With house prices on the up again, it may not be too long before the issue of affordability rears its head once again.
Long an issue not far from the headlines, affordability concerns gave way to fears of a housing market crash when COVID-19 went wild around the world. But less than a year on, economists – including Westpac’s – are upping their house price forecasts as Australia recovers from recession faster than feared and interest rates are tipped to stay at record lows for an extended period.
For Australians priced out of the market or not willing to relocate to more affordable areas, the challenges are many. However, one positive post the pandemic is more housing options look to be coming to market through the emerging “build-to-rent” (BTR) sector.
In recent months, both the NSW and Victorian governments unveiled new tax breaks for new BTR housing projects in a bid to make the sector more attractive to institutional investors and super funds looking to diversify their portfolios and get exposure to low-risk, stable income. Already, real estate investment firm Qualitas revealed it has joined rich lister Tim Gurner to create a $1 billion BTR development fund. Aware Super, one of Australia’s biggest funds with assets of $135bn, is also planning to invest up to 10 per cent of its property portfolio in offshore BTR projects and 5 per cent in affordable housing locally, including BTR projects.
“This will provide further confidence, boost the housing construction industry, create more options for investors and builders of developments and ultimately more housing options and security for tenants,” said NSW Treasurer Dominic Perrottet when unveiling the land tax discount for new BTR projects.
BTR involves developers and investors building and managing properties or housing communities that remove some of the downsides that come with renting, such as short-term leases.
Brandan Coates, Household Finances program director at the Grattan Institute, says while BTR is no silver bullet for solving the complex problem of housing affordability because the projects are typically focused on average wage earners, the main benefit is security of tenure.
“In Australia, these projects are often tied to creating a better rental experience so they tend to be priced at above-average rents. And that’s fine – providing greater tenant security to those who value that. But it’s not a solution to housing for low income earner who can’t afford the rent,” he says.
Worsening housing affordability over time is not just an issue for low income earners and first-time buyers.
The recently released Retirement Income Review weighed into the issue, noting retirees who didn’t own property suffered higher levels of poverty. Data from Grattan shows that by 2056, just two-thirds of retirees will own their homes, down from nearly 80 per cent today. It also found that between 1981 and 2016, home-ownership rates among 25-34 year-olds fell from more than 60 per cent to 45 per cent. Homeownership has also fallen for middle-aged Australians.
Frank Allen, director of property markets at Westpac, agrees BTR is no panacea for the problem of housing affordability. He says it’s grown into a multi-trillion asset class in the US and is fast gaining popularity in the UK, with investors unsurprisingly seeking exposure to leasing properties for the highest rent possible.
However, he claims shrewd BTR approval strategies can support affordable housing, citing how astute US councils use development rights to increase the level of social housing in their communities.
“A council can say to a developer, ‘your zoning and our planning permits allow you to build, say, 100 units on that block. Now if you want to build 120 units, we want you to also build 20 additional units either in the project or nearby as affordable housing’,” he says.
“We do need more affordable housing but we also need quality accommodation that offers people security of tenure in residential complexes held long term for income return and not have the prospect of the property they are living in being sold by a private investor to an owner occupier.”
Allen is seeing growth pick up quickly albeit it from a very low base. High land costs and low yields, particularly in Sydney and Melbourne was a deterrent for institutions to invest as it was more profitable and easier for developers to sell units to individuals when the market was hot.
“The recent tax cuts in NSW and Victoria have triggered a lot of interest from developers. They have also probably made the sector more attractive for developers like Mirvac and Lendlease, who were already active in trying to create a new asset class, diversifying their portfolio and not looking to sell.”
In Miranda, NSW, Aware Super is building its first purpose-built build-to-rent affordable housing project in Australia. Half of the 102 units in the Meridian project will be leased to frontline workers – such as nurses, teachers and police officers – at 80 per cent of the market rate. It will add to the super fund’s established portfolio of affordable housing worth about $350 million.
Damien Webb, Aware Super’s chief of income and real assets, says there are several reasons why BTR projects make sense, such as tenants wanting the comfort and security of a home without a mortgage.
Webb adds millennials are not necessarily wedded to homeownership or even car ownership and are happy to deal with a corporate landlord.
“We accept a slightly lower rate of return by renting some apartments out at discount,” he says, acknowledging the challenge many people face of being forced further and further out of big cities because of exorbitant rents.
“We are seeing good returns for our members but also seeking to make an impact in the community and housing affordability is a key issue.”
Nevertheless, according to Grattan’s Coates, it’s not actually the front-line essential workers critical to providing services all cities require who are typically struggling with high housing costs.
“It’s worth remembering the average wage in Australia is around $58,000 a year: the bottom 20 per cent of workers earn less than $30,000 a year.”
There are a few ways you can make rents affordable – increase rental assistance and build social housing. But the Retirement Income Review argued that even a 40 per cent increase in the rental assistant that would not be enough to meaningfully close the gap in retirement incomes between renters and homeowners.
Grattan calculated that raising rent assistance by 40 per cent, or roughly $1400 a year for singles, would cost just $300 million a year if it applied to pensioners, and another $1 billion a year if extended to younger renters as well.
On social housing, 100,000 dwellings would require upfront capital expenditure of $10-15bn.
Coates concludes: “The cut in land taxes has removed a major obstacle to the development of the BTR sector in Australia with projects being more economical then they ever have been. But while this goes some way to solving some problems for renters, it doesn’t reduce the cost of housing.”
The views expressed are those of the author and do not necessarily reflect those of the Westpac Group.
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