Can we solve the housing crisis?

The background to the problem can be simply stated.  After the 39-45 war there was a severe housing shortage as none had been built during the six years of war and this wartime shortage was compounded by post war immigration. The Federal government funded the States to build low-income rental houses, and as a result Housing Commissions were set up in the States and estates of detached houses were built, mostly in new suburbs, although some tall blocks of flats replaced slums in inner city areas.  This started to achieve its short-term aim but for ideological reasons right wing governments gradually reduced funding rental housing for low income families, it would be provided more efficiently by the market, they claimed.  In order to continue to build more houses the States sold off most of their housing stock to their tenants, and now they aren't very active.  This was a short sighted move as it removed a pool of rental accommodation  from the housing equation.  What's more, it was housing that would have been paid for by now so that the rents could have been lowered to match the ability of disadvantaged people to pay without any public subsidy being required.

Over the last 30 years the price of land and house packages built by private enterprise has grown to the level that if both members of a couple are working in good jobs, one of their incomes goes entirely to pay the interest on the mortgage needed to enable them to afford it.  Without interest the loan would be repaid in 11 years.  With interest, the repayment period is extended to 25 years.  Many couples can't afford to start this process, and rents have soared in the face of an increasing shortage of rental housing at all levels.  Developers have agitated that land should be released on the fringes in order to enable housing to remain 'affordable', but in many cases large areas of rezoned land have been bought up by large developers and then released slowly in order to keep the price of house sites up, and this of course, does nothing to keep the costs of houses for sale or rent down.  In any case 'affordable' is a misleading word; there are people in our society who not only may never be able to afford to buy their own home at present prices, but many of them can't even afford to pay an economic rent that covers the true land, construction and finance costs of a new house or flat. 

What is needed is a pool of housing that could be rented to low income families at rents these people can afford.  Some councils, like Port Phillip, build what they euphemistically call 'social housing' but this is usually only made possible by using land already owned by the council (so there is, in effect no land cost). They usually have to rely on infrequent grants from the Commonwealth to complete the equation. It's a worthy enterprise but barely touches the real need for this sort of housing.

House costs in Australia are among the highest in the world and the high costs have become a divisive thing that cuts across having a more sustainable society.  It's one of the basics of an honorable civil society that all people should have the dignity of adequate shelter. There is constant emphasis on reducing building costs but project house builders are pretty efficient and there are no radical ways of making great savings this way.  Part of the high cost equation is due to an increasing trend to build large, two storey houses
(so-called MacMansions) and I've agitated that all two storey houses should be designed so they can be easily converted into two units at some future crunch time. 

Land costs are a real problem and the NSW government set up a Lands Commission years ago to buy up outer metropolitan land and develop land for sale for housing in order to counter-balance the influence of land developers.  This has helped, despite calls for this so-called socialist intervention to be ended so the free market could decide everything.  Despite this rhetoric no one seriously thinks a free market would lower land costs or build low income rental houses; the upper 'sales' end of the market is much more profitable.  The main problem is that the cost of finance ends up costing as much as the initial cost of the house and land.  Except in Canberra where all land is leasehold, we have adopted a system of freehold land; leasehold is probably a better way of holding down land costs, but it's too late for that now.

In his book Australia Fair, Hugh Stretton provides one example that worked really well for over fifty years.  He describes the founding in 1936 of the politically independent South Australian Housing Trust by a conservative government.  Its growth and activity since then is a role model for well managed government intervention.  The Trust built houses (by private contractors through the normal competitive tender process) for rent and for sale for the bottom of the market that was being totally ignored by private enterprise.  It's not a complicated story and Stretton describes how:

'The Housing Trust's main link with government was a guarantee of its credit, so it borrowed at low interest and serviced its loans from its earnings.  By 1970 it had built 68,000 houses.  It had supplied more than half of them to new homebuyers by sale or rental purchase.  In the remaining 33,000, more than 90 per cent of the tenants were paying full rent.  The operation has not so far cost the taxpayer a cent.'

This supply of low cost housing had the effect of holding down wages and the cost of living to the extent that South Australia enticed large automobile plants to set up in Adelaide largely because of its stable work force.  After the Second World War the Trust became one of the most powerful of the State authorities and started to act as a total development authority and "metropolitan planner" at several levels simultaneously: as formal town planner (at Elizabeth); as de facto metropolitan planner, integrating factory development and housing and extending the suburbs; and as a major State planner, particularly in relation to industrial growth and immigration. The Trust's wide roles as a large-scale developer and public housing authority were curtailed from the late 1980s on in the wave of economic rationalism that led to reduced funds for housing by conservative Federal governments, but by the time the Trust was disappeared into a government department it had built over 110,000 houses.

Why hasn't this shining light been emulated elsewhere?  All that was needed was a guarantee of its credit and steady management.  Why has the dogma that the market knows best and is the most efficient way to do things taken root when, even leaving aside the excesses of the Global Financial Crisis, the toxic examples of Enron and HIH show that this is simply not always the case.

Selling off all the Housing Commission houses was good for the lucky tenants of course, but it created an increasingly severe shortage of rentable houses for people on low incomes.  This led to a tax concession called negative gearing being instituted; the market would provide enough rental housing, conservatives said, given the right incentives.   Tax savings were instituted with the aim of encouraging private enterprise to build more houses for rent, but most investors simply bought existing houses, rented them, claimed all the tax concessions and waited until the sale price became inflated and eventually sold the house at a profit.  Deduction of negative gearing losses on property against income from other sources for the purpose of reducing income tax is illegal in most countries; Australia, Canada and New Zealand are the exceptions.  Negative gearing here usually refers to borrowing for a residential investment (e.g. a house or unit) that is rented out.  In most cases rental income is less than the interest, and the investment thus results in negative gearing and tax relief if the investor has borrowed a large percentage of the cost.  Negative gearing payments by way of tax relief made by the Commonwealth to landlords suffering a loss have been estimated to be in the order of some $3.9 billion by 2004-05.

As time went on negative gearing was increasingly being described as 'middle class welfare' particularly as it never ever achieved its stated aim of stimulating the construction of more houses for rent.  Despite its lack of success, Labor governments have been reluctant to end what had become a rort because they fear a middle class voter backlash, and it's still in force.  It should be abolished immediately, the large amounts of tax foregone would be better spent on education and health. It is unfair to provide such a hidden financial advantage to a small well off group for no return. It's this sort of well intentioned aim, of bringing about a desirable end by a tax device, that worries me about the carbon tax; will it deliver real reductions in emissions?

The SA Housing Trust model could still be applicable to local government in new suburban areas but isn't relevant in inner city councils such as Port Phillip because of the lack (and cost) of available sites. While most Councils regard housing as solely a State Government responsibility, the City of Port Phillip has been enterprising by putting any redundant operating land to good social purpose.   The Oasis residential develop-ment on a council owned site in Inkerman Street St Kilda (made redundant in the wake of the Kennett amalgamation of councils) would seem on the surface to be a model of how to do such things.  The Council was smart and didn't try to be the developer, go into debt and design and sell the units themselves and attempt to take all the profit.  Instead it ensured the development was a good design that was environmentally responsible and left the rest to people whose business it was.  The development of this 1.2 hectare redundant waste depot comprises 237 residential units and three retail tenancies of high design quality in 5- three to five level buildings, one of which is a recycled building.   Nineteen community housing units, or 13.5 % of the total, were provided for the Council in exchange for the land.   And at the same time all this was achieved with a long list of real ecologically desirable and sustainable design features, the re-use of grey water being one of them. All the social housing units are indistinguishable externally from the private units and are scattered throughout the development and this has apparently made the units slow to sell and has lowered prices a bit; usually they are the ones without curtains.

Small developments, like that recently completed over a public parking lot in Kyme Place in Port Melbourne, seem to be largely determined by where Council owns a piece of land and such opportunities are, of necessity limited. And while being supportive of the need for more rental housing to be available for lower income people, many residents resist the idea that the State government should simply abandon its responsibilities and that local ratepayers should shoulder the financial burden.  And while Port Phillip Council has made some brave attempts to build community housing as described above, we have to face the fact that in terms of cost and the numbers built it has all been rather token in the face of such a large unsatisfied demand.  Many people, even families, are being forced into sub-standard rooming houses because they can't afford commercially determined rents that are inflated by the shortage.  And the homeless legion who sleep rough is at an all time high, and there is a nightly soup kitchen in St Kilda, one of the most affluent suburbs in Melbourne

 There may be a better model that would not only remove any financial burden from the ratepayers but also result in more rental units being made available. A background model that might be a source of inspiration is the first Strategic Plan for the City of Sydney prepared in 1971 by Clarke Gazzard Architects & Planners.  At that time it was prepared the legal Floor Space Ratio (FSR: the ratio of floor area to site area) for office buildings in the City of Sydney was 12 to 1; that is twelve storeys over the whole site, 24 storeys over half the site and so on.  Clarke Gazzard reduced it to 6:1 with provision for bonus FSR if desirable features were incorporated in the building design; if you did all the good things you could get back up to the commercially desirable FSR of 12:1. There was a mini recession at the time so complaints from the development industry were more muted than they might otherwise have been, and a Code setting down the bonuses was incorporated into the City of Sydney Planning Scheme and made law.  When the economy picked up, developers designed buildings incorporating all or some of the desirable features in order to claim the FSR bonuses and have more profitable developments. 

 I think it may be possible to develop financial incentives through the planning codes along these lines in the City of Port Phillip and other inner councils, incentives that would encourage developers to include community housing units in residential developments in some defined proportion to the size of the development.  On completion these units would be transferred to the Council to rent, particularly for indigent aged people, a rapidly increasing demographic group. To examine this possibility what is needed is a feasibility study of all residential developments built in the last four or five years to determine how the current development controls might be changed and what incentives would be necessary in order to make it profitable for a developer to both provide an extra unit or units for public use, and in the process, also to make a higher profit.  The aim would be to give developers a carrot of profitable extra development (for example, as an extra floor of apartments for sale) as long as two (say) of the units were strata titled to the Council on completion for rental to low income tenants. Just how this might be achieved would come out of the study, the current FSR could be reduced (as in Sydney) or slightly more intense development could be permitted. The bonuses would have to be pitched to make it worth the developers while, and when the sums are completed it may be that some subsidy may be necessary by way of government grants.

Napoleon once said (about fighting battles) En s'engage et puis on voit, you go into battle without fixed ideas and see what's needed to achieve your objective,  just what might work would come out in the course of the feasibility study.  Given the current economic downturn this might be a good time to try.  Instead of lower income people being concentrated in single buildings like a ghetto, they would be dispersed around the community everywhere new buildings were built.   And this may also have more inclusive community benefits too; you can't go on talking about welfare fraud and how it's all their fault, and at the same time say hello to that nice woman next door getting her two bright kids off to kindergarten every morning, can you? 

 Don Gazzard LFRAIA

May 2012