Why housing was the biggest missed opportunity in the federal Budget

Housing is in crisis. Rents are surging. Interest rates continue to go up, with fears of another rate rise on the horizon.

The 2023 federal Budget went some way to address the rising cost of living. But despite the increase to Rent Assistance, these policies don’t go far enough to address the long-term lack of housing supply.

Host Kat Clay is joined by Brendan Coates, Economic Policy Program Director, and Joey Moloney, Senior Associate, to discuss why housing was the biggest missed opportunity in the federal Budget.

Read Grattan’s previous work on the Social Housing Future Fund.

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Transcript

Kat Clay: Housing is in crisis. Rents are surging. Interest rates continue to go up, with fears of another rate rise on the horizon. The 2023 federal budget went some way to address the rising cost of living, but despite the increase to rent assistance, these policies don’t go far enough to address the long term lack of housing supply.

I’m Kat Clay, and today I’m joined by Brendan Coates, Economic Policy Program Director, and Joey Maloney. Senior Associate to discuss why housing was the biggest missed opportunity in the federal budget. Joey, what’s happening in the rental market right now?

Joey Moloney: It’s great to be back and talking about the rental market again.

I feel like we’ve done this a few times over the last 12 months and I suppose that’s indicative of it being the issue that’s not going away and is in fact getting worse and worse. So, you know, in a nutshell, what’s happening is the rental market’s really tight. So what that means is there’s low vacancy rates, so there’s not a flow of rental houses available for people to move into.

And asking rents, so the rents that landlords are asking for new listings, are jumping up really quickly, and that’s happening nationwide. So to put a bit of color on that, it depends on the source, there’s a few different places that try to collate data on vacancy rates and asking rents, but the consensus is they seem to definitely be running over 10 percent over the last 12 months and potentially up to 20 percent nationally.

There’s some particular hotspots, there’s places like Adelaide, Perth and Brisbane seem to be running, you know, further ahead of the rest. And in terms of vacancy rates. The consensus seems to me that they’re sitting somewhere between 1 percent and 1. 5%. To put that in perspective, consider that, you know, broadly speaking the rule of thumb benchmark for a healthy rental market, where people are, you know, able to find property in a reasonable time frame at a reasonable price, is generally about 3%.

So we’re well below the benchmark for a healthy rental market. And it’s no surprise that, you know, the vacancy rates in the cities like Adelaide and Perth, that I mentioned before, that seem to have the highest asking rents, are running at sub 1%. Now that’s the front of the rental market. That’s, you know, the new listings, what’s being asked of those.

The stock of rents is what sits behind that. So this is the rents that all renters pay. What we’re seeing now is we’re starting to see the front of the rental market flow into the stock. So the ABS measures what are the rents that all renters across the country are paying. They measure that as part of the consumer price index.

The last read, the March quarter, had that up 4. 9 percent over the last 12 months. Now just over six months ago, in the September 2022 quarter, That number was 2. 8 and basically all projections have that number ticking further and further up as that the hot front of the rental market starts to catch up with the stock.

Kat Clay: So that’s a great overview of what’s happening right now in the rental market, Joey, but what was in the federal budget on this front?

Joey Moloney: Like overall, there are a couple of different housing measures. Probably the one specifically targeting renters doing it tough at the moment was the increase in the Commonwealth Rent Assistance Payment.

So this is a payment, it’s a supplement that goes to income support recipients in the private rental market. It’s tied to their rent. It’s got a maximum payment per fortnight. That maximum is going up by 15%. In terms of dollar terms, that washes out to about an extra 24 a fortnight for rent. A single renter.

It doesn’t sound like much when I say it like that, and it’s probably not much in the con in the context of the current rental market. So, you know, consider maybe you signed a lease a year ago at, you know, relatively low rent of say three 50 a week. So that’s below median rents. Your landlord wants to renew your lease.

They see the rental market going up by 10%. They add 10% to your rent. So now you’re paying 3 85 a week, you’re paying $70 more a fortnight. So you can sort of see how, just how quickly. That modest increase in Commonwealth rent assistance gets sucked up. Grant is on the record saying that rent assistance needs to go up by at least 40%.

So, you know, we’re thinking of this 15 percent as a down payment on future increases. Other things in the budget, there were some tax breaks for build to rent investment. Now, the mechanics of this are very weedy, so I won’t bore our listeners with that. But what it boils down to is the government’s trying to incentivise more foreign investors.

Into what’s called build to rent construction. So this means the investors come in, they build a series of apartment building, and then they lease those apartments to tenants long term. So they both build and rent the apartments, you know, in theory, this sounds like it’s a good thing. It should expand housing supply, which, you know, every extra house.

Is good and will reduce prices unless the property council think this will add an extra 150, 000 homes over the next decade. But there’s reasons to be a little skeptical of that number. The budget papers projected dwelling investment to actually go backwards over the next four years. And there’s sort of a more fundamental point here that.

You know, the, the key constraint on more housing supply are the zoning and planning rules that restrict density. And if you’re thinking about build to rent projects that, you know, are high density and are near inner city areas, they’re going to run into those constraints regardless. And the last thing that was in the budget.

Well, not the last thing. There’s more things we’ll touch on later. But the last thing I’ll touch on is the home guarantee scheme. This is a scheme whereby the government you know, guarantees the deposits of people who buy a house with a low deposit of around 5%. It’s the same number of places. It’s still only available to 50, 000 homebuyers a year, but they’ve just expanded the types of people that can participate in the scheme.

But the big risk with this scheme, like a lot of demand side measures that try to boost home ownership, is that you just risk inflating prices. And that’s probably the big risk here because the income thresholds for the scheme are quite high. Most people are able to participate. So what you’re going to get is just people bringing forward house purchases that they were going to make anyway.

And you know, more fundamentally, you know, we started by talking about the rental crisis that is inferred that the people in the private rental market are facing right now. This doesn’t really offer them much. There might be someone at the margin who’s able to use this scheme to get out of the private rental market and into home ownership.

But we’re talking very, very marginal.

Kat Clay: So we will talk about the Housing Australia Future Fund a little bit later in the podcast. Brendan, I want to turn to you because Joey’s covered a little bit of why these policies aren’t quite as good as they seem on the surface. But I really want to dig into why they missed the mark in addressing the housing crisis.

Brendan Coates: Some of these things are certainly needed. The rent assistance increase is super important and you know, they’re going to have to go further on that. But they, they largely palliative. that, you know, the rent assistance increase is going to help people cover the costs of housing, but it’s not going to deal with the fact that housing is expensive because housing is scarce.

And so, the big missed opportunity in the budget was that we haven’t taken the steps that we need to boost supply. You know, we’ve seen the bill to rent tax deduction that will help. Although, like Joey, I’m pretty skeptical that we’re actually going to get to see 150, 000 homes built as a result. I’m skeptical on the modeling itself, but I’m particularly skeptical because, you know, we risk councils and state governments planning laws basically stopping those homes from being built.

So, if the underlying problem is a lack of supply, then we’re not going to end the crisis until we address that imbalance. Now, we’ve talked for a long time on this podcast that Australia You know, hasn’t built enough housing to meet the needs of the growing population. We’re one of only three countries that have seen housing per person go backwards over the last 25 years or so.

We have less housing per person than most other countries. And, you know, now we’ve also seen an increase in demand from the local community. So, you know, a big driver of why the rental market is so tight is because You know, we’re recording, I’m recording this from home, you’re recording this from home.

You know, Joey’s taking one for the team, doing it from the office. We’re doing it in a world where we’ve demanded more housing because, you know, people are working from home, they want home offices, they want more space. And so we’ve actually seen based on some of the work done by the RBA, household size has fallen from 2.

55 people per dwelling to 2. 48. People per dwelling between late 2020 and mid 2022. Now, that sounds really small. Like, that’s a tiny change. Except if you multiply it by 25 million households, then it’s equal to an extra 275, 000 homes that we need that we didn’t need before the pandemic. We’ve seen a huge increase in demand for housing.

Migration’s now returning as the borders reopen. And we’ve also got these forecasts for dwelling investment for the next few years that are going to, you know, suggest it’s really going to fall off a cliff because of rising interest rates and construction costs. So, you know. Rewind to one year, the government established or announced with much fanfare, fanfare in the October budget, the housing accord that we’re going to build 1 million new homes over 5 years.

But, you know, in this budget, the vaunted ambition of that accord lacks the substance needed to fill its ambitions. And you know, there’s a big risk. It’s in fact, quite likely we won’t build 1 million new homes over the next 5 years. You know, New South Wales, if it was to do that, would have to build about 314, 000 to meet its obligations.

You know, their planning department is forecasting they’re going to build 180, 000. The states are due to bring a package of reforms to National Cabinet as part of this process, but it’s hard to see them Agreeing to solve the problem now when they haven’t for the last three years or the last three decades, I should say.

And so, you know, unless we get the government, the Albany City Government, putting money on the table to push the states, to reward the states for getting the housing built that we need, it’s unlikely to happen. So, you know, we need money on the table to match the scope of that ambition. We’ve talked about on the podcast before, you know, that we’ve done this before with other nation building reforms.

So, you know, with the national competition policy in the 1990s, you know, the federal government put 6 billion on the table over a decade in order to get regulatory and competition policy reform. The Productivity Commission estimated that boosted GDP by about 2. 5%, so a huge increase. We could do the same thing with housing now and then frankly, unless that happens, unless the Commonwealth comes to the table and offers that kind of deal to the states, I don’t see how we get out of this.

Kat Clay: So Brendan, our policy recommendations led to the creation of the Housing Australia Future Fund. It’s one of the solutions that could provide a boost in housing supply, but I think there’s been some confusion about how the fund would actually work.

Brendan Coates: This is actually based largely on, on Granton’s work, although obviously any mistakes the government’s made in the costings are their own.

Where we are today is You know, social housing has fallen as a share of the total, total housing stock. You know, there’s not a lot of new social housing being built. And that’s a problem because people stay in social housing for a long time. If you don’t build or have new social housing coming online to keep up with population growth and young people in particular, you know, single moms fleeing domestic violence, if they need housing to avoid becoming homeless, that housing isn’t available to them.

And so that’s where the problem is now. The reason why we don’t build more social housing is because it’s expensive and I don’t mean it’s expensive in the sense that it costs 500, 000 to build a house. I mean in the sense that there’s a big rental discount that’s offered to vulnerable tenants. So social housing is typically rented out at 30 percent of someone’s income.

That’s a lot less when you’re talking about someone on job seeker or parenting payment than what it would cost To build and maintain that housing over time, which is the rent that you have to pay. And so, you know, if the government’s going to, the government’s basically giving up a large share of the rent, that it’s not going to get back.

And so that means there’s an ongoing subsidy gap. There’s a subsidy gap that we estimate for social housing is about 15, 000 a year. And it’s that subsidy gap, which is why we haven’t built. Much social housing over the course of the last couple of decades because it’s expensive. There’s no shortage of capital to provide the private finance, you know, to go out and build housing at fully commercial terms.

You see that in how much house prices have been bid up over the course of the last couple of decades. So a lack of finance isn’t the problem. It’s funding the gap in the, in the rental yield. that you won’t get back. You know, that’s what the Future Fund, the Housing Australia Future Fund, is intended to achieve.

Now, we put this forward to both sides in 2021. Then Labor, probably earlier than we expected, took it up in the budget reply speech in 2021. I was in the chamber watching Albanese actually give that speech. He gave that speech where he announced the fund. You know, partly so he can tell his log cabin story about having come from social housing, having come from public housing.

And then it was only later that year that we actually published our actual paper on the issue. So look, you know, very happy to see it get up. But we didn’t get around to actually putting out our own work until a bit later. The way it works is the fund is a 10 billion fund. We recommend a 20, 10 billion fund.

They borrow the money. So create the capital endowment for that fund that’s invested by the future funds, you know, the future funds already investing 200 billion on behalf of government across a bunch of different funds. The money is invested in, you know, investments just like your super, in stocks, bonds, infrastructure, in housing.

It delivers a return that’s above the cost of the debt that’s being raised, the interest cost and the debt that’s being raised to issue it. And it’s out of those returns that the government then provides the funding to fill the subsidy gap. To community housing providers for social housing dwellings.

There’s gonna be 20, 000 social housing dwellings where rents are set at 30 percent of people’s incomes and 10, 000 affordable dwellings, which is a much lighter discount where rents are set at 20 percent below market rents. And in our original proposal, we wouldn’t have gone down the path of affordable dwellings.

We would have just focused on social because that’s what actually helps. Reduce homelessness and that’s where we most need to provide that support. The reason why we propose this fund is because it’s making use of the equity risk premium. You know, that’s, you know, a term that basically says that, you know, finding economics that you get outsized returns by investing for higher risk.

That overcompensate you for the risk that it entails. And it’s basically a way of taking the money which you’d otherwise be just spending on the interest costs of the debt and you can make it go further if you’re investing in the fund and over time you get a higher return. It’s no different to what we do with superannuation.

Kat Clay: And so now it’s stalled in the Senate.

Brendan Coates: That’s right. So it’s stalled in the Senate. The government has, argues it’s an election commitment, and that’s true. And so they’re not for turning. They don’t really want to change the, the, the model they’ve taken to the election. But it’s, it’s also true that it’s not enough.

You know, the government itself is not arguing that this solves the problem. And so the Greens quite rightly argue. That it’s not enough and that they need to go further and they’re seeking to push the government to go further. Now, the reluctance to go further is because of the budget position because we’re in a world where the government is was seeking to get a surplus.

You know, that’s a big political win for them, even though I think the economic. Rationale for that is not particularly strong either way, and they’re worried in particular about putting more money into the economy and being perceived by the opposition to be turbocharging inflation. The Greens are also saying, well, this is.

This is just gambling on the stock market. It won’t raise any money. It won’t actually lead to any more housing being built. And they, you know, they use the example that if the fund had existed last year, it wouldn’t have made a return. It would have gone backwards like a lot of our super. I think that’s missing the mark on and overriding the critique of the reliability of the funding stream.

So the government Hasn’t been particularly explicit about how those funds will be allocated, the return, you know, the way, the only way you get 30, 000 homes out of this is if you do something like an availability payment model where you basically provide a community housing provider or a state government with the subsidy gap that they need to fill that hole and then the, the, the community housing provider or the state government goes out and finances the rest of it by borrowing.

itself. And so, you know, if the fund with 10 billion in it is going to deliver a return of say 700 million a year, you know, if you want to provide a subsidy gap for 15, for 20, 000 social homes at 15, 000 a year, that’s 300 million. If you want to provide the subsidy for 10, 000 affordable homes at 5, 000 a year, that’s 50 million, that’s 350 million.

Now, the numbers may have gone up a bit with rents, but that is how you would do it. The catch is that you actually write those long term contracts to provide that subsidy gap that gives the community how to provide us certainty to go and then borrow from you know, the catch is you’ve got to promise that payment each and every year for the home to be made available.

And so the fund, once it delivers its first 30, 000 homes, it’s not going to deliver anything else unless we increase the endowment beyond 10 million. But what it also means is that the money has to be paid out regardless. If the government writes a contract that says I’m going to give money to a community housing provider every year, they will have to honor that.

It’s exactly what we saw with. The National Rental Affordability Scheme, a scheme of the previous Labor Rudd Gillard Government. That prior to the discount or a subsidy to landlords or investors to go out and build and and offer affordable housing, that was shut down by the Abbott Government. The subsidies are still being paid now, even for the final homes, even though it was shut down a decade ago.

I do not think you can make the claim that the, that the fund is not going to deliver the housing And the funding certainty that you need because the nature of how the funds are going to be dispersed means that certainty is there. Now, the government should be clearer and just be explicit. So how can this thing get through the Senate?

Well, you know, the government should just make clear something that’s already implicit that they’re going to have to spend the money. So they should commit to do it. They should ideally raise the fund to the original 20 billion. So it delivers more housing. So at least we stabilize the social housing stock.

So social housing starts to keep up with population growth rather than falling further behind. And, you know, they should look at doing some other things like indexing rent assistance would be a big win because at the moment that rent assistance increase, that 15% rents are going to rise faster than the CPI over the next couple of years.

And it’s actually the rent, the rent assistance increase is not going to keep up with. The increase in the rental costs the low income owner is going to experience.

Kat Clay: Is it actually designed to return money to the government? I mean, do you actually invest in the fund in order to, you know, get the money back in the future?

Or is it, you know, we’re just going to put this money into housing and accept that that’s a loss that we’re going to have to make up for

Brendan Coates: elsewhere? Well, no, because it’s like your super, you put the money in, it invests, you use a dividend, a return in like, you know, the dividends or the coupons on bonds, you get that money back.

Now, you obviously still own the existing 10 billion worth of assets and you can liquidate that portfolio at any time if you wanted to. So, you could shut down the fund in the long term by just selling it. in the same way as people are supposed to sell their superannuation assets in order to actually fund their retirement.

Kat Clay: Is that a risk then for the people that actually live in these houses if they’re relying on that for social housing?

Brendan Coates: No, because the government, as I said, the government’s commitment is, will be to provide the funding to make the, the, the the housing available to people irrespective of the returns of the fund.

So, for example, the Medical Research Future Fund went backwards last year. It still made grants for medical research out of that fund last year. It would be no different with the Future Fund. Once the government’s made the commitments to community housing providers to actually provide the housing, then they’re going to have to do that anyway and they would do that anyway.

So, I don’t think you got to remember that the Future Fund is 10 billion. The federal government collects tax revenues of like 500 billion per year. This is a fund that allows the government to make the money it spends on housing go further, but the money they spend on housing is not contingent really on the returns to the fund.

Kat Clay: Peter Dutton’s budget reply accused the Albanese government of making Australia’s housing crisis worse by running a big Australia policy. Now we discussed whether the Labor government was running a big Australia policy on the podcast two weeks ago, but I am keen to dig into it from a housing perspective because we do often get questions on social media about the impact of migration on housing availability.

So the question is, is migration causing Australia’s housing crisis?

Brendan Coates: Migration itself is a contributor. As we said on the podcast a couple of weeks ago, it’s not really because the government’s running a big Australia policy. It’s just the normal policy settings leading migrants to return to the country that previously had left because of the COVID border restrictions.

And there is no doubt that migrants are adding to housing demand. You know, that’s, I think, just an undeniable fact. Migrants don’t get on the plane to come here and pack a house. On their back with them, they’re naturally coming here and they’re going to add to the demand for housing in time. They will help also add to the labor force that builds it, but you know, they’re obviously adding to demand for housing when they first get here.

And, you know, what we’re seeing is that the migration numbers are increasing pretty quickly. We saw that in the budget. So, you know, the headline number that Peter Dutton referred to is the 1. 5 million people that are going to be increasing Australia’s population due to migration over five years. But, you know, the budget papers make clear that by 2024, there will still be 215, 000 fewer migrants in Australia than were expected for this year for that year in 2019.

And we won’t actually catch up to the pre COVID trend in terms of the migrant population in Australia. Until pretty much 2030. How is it, you know, that we’re in a world where the, the rental crisis is as bad as it is, but the population is in fact smaller than expected to be before COVID? The answer, as we discussed before, is that Australians are demanding more housing.

It’s like we’re all sitting on a park bench. Everyone’s lined up in a row, then a couple of migrants left during the pandemic, we all spread out on the park bench, and then the migrants have come to sit back down again and there’s no space for them. And that’s what’s driving where we are today. So I would describe it as, it’s kind of one third migration, two thirds domestic, it’s two thirds Australians are in fact driving the housing demand, and therefore.

You know, the rental crisis that we’re having.

Kat Clay: Finally, Brendan, I mean, big picture, what happens if the Albanese government doesn’t get serious on fixing housing?

Brendan Coates: Well, I think this is where Peter Dutton has a point. The government’s housing policy is inadequate. They do not have a plan to deal with this at the moment.

And Housing is arguably now the biggest threat to much of the Albanese government’s agenda. Rents are increasingly going to drive inflation, which will make it hard for the government to get inflation down and therefore to start thinking about some of its, its, its priorities in other areas. And housing is now actually the biggest threat to the migration program.

The government set out a pretty sensible policy framework for migration and the big risk now is that it’s Housing and the link to migration gets weaponized by the coalition, leads to ad hoc changes and we don’t get those very valuable migration reforms. But more broadly, there is just a growing sense of frustration.

Younger people are finding themselves struggling to be able to find, get a roof over their head. They’re struggling to be able to buy their own home. And I just, it is a really big and potentially explosive issue for the government over the next couple of years if they cannot get on top of this.

Kat Clay: Thank you, Brendan and Joey for talking us through the housing matters that were in this year’s federal budget.

We look forward to seeing what happens next in the housing space. If you’d like to talk to us about anything you’ve heard in the podcast today, find us on Twitter at Grattaninst and all other social media networks at Grattan Institute. As always, please do take care and thanks so much for listening.