How does the Federal Budget 2022-23 affect housing affordability?

Ahead of the Federal Election in May we published our insights into housing affordability – Who is taking the lead on housing affordability? This article explored what private developers and not-for-profits are attempting to do, despite the industry wide challenges, to provide more affordable homes for people and families waiting for social housing, the younger generations, as well as retirees. When we published this insight house values had risen almost 25 per cent, rental costs were rising and interest rates were significantly lower than they are today.

With demand greatly outweighing supply, construction costs still high and further interest rate increases expected before the end of the year, what are the measures outlined in the Federal Budget? Are they enough to address the rising cost of living and provide first home buyers and at-risk groups with some relief?

The Treasurer had indicated early on that the budget would be ‘tough’ and ‘responsible’ given the economic landscape but would provide a focus on families.

Labor's pre-election commitments were heavy on housing affordability and this budget is intended to bring these to life. Most of the policies proposed were addressing the demand side of the affordability equation (which history shows has the impact of driving prices up as more are given assistance to enter the market) and investment in additional social housing.

Forecasters have been telling us for some time that new housing starts have fallen well short of the annual level of supply needed to keep pace with demand. Even the booming number of new housing starts following the COVID-19 stimulus have not been able to fill the backlog of homes needed, and further demand stimulus without more supply will mean prices go up and more miss out.

Housing Accord - $350m

To combat this – and on top of the previously committed $10b for social and affordable housing, Dr Chalmers announced the negotiated “Housing Accord” which sees federal, state and local governments along with institutional investors and the private sector, signing on to deliver an aspirational target of 1 million new homes from 2024. Government will kickstart this with $350m in additional funding for the construction of 10,000 affordable homes over 5 years, that are to be energy efficient and well located for essential workers. The States have committed to match this number. The Government’s role will be to co-ordinate and drive the Housing Accord – with the Private Sector to deliver on the broader target.

In the lead up to the budget there were 4 funding models underpinning Labor’s housing affordability plan:

1. Housing Australia Future Fund – $10b

Labor has committed $10b to build 30,000 new social and affordable housing properties in its first five years:

• 20,000 social housing properties – 4,000 allocated for at risk women and children
• 10,000 affordable homes for the frontline workers to live closer to where they work to support service improvements

Investment returns will also be utilised to support ongoing housing needs:

• $200m for the repair, maintenance and improvements of housing in remote Indigenous communities
• $100m for crisis and transitional housing options for women and at-risk
• $30m to build more housing and fund specialist services for veterans at-risk

While a focus on vulnerable and at-risk groups is a positive move for the new Labor Government, there were initial concerns that 4,000 homes was not ambitious enough for the thousands experiencing housing stress. The Housing Accord seeks to address these concerns with its 1 million new homes from 2024 target. It also raises the question of what land supply Government has available to them in the areas the affordable homes are needed. With limited available avenues the continued support of the private sector and not-for-profits will be critical.

Legislation for the Future Fund is expected be brought before Parliament before the end of the year with works likely to begin in the second half of 2023, expanding job opportunities and pipeline for the already constrained construction sector.

2. National Housing Infrastructure Facility (NHIF) – $575m

Following Labor’s Jobs and Skills Summit in September, one of the 36 initiatives to help Australians into work was to make up to $575m available to deliver social and affordable housing. Widening the remit of the NHIF, which cannot currently be used to fund social and affordable housing, the investment is to be used to partner with other tiers of government and social housing providers, and to attract financing from super funds and other sources of private capital.

Australia’s superannuation sector is one of the largest holders of pension fund assets globally, with approximately $3.3t invested in superannuation assets. There is some concern from the sector investing in this form of accommodation model due to high risk and low financial returns. While the government sees a larger role for superannuation investment in this area – they’ll need to provide some tax incentives around this to get the ball rolling. No doubt the commitments made under the Housing Accord will certainly bring these negotiations to the table quicker.

Currently institutional investment in the residential accommodation asset class achieves a less favourable tax outcome to other property asset classes, so it would make sense to even the playing field here if the objective is to increase supply.

3. Help to Buy – $325m

Labor’s Help to Buy policy will cut the cost of buying a home by up to 40 per cent for up to 10,000 eligible homebuyers annually, replicating similar schemes already in place in several states. Help to Buy will cost around $325m over the forward estimates.

4. Regional First Home Buyers Guarantee

Under this scheme, support for 10,000 eligible first home buyers a year in regional Australia with a minimum 5 per cent deposit. The measure will be funded from redirecting funding from the Regional Home Guarantee component from the March 2022-23 budget. The challenge for both of these demand side initiatives, will be ensuring an appropriate distribution of these new entrants to the market so that prices of existing housing are not driven up.

Who is managing Labor’s affordable housing program?

Housing Australia (formerly the National Housing Finance and Investment Corporation (NHFIC)) will manage the Help to Buy, Regional First Home Buyer Support Scheme and Housing Australia Future Fund in addition to the existing programs currently run by NHFIC, including the NHIF. Driving the Government’s housing approach currently is Minister Julie Collins, whose remit includes the Governments Housing and Homelessness initiatives, along with Small Business.

Housing Australia will also be the home of the announced National Housing Supply and Affordability Council, which will be established to improve the throughput of land supply and land use planning, including establishing land supply targets for the States and Territories. Advised by industry experts, the Council is intended to be a central data and research repository and reporter of statistics around land availability, affordability and homelessness along with measuring new supply.

Australia’s tax constraints and other barriers to housing affordability?

In overseas markets, Build-to-Rent and Build-to-Rent-To-Buy models are an attractive asset class to investors, such as superannuation funds and retail Real Estate Investment Trusts (REITS). They have been a popular investment class in the USA, Germany and the Netherlands for many years, with the UK increasing its supply in this space only in the last decade through Government incentives. However due to tax constraints, planning concerns and uncertainty surrounding legislation in Australia, it’s been a slow start for developers and private investors entering the market here, despite several states introducing ad hoc incentives in one form or another.

We will continue to see clunky progress here until the Government removes some of the tax disadvantages to investing in residential accommodation at the federal level – two off the wish list would be the differing GST treatment and the Managed Investment Trust (MIT) tax rate applied to residential rather than commercial property investments.

It seems the ship has already sailed when it comes to rising rental costs and it will be hard to scale back pricing from here without further supply. While government should take the lead on social housing, they could go a long way to plugging the supply gaps and encouraging new housing supply if they incentivise investors through tax policy.

While there is an active plan now in place to increase the supply of affordable housing, the 5-year delivery timeframe will still see families under rental pricing stress in the short term.

What more can the Federal Government do?

The policy levers available to the Commonwealth to influence housing affordability are limited compared with the avenues of reform available to its state and territory counterparts.

Labor also introduced the Social Services and Other Legislation Amendment (Incentivising Pensioners to Downsize) Bill 2022, to Parliament in September to free up larger houses for families. Pensioners will be given an additional 12-month asset test exemption on their home sale proceedings. If the bill is passed, the changes will reduce the deeming rate and drop from 2.25 per cent to 0.25 per cent per annum on principal home sale proceeds intended to purchase a new home.

Time will also tell if the new National Housing Supply and Affordability Council will make the impact needed on housing supply and affordability when so many issues at hand need more immediate resolution. It will certainly play a role in measuring whether the Housing Accord and governments at both the federal and state level are hitting their targets.

Unfortunately, many of the supply side solutions fall outside of the remit of the federal Government. Instead they can focus on incentivising state and local governments to have adequate land supply and planning frameworks with boosts of catalytic infrastructure to unlock sites where the private sector can take over.