Scott Morrison (Cook, Liberal Party, Shadow Minister for Housing and Local Government) Share this | Hansard source

I welcome the opportunity to comment on the government’s proposed National Rental Affordability Scheme to be established by the bills before the House. The scheme was put forward as one of the government’s ‘big rocks in the jar’ to address the issue of housing affordability in Australia. More specifically, the scheme was put forward as a measure to address the supply of affordable rental housing in Australia. A central component of the government’s strategy in this initiative is to seek to facilitate the establishment of a new asset class for institutional investors in the form of affordable rental accommodation.

The opposition will not seek to oppose these bills in terms of denying them a second reading; however, we will be moving an amendment in the House to highlight what we see as the design flaws in the scheme which, unless addressed, will serve to undermine the effectiveness of the scheme. Before I do that, though, I think it is important to provide some context in terms of what is happening in our housing markets and the environment that this scheme and these bills are seeking to address.

As housing costs have risen above 30 per cent of household incomes, there has been much discussion and debate about the impact of increasing rents and house prices on the affordability of housing for people and families across Australia, particularly in our major capital cities. There can be no doubt that these increases represent a fundamental change from what Australian households had been used to in the past and have put families under stress. However, one must be careful of one-dimensional analyses in this area. There can be no doubt, as I said, that there are major changes that Australian families are having to deal with, but one-dimensional analyses of housing affordability, when framing housing policy, can be very dangerous. This was an issue that was highlighted by the Reserve Bank’s Assistant Governor (Financial Markets) when he said that these types of indicators can be misleading as the bulk of household debt in Australia tends to be owed by those with the highest incomes who are most able to service their loans.

To understand better the issue of affordability, the Reserve Bank provided a new analysis that goes beyond average measures to look more specifically at the experience of those age groups looking to purchase homes. In a speech in March, the RBA’s head of economic analysis noted the findings that 30 to 35 per cent of transacted dwellings would have been accessible to median households in the homebuying age groups in 2006-07. This compares to a long-run average of 45 per cent. These figures also would suggest that housing has become less affordable, although the decline is not as drastic as the more superficial measures have indicated. The RBA actually went further to examine what the impact of increases in real incomes had been on affordability—more specifically how the disposable income available to younger homebuyers after meeting mortgage repayments had changed over time.

Their analysis revealed—and this was noted by Rismark International in their analysis of home affordability—that, despite strong growth in real house prices over the last 25 years, the income younger homebuyers had left after paying their mortgages was actually higher in 2007 than it had been at any other point. That is not a finding of the coalition; it is not a finding of any interest groups; it is the finding of a study undertaken by the Reserve Bank of Australia. The virtue of this analysis is that while prices have been rising—and that point is acknowledged; it is plainly obvious—so have incomes, in particular real incomes. Real wages, increasing under the coalition government by more than 20 per cent over our term in office, had a major impact—assisting people and families across Australia to deal with the issue of rising rents and rising home prices.

A further analysis is provided by the Australian Bureau of Statistics survey of income and housing in 2005-06 released in October 2007. This survey shows that there has been a relatively small increase in the average homeowner-occupier’s housing costs as a proportion of gross real income. That rose from 18 per cent in 1994-95 to 20 per cent in 2005-06. For first-time home buyers in 1995-96, 26 per cent of gross real income was spent on housing costs, while in 2005-06 it had risen to just 27 per cent. Rismark in their analysis also noted a further study by Deloitte on mortgage stress in the Australian mortgage market. The study involved a national survey of 1,200 persons across Australia. Deloitte found that, for those households that paid between 30 and 40 per cent of their income on mortgage repayments, less than 15 per cent defined themselves as being stretched. These findings led Deloitte to conclude that 40 per cent may now be a more reliable indicator of mortgage stress than the previous 30 per cent threshold.

I raise these issues simply to say that there are many figures bandied about on housing affordability and each of those figures, when you look underneath them, reveal interesting information and insights into this issue, but we should be cautious about simply grasping at figures here and there, or selectively, when trying to understand the true extent of the issue we are seeking to address through these bills.

Another issue raised in this debate is what actually constitutes housing stress. In June, the Age reported that 900,000 households were suffering mortgage stress. I suggest that these types of alarmist claims can be extremely dangerous for public confidence in our housing markets. Last Sunday—and, indeed, also in this place—we saw the outcome of that. The Prime Minister announced new measures—following the earlier suggestion of the Leader of the Opposition—to raise the level of guarantee on bank deposits. As stated, this measure was all about increasing public confidence in our banking system.

Likewise, in the current credit crisis we must be careful not to undermine confidence in our housing markets. The Australian housing market is performing solidly in the current economic conditions and is well placed to weather the storm. Vacancy rates are at between one per cent and two per cent in virtually all major capitals. Prices, except for in discrete areas and for specific reasons, have remained stable and there are no credible forecasts that our housing sector will suffer the collapse in prices experienced overseas, especially in the United States.

These points are important for those who are sitting in their homes right now and seeing what is going on around the world. Just as our banking system and our economy have been left in excellent shape by the previous government, so our housing market—at least in terms of its economic performance and its robustness in relation to overseas markets—is also in strong shape. So those sitting in their homes, those looking to buy homes and those with investments in Australian real estate, particularly in the housing sector, have reason to have a sense of confidence about the current position of the Australian housing market and should be encouraged by that fact.

One of the reasons for this lower level of mortgage stress in Australia compared to overseas markets, particularly in terms of our performance currently, is our extremely low level of exposure to subprime mortgages, with non-conforming loans comprising around one per cent of mortgages outstanding in Australia compared to 15 per cent in the United States. Unlike the US, our loans are full recourse, protecting our markets from distressed housing stock being dumped on the market. Another factor is our relatively low level of foreclosure. According to RBA statistics for August, the figure for delinquent home loans on bank balance sheets in Australia was 0.4 per cent. This compared to 2.2 per cent in the US and 1.3 per cent in the UK. There are also significantly less 90-day arrear rates experienced by Australian banks now than in the late eighties and early nineties. I also note that in early 1996, before the coalition came to office, arrears levels were more than 50 per cent higher than they are today. The RBA informed the House of Representatives Standing Committee on Economics that the figure of ‘90 days past due’ represented fewer than 25,000 households in arrears. That is significantly less than the 900,000 figure quoted in the Age. Other figures suggest that this figure could be as low as 17,000, although it is taken for granted that those numbers have been added to in more recent times.

The most significant risk to these figures is the prospect for increases in unemployment. Key objectives in the current credit crisis are to do all we can to keep people in their homes and to do all we can to keep people in their jobs. This means keeping them in their jobs and ensuring that interest rate cuts are passed on in full. There can be no doubt that Australian banks are far better placed to absorb increases in borrowing costs than families seeking to pay mortgages to keep them in their homes and small businesses seeking to meet their payroll costs to keep people in their jobs. The contrary argument has simply not been made by those who seek to dismiss the position put forward by the coalition as populism. They fail to understand the serious economic point that is being made about the need for banks to pass on the full interest rate cuts which have been made and those cuts which, I suspect, will be made in the future.

Rate cuts must go to those who need them most, and these are people who cannot afford to give banks a 20 per cent hardship commission on these rate cuts as they are passed through by the Reserve Bank. For those who take the contrary view, I look forward to their explanation as to why our banks cannot afford to pass on rate cuts but can afford, within days, to buy another bank. I look forward to their explanation when the next round of bank profit figures are announced and they contain the word ‘billion’ in them or when bonuses are paid on share prices which are being maintained as a result of offsetting funding costs by failing to pass on the rate cuts in full. I look forward to the explanation of those opposite as to why they are prepared to provide excuses for banks which do not pass on those rate cuts to where they will have an even better and more beneficial input to the Australian economy.

A further factor, and one that represents the dominant influence on housing prices and rental affordability, is the significant undersupply of new homes across Australia and especially in New South Wales. The Housing Industry Association estimates that across Australia annual housing demand will increase from around 170,000 new homes and units in 2007-08 to more than 195,000 by 2009-10. At the same time, forecast completions will fall from just over 145,500 to less than 140,000. This represents a ballooning in the annual undersupply of homes from around 25,000 a year to over 55,000 a year and a cumulative undersupply of more than 200,000 homes by the time of the next election. This has been forecast not only by the Housing Industry Association but also by respected economists, in particular the ANZ Bank. These forecasts are also supported by recent ABS housing approval figures which show that the trend estimate in the number of dwelling units approved across Australia has fallen every month for the 10 months since the Rudd government was elected. The trend estimate for August was down 8.2 per cent on the same time last year, with the worst declines in New South Wales and Queensland.

To address housing undersupply requires action across a broad range of fronts. I suggest there are five key fronts. Firstly we need to maintain access to capital for homebuyers and the housing industry throughout this capital drought, keeping liquidity in the system and people in their homes. To this end, I welcome the government’s now $8 billion investment in the mortgage securities market, first flagged by the Leader of the Opposition, and the increase in the First Home Owner Grant to $21,000 for new housing. I sincerely hope that it will mean new construction. The most recent ABS housing finance statistics are from August and show that fewer and fewer people are taking out loans to buy and build the houses needed to meet increased demand across the country. Compared with July 2008, there was a four per cent decline in the number of finance commitments for the construction of new dwellings for owner occupation and, with the trend series falling by 2.8 per cent, the ninth consecutive monthly decline. There was also a six per cent decline in the number of finance commitments for the purchase of new dwellings for owner occupation. The trend series fell by 2.8 per cent, the 14th consecutive monthly decline.

I will not say the opposition has concerns, because the coalition will not be quibbling about the package the government announced yesterday. These are very serious economic times, and the government has made some decisions; 8 December will be a very big day. We are not seeking to quibble on these matters, but I reflect today on some concerns that have been raised in the public, particularly about the affordability of housing, and by ANZ economists about the impact of the first home owners grant and what it might mean for house prices, particularly for existing dwellings, where it has been raised to $14,000 for first home owners. What might that mean for rental affordability and the price of housing across our capital cities and right across the country?

There is always benefit in helping Australians to buy their first home. The government needs to respond to the issue of the role of the increase in the first home owners grant for existing homes that has been raised out in the community. I look forward to their explanation of what it means, why it is part of a stimulus package and particularly why, when they are putting forward a policy which should seek to support first home buyers to get into their first home, they are in the same breath excusing banks from passing on their full rate cuts.

Secondly, in terms of access to capital we need to look at unlocking land supply in our cities from the core to the fringe, not just on the fringe. Often, when we talk of land supply issues we think of greenfield sites on our urban fringes. I think it is far more significant that as time goes on we ensure that we have infill sites, the release of land and the conversion of land from other uses to housing supply at affordable levels right across our cities. In understanding that, we need to understand how state urban consolidation and planning policies, combined with excessive infrastructure levies, have strangled the supply of land. This, without doubt, is the biggest issue impacting on land supply, home affordability and rentals across the country. It is how land is being supplied to the market.

Particularly in New South Wales, this has been the most chronic of problems. Some years ago the then Premier of New South Wales, Bob Carr, basically put up a ‘house full’ sign. In putting up that house full sign he strangled housing supply in that state. As a result, homeowners, those renting accommodation and those right across the housing market in New South Wales have paid a great price for the lack of foresight by the former Premier of New South Wales in making that fairly ill considered decision.

Thirdly, we must calibrate how local, state and federal governments work together with the private sector to deliver infrastructure to support land releases so amenity is maintained in established areas and new communities are made viable. This must be backed up by the need for accountability and transparency at every level. We must not allow funds to sink into the abyss of state government treasuries. The government has made much of their nation-building agenda and their edifice projects. They have claimed that they will be bringing these large-scale projects forward. The reality is that large-scale projects cannot be turned off and on like a tap. The suggestion of bringing forward these projects to stimulate activity has, I think, been questioned. If the government really wants to do something about bringing forward infrastructure projects, they should engage with local government on the provision of basic infrastructure and services to unlock land supply right across our cities.

Fourthly, we need to keep a lid on building and site development costs, particularly in the face of the government’s Carbon Pollution Reduction Scheme. A recent master builders survey in Victoria found that steel prices for housing construction have on average risen by more than 30 per cent in the last six months. Imagine what the impact of the government’s Carbon Pollution Reduction Scheme will be on these prices going forward. The Leader of the Opposition has made a right argument that the government’s 2010 timetable for the CPRS should be shelved and replaced by the coalition’s more responsible 2012 schedule.

These issues impact on housing affordability across our country. These issues of when we decide to bring in a CPRS and what we decide to do with rate cuts passed on by banks amount to an equation that determines whether people can afford the cost of being in their homes. The debate around the CPRS is not just about the environment; it is very much about affordability of accommodation right across our country. We also need to be mindful that outbreaks of union activity threaten building costs. I remind those opposite to find the steel to resist union pressures to abolish the ABCC. I also warn them that they should not allow a corrosion of the ABCC from within. Fifthly, we must understand the impacts of immigration and population policy on housing demand and our demography, most notably the ageing of our population.

It is against this backdrop and what is occurring in our housing sector that I believe we must evaluate the scheme put forward in the bills before the House. The purpose of these bills is to establish the National Rental Affordability Scheme, providing over $600 million, including administrative costs, to be invested over four years in incentives for complying applicants for the development of 50,000 new, affordable rental accommodation units to rent to low-income earners at 20 per cent below market rates. The objective of this program is to foster the development of a new, affordable housing asset class for institutional investors. The scheme offers a $6,000 per year indexed flat rental incentive in the form of a refundable tax offset for 10 years to taxpaying entities, supported by a $2,000 incentive from the state or territory government and direct financial assistance for each successful project. Registered charitable organisations, non-taxpaying entities, will receive their Commonwealth incentive as an annual cash grant.

The primary bill deals with the establishment of the scheme. The secondary bill deals with the refundable tax offset and other taxation measures. Of the more than $600 million allocated for NRAS in the May budget, over four years almost $500 million has been allocated to fund the tax offset and the balance is spent on direct financial grants and administrative costs. More than half of all the funds are allocated in the final year of the scheme. That is four years away.

NRAS was officially launched by the Treasurer early this year and was announced as ALP election policy in October. I make that point because this is a measure that has been put forward, I think, to make massive inroads into the housing undersupply issues that I mentioned earlier. This is a scheme that is being held up as one that is going to be a ‘big rock in the jar’, but I fear that this scheme may only end up being a very, very gentle drip in a very, very large pond. It is part of other measures being introduced, such as the first home savers scheme, and later in this place we will see the Housing Affordability Fund. A consultation and application process has been underway since May and allocation of the first 3½ thousand incentives from round 1 for projects to be delivered this year will be made once passage of these bills is completed. There will be a further 7½ thousand incentives available for round 2 and 39,000 incentives will be available under the third round for projects to be completed in 2010-11 and 2011-12, which is beyond the forecast period that I was referring to earlier. We will already, by that time, because of cumulative undersupply in the next three years, have an undersupply of over 200,000 homes across the country.

The coalition does not wish to delay the allocation of incentives from round 1 and is therefore not seeking to oppose the bill or to refer the bill to a Senate committee necessarily, as industry and interested parties have already had an opportunity to make submissions on the scheme as part of the technical discussion paper process. It is now time for the scheme to face the test of the market. The government has built up high expectations about the scheme. We will now see how effective it is in addressing the challenges I have outlined. That said, the coalition believes there are some significant issues relating to scheme design.

Firstly, I believe the scheme fails to address major undersupply issues in the housing market. In total the scheme will deliver less than five per cent of the projected shortfall, but, as I just noted, the vast bulk of that will not even come until after 2009-10. The department has confirmed through the application process that projects already under construction will be eligible for this scheme. So there is not even a guarantee that this scheme will be out there funding the construction of yet to be conceived projects or projects that are not already approved. In fact, it is going to approve projects that are already under construction and already built in to the supply pipeline, which is showing a high level of undersupply. As a result of that, I think there are reasonable question marks about this scheme’s ability to be that ‘big rock in the jar’ that the government has claimed this bill will provide.

Secondly, I would argue that incentives are rigidly structured and insufficient to make investments viable for institutional and commercial investors. The government says it wishes to create a new institutional investment asset class, supported by the forward estimates, I note, which assumes that the vast bulk of these incentives will be provided in tax offsets. I fear this may prove to be little more than a romantic notion on the part of some social engineers, who appear to be behind the design of the scheme in this bill. For a start, there is currently negligible institutional investment in Australia’s existing residential stock. Australian institutional investors currently do not invest in Australia’s residential housing market as long-term capital investors. There are many reasons for this: the lack of scalability, higher transaction costs, unwieldy asset management arrangements—and the list goes on. Yet it would seem there is an enthusiasm to try to recruit some of Australia’s superannuation funds to the cause. The problem is that this requires more than good intention; it requires a competitive rate of return and an understanding of how institutional investors price risk.

Figures provided by the residential property council highlight that any new asset class of this type would need to achieve passing yields of a minimum five per cent, with total returns of at least nine per cent to be competitive. Other estimates put this as high as 15 per cent. The assumption of the passing yield under NRAS is just 4½ per cent. It is no wonder that John Sutton, a CFMEU comrade of the Labor Party but of greater relevance as a director of the Cbus super fund, was quoted in the Australian Financial Review in September this year as saying:

I can’t see any evidence yet of industry super funds picking this up … on at least two occasions I’ve asked a couple of the main investment advisers and my inquiries don’t reveal any take up yet … I don’t know whether the incentives are going to be enough.

The first part of the problem is that, by fixing the value of the incentive at $6,000 per annum, the value of the incentive will be far greater for locations in South Australia or Tasmania but far less for the major metropolitan markets in Sydney, Melbourne or Brisbane, and equally far higher in outer-ring areas and far lower in inner-ring areas. The value of the incentives should be more closely tied to the value of the project and projected rents, with a sliding scale offered for the incentive, as suggested by the AHA, to make the project viable.

Secondly, tax offsets are confined to those parties participating in the development who will derive rental income. In the US, their tax credit scheme enables the transfer of tax credits to financing parties involved in the project, who are then able to make better use of the offsets and pass on lower costs of finance in return. This scheme ties the offsets up in knots. Thirdly, state and territory governments must be called on to at least match the Commonwealth’s contribution to the scheme to improve the value of the incentive, as they will enjoy windfall benefits in stamp duty and GST revenue from these new projects proceeding. For example, according to the Residential Development Council, conveyancing duty on a 2-bedroom apartment in Melbourne is estimated at $26,500, while GST paid on the completed unit will be approximately $42,000. These revenues will be derived from an outlay of around $20,000 worth, in net present value terms, of cash incentives delivered over 10 years. In short, state governments will make a profit from this scheme and should be asked to do more to make the scheme viable.

Fourthly, penalties ranging from potential withdrawal and suspension of incentives for vacancies or completion delays, as well as turnover created by tenants moving out of the income bands, all constitute risks that must be priced as they ultimately detract from the viability of a proposal. In short, the scheme’s conditions and regulations are too tight. While those who designed them may feel a sense of comfort that they have avoided all potential abuses, in the process I fear they may have cut off the scheme’s nose to spite its face. If incentives are left as currently designed, viable projects are likely, from a commercial perspective, only on the urban fringe in major cities at best and in smaller metropolitan and rural areas. Furthermore, it is more likely incentives will be more commonly taken up by the not-for-profit sector, which would require a reworking of the financial estimates contained in the budget papers.

Fifthly, new dwellings and lot size requirements will further deny inner- and middle-ring suburbs access to the scheme. The requirement that dwellings must not have been previously zoned for residential purposes, must not have been previously occupied or habitable or must be subdivided to provide more dwellings than previously available on the same block or section significantly reduces the opportunities to create new affordable housing in established inner-ring and middle-ring urban areas. To this end, the scheme is conflicted in its purpose. If a development is designed to convert existing residential stock in an established urban area to affordable housing stock based on a new design and layout that caters for specific disability groups or the aged, this project should be worthy of consideration by this scheme. Such proposals are excluded by this scheme. While initial rounds relax the 100-lot requirement, I suggest that this requirement also be relaxed and be made a permanent feature of the scheme to provide opportunities for smaller lots in middle-ring and inner-ring areas.

Sixthly, tenant eligibility criteria, I believe, are too constrictive and ignore key workers. The scheme should be part of a series of measures to provide people with a pathway to home ownership. However, tenant eligibility criteria imply that it is largely seeking to buttress the tenant base of public housing. If the purpose is to attract commercial investors then there must be an attempt to source tenants that provide a reliable form of income security for those investors at 80 per cent of market rents. Such persons may be those who are seeking to save to buy their first home or who may have recently lost their home and are back in the private rental market. If our objective is to deal with rental stress for those in the private rental market then we should be targeting those persons who are currently struggling in the private rental market. A submission by the Residential Development Council highlights this point and makes special reference to the plight of key workers, noting that many key workers, such as teachers, childcare workers, nurses, police, fire fighters and ambulance officers, may well be ineligible under this scheme. In fact, they show that the award rates for police officers in New South Wales and Victoria are above the upper threshold for single persons, yet the government claims in their prospectus that the scheme provides for key workers.

Finally, the government must provide some real commitment to ensuring these projects take positive steps toward sustainability. This commitment should be achieved not by placing further costs on the developer but by providing as of right entitlement to government schemes, most significantly, the solar panel and solar hot water rebate schemes. I therefore seek to move the amendment in my name on the Notice Paper. I move:

That all words after “That” be omitted with a view to substituting the following words:“while not declining to give this Bill a second reading, the House calls on the Government to make such amendments to the National Rental Affordability Scheme as would:

(1)

provide for incentives to be given on a sliding scale to take account of the different development and land costs in different locations;

(2)

provide for successful applicants to transfer their tax offsets on a once only basis to project financiers in return for a lower cost of funds, including providing such tax offsets to not for profit entities for this purpose;

(3)

require that State and Territory Government match the incentives provided by the Commonwealth under the Scheme;

(4)

extend project eligibility criteria to include conversions to affordable housing from existing residential stock, particularly where such projects involve substantial redevelopment to provide for specific needs groups such as aged or disabled accommodation;

(5)

extend the upper level income limits for tenant income eligibility criteria by 30% in each band to ensure greater access for key workers and those seeking to save to buy their first homes;

(6)

provide ‘as of right’ eligibility for the Federal Government’s solar panel rebate and solar hot water rebate schemes; and  

(7)

extend the establishment phase criteria that approximately 20% of incentives be available for projects of not less than 20 dwellings, to the entire Scheme”.

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