Melbourne and Brisbane only exacerbate this issue.

Meanwhile, the rental experience is challenging. Insecurity is part and parcel of renting in Australia, and rental quality is often poor or poorly maintained. This can result in a less satisfactory living experience, but it can also have deeper consequences. At the PIA Planning Congress last week, Flavia Barar, a Data Science Officer at Aurin, presented her work on developing a national Heat Health Vulnerability Indicator. One of the core inputs in assessing an area’s vulnerability to heat-related issues was the proportion of renting households. Renters are less able to adapt to our changing environment, as landlords are unlikely to upgrade properties with air conditioning.

The paper also pointed out that the rental experience is not great for many landlords. Property investment is complex, stressful and risky.

Since 1990, approximately 60% of all property investors would have profited more by investing in superannuation.

Why some attempted solutions fail

It’s difficult to overestimate the scale of housing in Australia. Nearly 140,000 first homes are bought each year; we have more than 2.2 million landlords and more than 2.9 million renters in the private rental systems. The housing market looms over all other asset classes, with a total value of $9.8 trillion. The annual growth in property prices is comparable to a third of Australia’s total GDP. Residential land( (not including the property on that land) accounts for more than 50% of our national assets.

The paper suggests (with examples) several categories of solutions that don’t hit the mark.

• Solutions that don’t go far enough
• Solutions that don’t scale
• Solutions that focus on demand rather than supply
• Solutions that are not realistic

It also emphasises the importance of solutions that “swim with the tide of the economics”.

Mobilising private capital to scale housing solutions

The size of Australia’s housing market, and the difficulties governments have in addressing housing crises at sufficient scale, offers an opportunity for private capital to provide solutions.

Private capital solutions can come in addition to, and potentially dwarf, government and non-profit action, increasing the effort invested in solving these problems without diminishing the value of existing initiatives. The Federal Government has recently announced a major push to work with superannuation funds to engage with the Australian housing sector. A much larger additional source of capital could be found with individual investors, aka landlords.

Assessing private investment models

The paper looks at four different private investment models.

Shared equity A third-party investor co-investing in a property with a homeowner in exchange for a share of a property’s capital growth.

Built to rent Developer build properties – often high-density apartments – to be held by the developer or wholesale purchaser and offered for rent indefinitely.

Institutional ownership of existing properties An investment structure focused on acquiring portfolios of residential properties held over the long term and offered for rent.

Rent to buy Renters pay above-market rents to gradually purchase a home or to purchase a home at the end of a lease term.

Each of these models were assessed against three key criteria.

• Does the model improve any of the three housing crises?
• Does the model meet the needs of private investors?
• Can it scale to make a significant difference?

Of the four, shared equity and institutional ownership were found to be the most promising private capital solutions. Build to rent and rent to buy were found to have some merit, particularly investors, but be unlikely to help affordability or significantly scale.

Enabling private capital models

For the models discussed to be effective, systemic infrastructure needs to be in place. The paper points to two key elements: liquid secondary investment markets and the use of data. The former is a mechanism to reduce investment periods, allowing the buying and selling in a similar fashion as equities on the stock market. Essentially a property fund. The latter – unlocking data to make informed decisions – is right up our alley.

The paper calls for a vast improvement in the way housing data is gathered, shared and utilised. This thinking is, of course, close to our heart and key to our work at .id (informed decisions), illustrating the shared values between .id and our parent company, PEXA.

In its call to unlock housing data, the paper proposes the development of a national social housing register. This reminded us of the most common questions we get from our local government partners: how to get a clear view of local social housing waitlists.

.id (informed decisions) has been working in this space for many years. One of our more recent additions to our suite of local government information tools is the housing monitor, dedicated to providing a regularly updated view of the local housing story. We understand how difficult it can be to collate the relevant data and how powerful it can be to have that data available when making local decisions.

Multiple solutions are needed for concurrent crises

The paper concludes with a look at a future housing tenure mix, where the rate owner occupiers is slightly reduced and private rental is significantly reduced, replaced with institutional ownership of existing properties, shared equity, rent to buy and buy to rent.

This series of whitepapers has articulated the complexity and multi-faceted nature of Australia’s housing challenges. When the RBA governor suggests higher interest rates can resolve rental pressures by forcing people to “economise” on their housing, clearly multiple macro-level solutions are needed. At the micro level, it’s local governments who best understand the competing needs of their community, the local drivers and dynamics, the best opportunities for increasing appropriate land and housing stock. At .id (informed decisions) we work at with local governments to help them build a strong evidence base of local data, enabling them to take these big ideas and make informed local decisions.

Bringing the community along

It’s important to acknowledge local governments as the gatekeepers to all development. At the executive level, local governments are strong advocates for changes that will support affordable housing, but often the solutions are unpalatable to the community. Telling a powerful, evidence-based story starts with unpacking what the community thinks will advance quality of life. Affordable decent housing is usually one of the most important values.

Providing the evidence to tell their local housing story, to understand and quantify housing need in their area and to identify what types of changes they can make to address that need. .id (informed decisions) supports our local government partners in this area, sharing our expertise through consulting work and, most importantly, the development of new information tools in our local government suite.

housing.id Make informed, evidence-based decisions delivering affordable and appropriate housing for our communities, and monitor their impact.

views.id Represent your community’s best interests in decision making by understanding what’s important to them and their local experience.

Use the link below to view the full whitepaper.