Hosted by Natasha Sarkar and Tamba Carleton
Thursday 17 September 2020
NS:
Affordable housing, both affordable rent and ownership. What is it? Who qualifies for it and what are the different products being delivered?
Hello and welcome to Talking Property with CBRE. A podcast in which our team of experts share their real estate insights. My name is Natasha Sarkar - Director of Structured Transactions and Advisory Services, and I'm joined here today by Tamba Carleton - Research Manager CBRE New Zealand. Thanks for joining me Tamba.
TC:
Thanks for having me on the show.
NS:
In this episode, Tamba and I are going to define affordable housing and look at what needs to be done to activate the sector. Let's get started.
I guess we should start by defining affordable housing. From my perspective, people often get it confused with state housing and so a good way to look at, I think is as a housing continuum. So, on one end, we've got state or otherwise known as social housing, which is subsidised or government assistance. Often in New Zealand we’ve seen that as Housing New Zealand stock and then you move along to affordable housing, which sits in the middle. Then on the other end is market housing and when I talk about all three of these, I mean it could be mortgages, it can be ownership or it can be rented products. When we look at the market end you know that's just what it was being delivered on the open market by private developers and in between is affordable. So, this is what may or may not necessarily around the world be delivered with state assistance we have CHIPs, or community housing providers in New Zealand and Australia and it can also, in some instances, especially UK, be delivered by private housing that is sometimes required through planning or other legislation for that city.
Tamba from your view and your experience in New Zealand?
TC:
I agree with housing continuum and that progression from social to affordable to market. I do see affordable as the one that's the least supported, but it's also the one that has the greatest need for support currently. With who is intended for each segment, I think that it really comes down to income, so the minimum wage right now is about $40,000 a year. But the current market rent is $580 a week, which means you really have to be earning $100,000 a year to afford that because that's 30% of income - that’s global consensus isn’t it? That 30% of income is affordable.
NS:
Of gross household income.
TC:
Yeah, if you're spending that on housing cost. So, the affordable segment of the market is really for people earning between $40,000 and $100,000 per year. There's about a third of New Zealand households earning that segment, 36% are renter households and 29% are owner households. So, there's need for both affordable rent and affordable ownership. But so far, most of the focus has been on affordable ownership.
NS:
And to add to that in Australia, it's the same metric so in their planning environment act it's defined as 30% of gross household income and across different states based on as you said, affordability and median incomes and rents that’s income band driven for people on very low, low and moderate incomes. So, I guess that's the sort of consensus 30% of gross household income is defined as affordable, in the UK it's defined similarly in planning legislation, so there’s a Section 106 agreement and for every single development, it's looked at on a case by case basis. But the overarching idea is the Mayor of London's mandate was for 30 to 35% of any new build development being affordable. That can mean ownership which we’re starting to see come through New Zealand in terms of shared equity. In the UK, there's a similar programme, there’s Help to Buy and then they have rented product, there's London Living Rent, which again is income driven or borough income driven and discounted market rent, which is 80% of the market rent for that unit. So I guess you can define it through legislation, you can define it through income bands and in the U. S. actually, products come through through tax credits.
TC:
Yeah, the low-income housing tax credit has been the most successful for delivering affordable housing. There's over five million affordable units because of that programme. There's also a voucher where if you qualify, then you can pay the proportion of your income on rent and the local housing authority will make up the short fall.
NS:
Another metric globally is when we look at mortgages in terms of the price earnings to the price of that house, globally that sits somewhere preferably below five times multiple. But if we look across New Zealand, Australia and many countries around the world, affordability of housing isn’t a question. In Auckland, that sits at nine times multiple and Hamilton, Wellington seven times and Christchurch around that five times multiple.
TC:
Yes, there's real lessons to be learned from Christchurch about how they have so much affordable housing and it's because after the earthquake, construction of new housing got a lot more permissive, understandably, because they lost a lot of their housing stock. So, houses were popping up everywhere, which meant that supply was very elastic in relation to the demand.
So New Zealand doesn't really have a lot of affordable rent, certainly not to the same degree that Europe and the Americas do. We have had a bit of activity with shared equity over the past three years, so the Housing Foundation has done some really great work helping families who can't access home ownership but would like to. So the way it works is they purchase about 75% of the house and then they pay out the Housing Foundation over maybe 10 years to eventually own 100% of the house. So that helps get them over that hurdle where the market means that they can't quite get there without support. So affordable ownership has really been boosted by that shared equity programme.
NS:
A very similar in the UK and it's known as ‘staircasing’, staircasing from a rental product, part rental to part ownership.
I guess now that we've defined it, we know it's a big segment of the market, you know what's the investment case for affordable housing?
TC:
Well, there’s huge, huge, fundamental underlying demand for affordable housing and that's what's driven a lot of the investment globally and it's what will eventually come to New Zealand. So, there's really three main reasons for investment and affordable housing. The first is that it's got global investment possibilities, and that's because every major study around the world needs affordable housing. That's a problem that very rarely ever goes away. So global investment possibility, the second is stable returns even in times of crisis. So arguably during the GFC, the need for affordable housing went up even further because people were losing their jobs and their homes, and they needed somewhere to live. So, investment and the year after the GFC more than doubled to $13 billion. The third reason for a global investment is the shift towards mandated socially responsible investing. So, there's a real desire from retail investors and from large corporate investors to have a positive social impact in their investment. I don't know about you better shifted all of my Sharesies to the responsible fund just recently.
NS:
You'd say there's been a lot of focus and news on sustainable climate change, people mandating that, requiring that from their funds and now hopefully we'll start seeing a shift where if people are investing into real estate they want housing solutions.
I think we've already seen that recently come through with the Australian Superfund. They're working with Australian providers focusing on the affordable segment of the market and said that they will invest in Build-to-Rent schemes specifically that are on that spectrum of that continuum, that are purpose built for rent to buy.
TC:
It's quite interesting what Portland, Oregon have done, I mean they’ve always been quite forward thinking in their urban solutions but they've recently changed their legislation to allow you to do four houses on a plot or six, if a least half are affordable. So that means, that really makes the affordable inclusion quite competitive and means more developers would choose to do affordable housing because it means they can do more on their site.
NS:
Another thing to consider as another tool is levelling the playing field. So, in the UK by requiring it that every site whether it's ownership or rent, requiring people to deliver affordable housing or otherwise, they're not going to get planning permission it just levels playing field, it's just a norm. It becomes the norm to deliver affordable housing as 30% of your stock and it's just done and delivered, there’s mixed housing. People do use other levers to activate that so you might put the affordable units on the lower levels of the scheme so you know that assists values or perhaps they're the least desirable views facing the railway rather than the River Thames so there’s other levers that you can use and include these units in these schemes.
So, I think we'll continue on with the rest of this podcast on this middle segment, that affordable segment and one more point actually I wanted add in defining that is, there's a bit of a blur between where the state comes in, because in an ideal world, whenever you need to get some sort of government subsidy, then it should sit a bit more to the left side, in an ideal world we want to move towards the market delivering this affordable product. But for now, with the likes of CHIPs and community housing providers and housing associations in the UK, Australia and New Zealand, that is a bit blurred. So, you know, we're not to say that affordable housing in the middle isn't stock that's delivered by community housing providers. So these sort of tools in the middle, be it Help to Buy or Shared Equity are ways of bridging that affordable segment. I think what's interesting to know or to recognise is Australia, New Zealand seem to be in a similar place of the affordable market, which isn't heavily defined - it is in Australia through legislation, but there isn't a lot of stock coming through.
To look at the US and the UK, we can kind of see what they're doing different. In the US it's a huge sector, and that is because of tax credits that has stimulated the affordable market from the 80’s and the UK planning requirements define affordable housing. So say in Central London, the Mayor of London requires somewhere in the order of any new build development, whether it's ownership or rent has to provide 35% affordable. Now, if that's a Build-to-Sell scheme, 30% of that stock has to be Help to Buy or Shared Equity which Tamba touched on before and those are different bands and in London that's under £600,000 and similarly with Build-to-Rent schemes, that's achieved through 30% of the units being at the London Living Rent or at discounted market rents. So that gives every development a level playing field. All sites are required to deliver it, and so it is delivered by market participants, which is where we really want to move too.
TC:
It's interesting that those private market participants must do affordable housing because we used to have that we had that as temporary legislation before they enactment of the Unitary Plan. It was called Special Housing Measures, so private developers had two choices where they were required to include affordable housing. The first choice was that they could do a certain proportion of units at 75% of the median price in that area and the other one was that they could do it at 30% of income for rental or mortgage. Basically, most people chose the 70% percent of median house price because it was a lot easier to do without subsidy. They basically provided studio units that were south facing with no carpark, which, yes, they were 75% of the median house price but they were probably quite similar on a dollar per square metre basis to the market rate units in the building. So, it was great because it brought in some below average priced units where supply was really needed, and it still gave developers a profitable development.
NS:
Okay well then, looking at say ownership, right. So, what do you think is more important? Affordable ownership or affordable rent?
TC:
They're both important. I mean, there's more renters in that $40,000 to $100,000 income band then there are owners. But you want people to progress on the continuum, so you don't want people to be in social housing forever. You want to support them into affordable rent, then into market rent and then into affordable ownership and then market ownership.
NS:
Also, if they want to move along that spectrum, you know, it’s not to say provide people with options, provide different tenures because, you know, ownership's not for everyone. People have different lifestyle choices they might want to save for their retirement with Sharesies.
TC:
Owning a home is a major financial responsibility. It really ties you down and people are delaying homeownership partly because they can't afford it, but also because they like the freedom of their renting lifestyle.
NS:
Which is where Build-to-Rent has been particularly successful in transient cities where people might be working there for five years, they don’t necessarily want to buy but they still want a good quality of living. So, I guess you’re saying both ownership and rent is important.
TC:
Yes, exactly.
NS:
I guess before we run out of time the last point that I wanted to touch on is that focus on that housing continuum and ideally, that middle segment that affordable segment we're talking about. In the future, the ideology is for that middle segment to be delivered by the market. Sure, for now we have the lights of community housing providers or housing associations that are part subsidising it. But ideally, we want social/state to be delivered with housing or government subsidies. The affordable segment by market participants, be it in the UK through planning requirements for those market participants to deliver as part of the predominantly market scheme. Then the market is, of course, delivered by a market participants and to get people the spectrum of choice right, whether it's ownership or rental based on their personal investment requirements, wherever they choose to live based on what part of their life they’re at and giving people more options and I guess, bringing to attention that middle segment that is not being sufficiently catered for currently.
TC:
Well, that's been a great episode. From Tash and I, a big thank you to our listeners for joining us today. If you like the show and want to check out more, visit cbre.com.au/talking-property or subscribe on Spotify or Apple podcasts. Thanks for listening to Talking Property with CBRE. Until next time.
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