The cost of increasing social and affordable housing supply in New South Wales

The cost of increasing social and affordable housing supply in New South Wales Prepared for Shelter NSW Date December 2014 Prepared by Emilio Ferrer 0412 2512 701 eferrer@sphere.com.au 1

Contents 1 Background 3 1.1 The State of Public Housing in NSW 3 1.2 A New Social Housing Policy 5 1.2.1 Pillar 1 A Housing System that Promotes Client Independence 5 1.2.2 Pillar 2 A Safety Net for Vulnerable People 7 1.2.3 Pillar 3 Financial Sustainability 7 2 Modelling 9 2.1 Assumptions 9 2.2 Scenarios Modelled 10 2.3 Definition of Scenario Outcomes 10 2.4 Scenario Results 11 2.5 Comment on the Results 12 3 Conclusion 15 Any opinions expressed in this paper are those of the author and do not necessarily reflect the views of Shelter NSW. This paper may be reproduced by nonprofit organizations and individuals for educational purposes, so long as the author is acknowledged. 2

1 Background Shelter NSW has commissioned Sphere to conduct financial modelling to estimate the cost of growing social and affordable housing in NSW at a sufficient scale to make an impact on unmet demand. The modelling has been performed based on the following approach: All existing public housing currently managed by the Department of Family and Community Services being transferred for management by community housing providers; The Commonwealth Government agreeing to provide Commonwealth Rent Assistance (CRA) to all current and future eligible tenants in properties managed by community housing providers 1 ; Community housing providers maximising their borrowing potential to contribute towards the funding of growth housing; In scenarios where private sales are included as part of the growth strategy, community housing providers to use development profit to contribute towards growth housing; and Government providing capital subsidies to meet the funding gap to finance housing growth. Before presenting the results of the modelling it is important to briefly outline why there is a need to grow social and affordable housing in New South Wales. 2 1.1 The State of Public Housing in NSW In 2013, the NSW Auditor General: Estimated that social housing in NSW only meets 44 percent of need in New South Wales. The constraints in the current portfolio and funding arrangements do not enable HNSW 3 and LAHC 4 to meet the changing public housing need ; Found that between 30 and 40 percent of LAHC properties were not at its well-maintained standard and that while LAHC attempts to maintain standards, because of the funding constraints it has delayed some maintenance, upgrading and capital programs." During 2012-13, approximately $85 million of such works were delayed 5. Found that to continue to operate within its means, LAHC has implemented measures such as selling properties and delaying some capital and maintenance expenditure. This will impact the condition and level of stock, and is not financially sustainable in the long-term 6 ; and 1 At present, the Commonwealth has only agreed to provide CRA up to 35 percent of total social housing. This commitment follows an agreement by Commonwealth and state/territory Housing Ministers in 2009 to develop, over time, a large-scale community housing sector in Australia, comprising up to 35 percent of all social housing by 2014 (Australian Government, Roles and responsibilities in housing and homelessness', Reform of the Federation white paper: issues paper 2, Department of the Prime Minister and Cabinet, December 2014, page 18). Community-housing and Aboriginal-housing tenants are eligible for CRA (whereas tenants of mainstream public housing are not). 2 In this report, affordable housing is used in the sense used in the NSW Affordable Housing Guidelines (NSW Family and Community Services, July 2013), rather than in a more general way. 3 Housing NSW. 4 NSW Land and Housing Corporation. 5 Making the best use of public housing, New South Wales Auditor-General s Performance Audit, 2013, page 22. 6 Making the best use of public housing, New South Wales Auditor-General s Performance Audit, 2013, page 22. 3

Found that there is no clear direction for managing the shortfall between need and demand for public housing, although HNSW and LAHC are working towards one. 7 The consequences of this situation are illustrated by Figure 1. Figure 1: Social Housing Indicators Change Between 2011-12 and 2013-14 8 Social Housing Waiting List, +7.3% Aboriginal Housing Households, +3.0% Total Social Housing Households, -1.7% Public Housing Households, -2.0% Community Housing Households, -0.9% New Social Housing Applications, -6.4% Over the past three years: There has been an overall reduction in social housing tenancies of 1.7 percent. This overall reduction of 2,341 households comprises a reduction of 2,251 households managed by the Department of Family and Community Services, a reduction of 220 households managed by community housing providers and an increase of 120 households managed by the Aboriginal Housing Office; and The number of applicants for social housing reduced by 6.4 percent but the waiting list for social housing grew by 7.3 percent there are now almost 60,000 applicants waiting for social housing. It is also important to note that over 50 percent of new allocations were made to priority approved applicants. The average time for priority applicants to receive an allocation grew from 3.9 months in 2011-12 to 4.1 months in 2013-14 9. Additionally, social housing exit rates keep falling decreasing from 8.8 percent in 2006/07 to just 6.9 percent in 2012/13 10. 7 Making the best use of public housing, New South Wales Auditor-General s Performance Audit, 2013, page 2. 8 NSW Family and Community Services, Annual Report 2013 14, Volume 1, Part 2, page 27. 9 NSW Family and Community Services, Annual Report 2013 14, Volume 1, Part 2, page 27. 10 NSW Family and Community Services, Social Housing in NSW: A discussion paper for input and comment, November 2014. 4

In summary, social housing provision in New South Wales is nowhere near able to meet service demand. Furthermore, the strategy to delay maintenance and sell public-housing assets as a mechanism for meeting current funding allocations is further exacerbating the inability of the system to meet service demand. 1.2 A New Social Housing Policy The Department of Family and Community Services has recently released a discussion paper for the development of a new social housing policy. The new policy is to be based on the following three pillars: Pillar 1: A social housing system that provides opportunity and pathways for client independence a system that works to break the cycle of disadvantage and build people s capacity to move into or stay in the private market; Pillar 2: A social housing system that is fair an integrated and fair system that provides a safety net for vulnerable people ; and Pillar 3: A social housing system that is sustainable a sustainable system that provides appropriate housing assistance now and into the future 11. 1.2.1 Pillar 1 A Housing System that Promotes Client Independence The objectives in Pillar 1 can only be implemented if the private market is affordable to existing public housing tenants bearing in mind most public housing tenants either rely on welfare payments as a source of income or have poorly paid jobs. In terms of home ownership, Sydney is one of the least affordable cities in the world. According to the Demographia 12 annual survey, in the last decade Sydney has consistently ranked among the five most expensive cities in the world with a median house price to median income ratio of around nine. This means that it takes nine full median Sydney salaries to purchase a house with a median Sydney price. On average, in the last decade, Sydney house prices increased by 23 percent in real terms 13. As Figure 2 shows, in the last decade, Sydney house prices grew below the Consumer Price Index (CPI) up to mid-2013. From that point strong price increases have meant that, overall, house prices in the last decade have grown significantly faster than CPI. 11 NSW Family and Community Services, Social housing in NSW: A discussion paper for input and comment, November 2014. 12 http://www.demographia.com/dhi-rank200502.htm. 13 ABS Residential Property Price Index, Sydney; ABS, CPI All Groups, Sydney. 5

Sep-2004 Mar-2005 Sep-2005 Mar-2006 Sep-2006 Mar-2007 Sep-2007 Mar-2008 Sep-2008 Mar-2009 Sep-2009 Mar-2010 Sep-2010 Mar-2011 Sep-2011 Mar-2012 Sep-2012 Mar-2013 Sep-2013 Mar-2014 Sep-2014 Figure 2: Sydney Consumer Price Index vs. Sydney Residential Property Price Index 1.60 1.50 1.40 1.30 1.20 1.10 1.00 0.90 Residential Property Price Index Consumer Price Index The deterioration in housing affordability is even worse for private renters. On average, in the last decade, Sydney private rents increased by 47 percent in real terms 14. Figure 3 shows the gap between private rents and CPI over the last decade. Figure 3: Sydney Consumer Price Index vs. Sydney Residential Property Price Index 15 1.90 1.80 1.70 1.60 1.50 1.40 1.30 1.20 1.10 1.00 0.90 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Private Rent Index Consumer Price Index It is clear that the overwhelming majority of public housing tenants will not be able to afford housing in the private market either as home buyers or renters. Consequently, the most likely scenario for the implementation of the Pillar 1 objective is increasing supply of affordable housing for rent and this is unlikely 14 Department of Family and Community Services, Rent and Sales Reports, Sept Qtr. 2004-2014; ABS, CPI All Groups, Sydney. 15 Department of Family and Community Services, Rent and Sales Reports, Sept Qtr. 2004-2014; ABS, CPI All Groups, Sydney. 6

to occur without direct government intervention specifically through the provision of capital subsidies 16 for this purpose. 1.2.2 Pillar 2 A Safety Net for Vulnerable People As shown above, today, social housing in NSW: Has a waiting list of almost 60,000 applicants; Allocates over 50 percent of housing vacancies to priority applicants fundamentally to individuals and families who are homeless; Has increasing waiting times for priority applicants; and Has declining numbers of social housing dwellings through a strategy of asset sales and delayed maintenance to meet current funding allocations. As the NSW Auditor General points out, current funding levels are delivering reductions in supply in response to increasing demand. From a service delivery perspective, this makes no sense, and to ensure that the social housing system is a safety net for vulnerable people the only possible response is to increase social housing stock. This requires the provision of capital funding by government for this purpose. 1.2.3 Pillar 3 Financial Sustainability Traditionally, financial sustainability in social housing has been interpreted as a system which is close to financially self-sufficiency. Perhaps this made sense in the 1950s and 60s when public housing had a much lower proportion of tenants who relied on welfare payments for their income. It certainly makes no sense today when social housing is a form of welfare delivery only targeting the most vulnerable members of our community. Over time, successive governments have tightened public housing eligibility in response to growth in demand. An exclusive focus on people in greatest need has meant reduced levels of rent income and larger gaps between operational costs and revenues. Furthermore, service delivery in social housing is capital intensive with high costs for ongoing maintenance, asset replacement and asset growth. It is clear that self-sufficiency is unrealistic and that the current social housing system will always require both recurrent and capital subsidies. However, it is important to see the delivery of social housing services in the context of government service delivery. Social housing comes close to being operationally self-sufficient and can achieve operational selfsufficiency through introducing a mix of social and affordable housing tenants. Most public services in NSW are usually much less self-sufficient than housing and require substantial operational subsidies. For example, recurrent health expenditure is 86 percent subsidised; education is 96 percent subsidised; and trains are 52 percent subsidised 17. Furthermore, none of the above services is expected to significantly cover their capital needs, and they can access annual capital programs as well as specific initiatives from time to time (e.g. the current Rebuild NSW strategy). Social housing, on the other hand has no explicit annual capital program for asset replacement and growth in the way health, education and transport do. Consequently to be financial sustainable social housing faces two choices, the current strategy of asset sales and delayed maintenance (and the abandonment of the policy objectives of Pillars 1 and 2) or the establishment of a capital program for asset replacement and growth. 16 Affordable housing for rent will generally be able to meet operational costs and even contribute to capital costs though leveraging. However, there will always be a need for significant capital subsidies from government. 17 McKell Institute, Getting us there, November 2014, page 22. 7

In summary, the objectives of the new social housing policy recently released for consultation by the NSW Government can only be met through increasing supply of social and affordable housing. This will clearly require the provision of capital subsidies by government. A clear option to implement this approach would be the establishment of an annual capital program for this purpose. The next section will provide the results of modelling to quantify the required size of this capital program for different growth scenarios. 8

2 Modelling Sphere has conducted financial modelling to estimate the required size of a NSW social and affordable housing capital program to deliver growth. The modelling has been conducted with a sliding scale of growth from 1,000 dwelling per annum to 10,000 dwellings 18 per annum. This would mean increasing social and affordable housing between 10,000 and 100,000 tenancies over the next decade. 2.1 Assumptions The following assumptions have been used for all scenarios All public housing currently managed by the Department of Family and Community Services is transferred for management by community housing providers; Community housing providers are given enough title to properties so that loan to value ratios are not an impediment for borrowing. This means that the only hurdle for borrowing is the interest cover ratio which has been assumed to be a minimum of 1.5 times 19. Interest rates have been assumed at 5.0% per annum with a 20-year loan term; The Commonwealth Government agrees to provide CRA to all eligible tenants (i.e. the practice of providing CRA for community housing tenants up to 35 percent of social housing in the State is expanded to 100 percent); Existing public housing tenants continue to pay rent equivalent to 25 percent of their income. Based on the 2013-14 Annual Report from the LAHC, the average rent per tenant has been assumed to be $133 per week including $6 per week in water recovery charges; Additionally existing public housing tenants also pay the additional CRA income they receive as rent. Based on the average rent, this additional CRA component has been assumed to be $58 per week; Growth properties have been assumed to be occupied by a mix of 20 percent of tenants paying rent set at 25 percent of their income (plus CRA: $58 per week), 40 percent of tenants paying 60 percent of market rent (plus CRA: $63 per week) and 40 percent of tenants paying 74.9 percent of market rent 20. The first group is referred to in the modelling as Social Housing Rentals where there last two groups are referred to in the modelling as Affordable Housing Rentals ; Based on the 2013-14 Department of Family and Community Services Annual Report, repairs and maintenance costs have been assumed to be 0.6% of building value and lifecycle maintenance costs have been assumed to be 0.8% of building value. No allowance has been made for long term replacement costs; Based on the 2013-14 Department of Family and Community Services Annual Report, other portfolio costs (including utilities, council rates, and tenancy management costs) have been assumed to be $3,287 per annum per dwelling; New dwellings have been assumed to have a mix of 50 percent one-bedroom units and 50 percent two-bedroom units; Based on the September 2014 Rent Report Average for Middle Ring Sydney, Outer Ring Sydney and Rest of NSW the average market rent for new dwellings has been assumed to be $368 per week; 18 Including both social and affordable housing for rent. 19 To Sphere s knowledge this is the best Interest Cover Ratio given by a financier to a community housing provider in New South Wales. 20 Tenants paying 74.9 percent of market rent have been assumed not to be eligible for CRA. 9

The average development cost for a dwelling has been assumed to be $220,000 for the building component and $166,000 for the land component; and The average market net sale value of a new dwelling has been assumed to be $464,000. 2.2 Scenarios Modelled The following five scenarios have been modelled: 1. No Private Sales, Full Cost of Land Scenario. Under this scenario, all development is conducted in land that has to be purchased. Development is only conducted for social and affordable rental housing and not private sales. 2. No Private Sales, No Land Cost, 4:1 Yield. Under this scenario, all development is conducted in land with existing public housing (e.g. estate renewal). Public housing is demolished and replaced. The modelling calculates the required number of demolished dwellings to deliver enough land to allow all required development to be conducted and consequently this scenario requires no cash for land. It is assumed that four new dwellings can be constructed in land currently occupied by one public housing dwelling. Development is conducted for social and affordable rental housing only. 3. Private Sales, No Land Cost, 4:1 Yield Scenario. As Scenario 2, but development is not only conducted for social and affordable housing but also for housing for private sale the same number of private sales as the net growth in social housing dwellings. 4. No Private Sales, No Land Cost, 2:1 Yield Scenario. As Scenario 2, but it is assumed that only two new dwellings can be constructed on land currently occupied by one public housing dwelling 5. Private Sales, No Land Cost, 2:1 Yield Scenario. As Scenario 3, but it is assumed that only two new dwellings can be constructed in land currently occupied by one public housing dwelling. 2.3 Definition of Scenario Outcomes For each scenario and quantum of growth (in the range 1,000 to 10,000 dwellings per annum), the following outcome data is provided. Total Annual Development Program. The total annual number of dwellings developed each year. This number comprises new social housing dwellings developed (including dwellings replaced in scenarios where development is conducted in land with existing public housing); new affordable rentals; and housing for private sale. Annual Growth in Social Housing Rentals. The annual net growth in social housing tenancies. Annual Growth in Affordable Rentals. The annual net growth in affordable housing tenancies. Total Growth. The total annual net growth of social and affordable housing for rent (this is the sliding quantum of growth ranging from 1,000 to 10,000 dwellings per annum). Number of Public Housing Dwellings Re-developed. This is the annual number of dwellings demolished and replaced. Number of Development Sales. The annual number of dwellings developed and sold in the private market (for profit). Total Annual Capital Cost. The total cost of the annual development program. Contribution from Debt. The contribution to development costs from community housing leveraging, i.e. borrowing against operational surpluses and using part of the portfolio as security. 10

Contribution from Sales. The contribution to development costs from private sales. Net Annual Capital Subsidy. The gap in funding to be met by government in practice, the size of the required annual capital program. Net Capital Subsidy per New Dwellings. The level of cash subsidy per new dwelling (not including the value of land if development has occurred on public housing land). Annual CRA Subsidy. The cost to the Commonwealth Government for the provision of additional CRA. 2.4 Scenario Results Tables 1-5 show the modelling results for each scenario. Table 1: Modelling Results for the No Private Sales, Full Cost of Land Scenario No Private Sales, Full Cost of Land Total Annual Development Program 1,000 2,000 3,000 4,000 5,000 6,000 7,000 8,000 9,000 10,000 Annual Growth In Social Housing Rentals 200 400 600 800 1,000 1,200 1,400 1,600 1,800 2,000 Annual Growth in Affordable Rentals 800 1,600 2,400 3,200 4,000 4,800 5,600 6,400 7,200 8,000 Total Growth 1,000 2,000 3,000 4,000 5,000 6,000 7,000 8,000 9,000 10,000 Annual Number of Public Housing Dwellings Re-developed 0 0 0 0 0 0 0 0 0 0 Annual Number of Development Sales 0 0 0 0 0 0 0 0 0 0 Total Annual Capital Cost $387m $773m $1,160m $1,547m $1,933m $2,320m $2,707m $3,093m $3,480m $3,867m Contribution From Debt $387m $551m $639m $726m $814m $902m $990m $1,077m $1,165m $1,253m Contribution From Private Sales $0m $0m $0m $0m $0m $0m $0m $0m $0m $0m Net Annual Capital Subsidy $0m $222m $521m $820m $1,119m $1,418m $1,717m $2,016m $2,315m $2,614m Net Capital Subsidy per New Dwellings $0 $111,143 $173,751 $205,055 $223,838 $236,359 $245,303 $252,011 $257,229 $261,403 Net Capital Annual CRA Subsidy $374m $393m $412m $431m $450m $470m $489m $508m $527m $546m Table 2: Modelling Results for the No Private Sales, No Land Cost, 4:1 Yield Scenario No Private Sales, No Land Cost, 4:1 Yield Total Annual Development Program 1,333 2,666 4,000 5,332 6,666 8,000 9,333 10,664 11,999 13,333 Annual Growth In Social Housing Rentals 200 400 600 800 1,000 1,200 1,400 1,600 1,800 2,000 Annual Growth in Affordable Rentals 800 1,600 2,400 3,200 4,000 4,800 5,600 6,400 7,200 8,000 Total Growth 1,000 2,000 3,000 4,000 5,000 6,000 7,000 8,000 9,000 10,000 Number of Public Housing Dwellings Re-developed 333 666 1,000 1,332 1,666 2,000 2,333 2,664 2,999 3,333 Number of Development Sales 0 0 0 0 0 0 0 0 0 0 Total Annual Capital Cost $293m $587m $880m $1,174m $1,467m $1,760m $2,053m $2,347m $2,640m $2,933m Contribution From Debt $293m $551m $639m $726m $814m $902m $990m $1,077m $1,165m $1,253m Contribution From Sales $0m $0m $0m $0m $0m $0m $0m $0m $0m $0m Net Annual Capital Subsidy $0m $36m $241m $447m $653m $858m $1,064m $1,270m $1,475m $1,681m Net Capital Subsidy per New Dwellings $0 $13,391 $60,336 $83,859 $97,893 $107,275 $113,979 $119,092 $122,958 $126,057 Annual CRA Subsidy $374m $393m $412m $431m $450m $470m $489m $508m $527m $546m Table 3: Modelling Results for the Private Sales, No Land Cost, 4:1 Yield Scenario Private Sales, No Land Cost, 4:1 Yield Total Annual Development Program 1,600 3,200 4,800 6,399 8,000 9,600 11,200 12,797 14,399 16,000 Annual Growth In Social Housing Rentals 200 400 600 800 1,000 1,200 1,400 1,600 1,800 2,000 Annual Growth in Affordable Rentals 800 1,600 2,400 3,200 4,000 4,800 5,600 6,400 7,200 8,000 Total Growth 1,000 2,000 3,000 4,000 5,000 6,000 7,000 8,000 9,000 10,000 Number of Public Housing Dwellings Re-developed 400 800 1,200 1,599 2,000 2,400 2,800 3,197 3,599 4,000 Number of Development Sales 200 400 600 800 1,000 1,200 1,400 1,600 1,800 2,000 Total Annual Capital Cost $352m $704m $1,056m $1,408m $1,760m $2,112m $2,464m $2,817m $3,168m $3,520m Contribution From Debt $259m $519m $639m $726m $814m $902m $990m $1,077m $1,165m $1,253m Contribution From Sales $93m $186m $278m $371m $464m $557m $650m $742m $835m $928m Net Annual Capital Subsidy $0m $0m $139m $311m $482m $653m $825m $997m $1,168m $1,339m Net Capital Subsidy per New Dwellings $0 $0 $33,084 $55,492 $68,852 $77,786 $84,171 $89,049 $92,726 $95,674 Annual CRA Subsidy $374m $393m $412m $431m $450m $470m $489m $508m $527m $546m 11

Table 4: Modelling Results for the No Private Sales, No Land Cost, 2:1 Yield Scenario No Private Sales, No Land Cost, 2:1 Yield Total Annual Development Program 2,000 3,996 5,997 7,993 9,997 11,999 13,999 15,987 17,993 19,998 Annual Growth In Social Housing Rentals 200 400 600 800 1,000 1,200 1,400 1,600 1,800 2,000 Annual Growth in Affordable Rentals 800 1,600 2,400 3,200 4,000 4,800 5,600 6,400 7,200 8,000 Total Growth 1,000 2,000 3,000 4,000 5,000 6,000 7,000 8,000 9,000 10,000 Number of Public Housing Dwellings Re-developed 1,000 1,996 2,997 3,993 4,997 5,999 6,999 7,987 8,993 9,998 Number of Development Sales 0 0 0 0 0 0 0 0 0 0 Total Annual Capital Cost $440m $880m $1,320m $1,760m $2,200m $2,640m $3,080m $3,519m $3,960m $4,400m Contribution From Debt $440m $551m $639m $726m $814m $902m $990m $1,077m $1,165m $1,253m Contribution From Sales $0m $0m $0m $0m $0m $0m $0m $0m $0m $0m Net Annual Capital Subsidy $0m $329m $681m $1,033m $1,386m $1,738m $2,090m $2,442m $2,795m $3,147m Net Capital Subsidy per New Dwellings $0 $82,264 $113,575 $129,260 $138,612 $144,857 $149,322 $152,756 $155,321 $157,379 Annual CRA Subsidy $374m $393m $412m $431m $450m $470m $489m $508m $527m $546m Table 5: Modelling Results for the Private Sales, No Land Cost, 2:1 Yield Scenario Private Sales, No Land Cost, 2:1 Yield Total Annual Development Program 2,400 4,796 7,196 9,592 11,996 14,398 16,799 19,184 21,592 23,997 Annual Growth In Social Housing Rentals 200 400 600 800 1,000 1,200 1,400 1,600 1,800 2,000 Annual Growth in Affordable Rentals 800 1,600 2,400 3,200 4,000 4,800 5,600 6,400 7,200 8,000 Total Growth 1,000 2,000 3,000 4,000 5,000 6,000 7,000 8,000 9,000 10,000 Number of Public Housing Dwellings Re-developed 1,200 2,396 3,596 4,792 5,996 7,198 8,399 9,584 10,792 11,997 Number of Development Sales 200 400 600 800 1,000 1,200 1,400 1,600 1,800 2,000 Total Annual Capital Cost $528m $1,056m $1,584m $2,112m $2,640m $3,168m $3,696m $4,223m $4,752m $5,280m Contribution From Debt $435m $551m $639m $726m $814m $902m $990m $1,077m $1,165m $1,253m Contribution From Sales $93m $186m $278m $371m $464m $557m $650m $742m $835m $928m Net Annual Capital Subsidy $0m $319m $667m $1,014m $1,362m $1,709m $2,057m $2,403m $2,751m $3,099m Net Capital Subsidy per New Dwellings $0 $72,599 $101,066 $115,326 $123,829 $129,506 $133,566 $136,687 $139,019 $140,890 Annual CRA Subsidy $374m $393m $412m $431m $450m $470m $489m $508m $527m $546m 2.5 Comment on the Results For each of the scenarios, there would need to be a government capital program to enable growth. Figure 4 shows the estimated required Government capital program for the five scenarios and growth of 2,000, 5,000 and 10,000 dwellings per annum. An annual growth of 2,000 dwellings would (not surprisingly) require a smaller capital program than an annual growth of 10,000 dwellings, for each of the five scenarios. Figure 4: Annual Capital Subsidy Required $3,147m $3,099m $2,614m $1,681m $1,339m $1,386m $1,362m $1,119m $222m $653m $482m $329m $319m $36m $0m No Private Sales, Full Cost of Land No Private Sales, No Land Cost, 4:1 Yield Private Sales, No Land Cost, 4:1 Yield No Private Sales, No Land Cost, 2:1 Yield Annual Growth: 2,000 Annual Growth: 5,000 Annual Growth: 10,000 Private Sales, No Land Cost, 2:1 Yield 12

Conclusions from the modelling include: If development is conducted on land which has to be purchased, the required annual capital program required ranges from $222 million per annum for an annual growth of 2,000 tenancies per annum to $2.6 billion per annum for annual growth of 10,000 tenancies per annum. This cost might be reduced if development is conducted in land with existing public housing. At a 4:1 development yield the required annual capital program would range from $36 million per annum for an annual growth of 2,000 tenancies per annum to $1.7 billion per annum for annual growth of 10,000 tenancies per annum. This cost can be further reduced if dwellings were also developed for private sale and development profit was used to contribute toward development costs. In this case, at a 4:1 development yield, the required annual capital program would range from no cost for an annual growth of 2,000 tenancies per annum to $1.3 billion per annum for annual growth of 10,000 tenancies per annum 21. The importance of development density has to be noted. If development was conducted on land with existing public housing but the development yield was only 2:1, costs would be higher than in the first scenario. Without private sales, the required annual capital program would range from $329 million per annum for an annual growth of 2,000 tenancies per annum to $3.1 billion per annum for annual growth of 10,000 tenancies per annum. With private sales, the required annual capital program would range from $319 million per annum for an annual growth of 2,000 tenancies per annum to $3.1 billion per annum for annual growth of 10,000 tenancies per annum. It has to be pointed out that scenarios with a development yield of 2:1 have a higher cost but also deliver as an outcome the renewal of many more existing public housing dwellings. Figure 5 shows the estimated size of the required development program for the five scenarios and growth of 2,000, 5,000 and 10,000 dwellings per annum. Figure 5: Size of Development Program 24,000 20,000 16,000 13,333 12,000 10,000 10,000 2,000 5,000 2,666 6,666 3,200 8,000 4,000 4,800 No Private Sales, Full Cost of Land No Private Sales, No Land Cost, 4:1 Yield Private Sales, No Land Cost, 4:1 Yield No Private Sales, No Land Cost, 2:1 Yield Private Sales, No Land Cost, 2:1 Yield Annual Growth: 2,000 Annual Growth: 5,000 Annual Growth: 10,000 Conclusions from the modelling include: If development is conducted on land which has to be purchased, the size of the annual development programs would be the same as the quantum of growth of social and affordable housing. If development is conducted in land with existing public housing with a 4:1 development yield and no private sales, the annual development program would range from 2,666 dwellings for an annual 21 Based on the private sales profile described in Section 2.1 Assumptions. 13

growth of 2,000 tenancies per annum to 13,333 dwellings for an annual growth of 10,000 tenancies per annum. If development is conducted in land with existing public housing with a 4:1 development yield and includes private sales, the annual development program would range from 3,200 dwellings for an annual growth of 2,000 tenancies per annum to 16,000 dwellings for an annual growth of 10,000 tenancies per annum. If development is conducted in land with existing public housing with a 2:1 development yield and no private sales, the annual development program would range from 4,000 dwellings for an annual growth of 2,000 tenancies per annum to 20,000 dwellings for an annual growth of 10,000 tenancies per annum. If development is conducted in land with existing public housing with a 2:1 development yield and includes private sales, the annual development program would range from 4,800 dwellings for an annual growth of 2,000 tenancies per annum to 24,000 dwellings for an annual growth of 10,000 tenancies per annum. Finally, Figure 6 shows the potential contribution to development costs from community housing borrowings for all scenarios and growth of 2,000, 5,000 and 10,000 dwellings per annum. Figure 6: Potential Debt Raised by Housing Providers $1,253m $814m $551m Annual Growth: 2,000 Annual Growth: 5,000 Annual Growth: 10,000 The modelling estimates that the level of debt that community housing providers could raise to contribute toward growth funding would range from $551 million per annum for an annual growth of 2,000 tenancies per annum, to $1.25 billion per annum for an annual growth of 10,000 dwellings per annum. 14

3 Conclusion Social housing is a mission-based activity with positive social externalities and these characteristics have been, and still are, the reasons for government provision and subsidisation of it. The important contribution of government spending to its fiscal sustainability, especially to public housing, should not cause an overlooking of the contributions of tenants through their rents. But where social housing is targeted only to the lowestincome sections of the population, and where rents are charged to avoid housing stress, rental income does not pay for all the costs of provision. Where an approach is taken that accommodates a mix of incomes and draws on other sources of revenue (e.g. CRA), then social housing can achieve operational self-sufficiency. Affordable housing for rent will generally be able to meet operational costs and even contribute to capital costs though leveraging. However, there will always be a need for significant capital subsidies from government. A critical point to note is that social housing providers, including community housing providers, share the same predicament: even if sustainability of recurrent services can be achieved (and it should be), there is still a need for an increase in the number of social/affordable rental dwellings (to meet consumer demand), and there is still a need to replace current stock as it ages. 22 The modelling shows that it is possible to sustain and grow the social housing system in New South Wales. The extent of government subsidy needed depends on a range of factors, such as tenant profile, rents charged, eligibility of tenants for CRA, cost of land, and redevelopment opportunities. The ways these matters are approached is essentially one of public policy choice but it requires the establishment of an explicit annual capital program for social housing in a similar way as it operates for services in health, education and transport. 22 E Ferrer, Leveraging affordable rental housing for sustainability and growth, Shelter Brief 45, 2010, pages 10-11. 15