Friday, June 12, 2015

Mixed income/rental models in social housing

I have recently been involved in discussions on the development of a new social housing policy for NSW. For those who are interested, you will find the background papers here. It's been quite an interesting and, I think, useful process. The photo shows the Lilyfield Development.

One of the issues under consideration was the possibility of introducing what are called mixed models. At present, social housing is reserved for those on low to very low incomes and, increasingly, for priority cases with complex needs. One effect is that rental streams have been dropping, maintenance costs rising, leading to an increasing financial loss across the whole system. In simple terms, social housing is going broke.

A mixed model involves relaxing the income eligibility and priority needs constraint to allow a greater variety of people to access social housing at varying rents up to market rents and beyond. This approach offers a number of social benefits:
  • It allows people to stay in social housing as their income rises, just paying more. This can be combined with home ownership options, moving the social housing system back towards its original social advancement role.
  • It reduces the potential disincentive created by income eligibility rules that are so tight that people may knock back work or reduce working hours for fear of losing their home. 
  • It means greater variety in social housing tenants, thus reducing the problems that can arise when you concentrate the most disadvantaged in particular locations. 
  • Importantly, it improves the financial viability of the social housing system itself.
The  big disadvantage, of course, is that it means that some of most disadvantaged may miss out on housing.  It is almost impossible politically to justify this. The counter argument always is that governments should just buy or build more social housing. Sadly, that's not going to happen to the scale required, nor would it address the financial viability problems now plaguing the system.

Mind you, it would be easier to sell if governments were to say that we are going to have a mixed model, but will build a certain quantity of additional houses to cushion the short term effects.

Earlier, I referred to market rents and beyond. How on earth  can you charge more than market rent for a social housing property? To understand this, you need to understand something about the dynamics of the rental  market place.

Rental properties fall into two primary groups. The first are owner occupied properties that have come onto the market because the owners have moved away for a period. Lease terms are generally short or shorter term. The second group is investor owned properties. Here you can get terms that roll out to years, but the market is still unstable as investor circumstances change and they decide to sell the property.

This creates two problems from the viewpoint of renters. One is simply uncertainty, when will things change? The second is the transaction costs associated dwelling shifts.To illustrate the second, we came down to Sydney in 1996. Over the period to the final break-up of the household in early 2013, we moved six times. One move was our choice, the others were all instigated by owners whose circumstances had changed. Each move cost us over $2,000 as well as inconvenience, costs that have to be added to weekly rentals to get the real rental cost.

This simple maths explains why social housing providers as long term providers may be able to charge a premium above notional market rents. Ignoring the uncertainty factors associated with rental and the inconvenience factors in moving, if the transaction costs associated with moving average out to $20 per week over a ten year period, then the social housing provider might charge $15 extra a week and still leave the tenant better off. That would certainly help the viability of the social housing system.

It would also increase the capital management options open to the social housing system in that parcels of houses under longer term lease at good rents could be packaged and sold to an insatiable superannuation market place. The system might retain the property and tenancy management functions on a fee for service basis.

In the world I am talking about, the private sector is likely to follow if it looks like they are going to make money. As they do, the social need for this type of public or NGO provided housing will decline.


Winton Bates said...

I doubt whether a government agency would have greater skills in property management than private landlords. Would it be beyond the pale to suggest that it might be possible to achieve more efficient allocation of property and better maintenance of property by seperating the rental subsidy and property ownership/management functions?

Jim Belshaw said...

That's obviously an issue that's being discussed including in the various national inquiries that have gone on and there have been a number of internally commissioned consulting studies addressing cost and service issues.

It's probably beyond the scope of a short comment to go into the issues, I suspect that I should do a full post, but it's quite complex. In very simple terms, the social housing system is highly rationed. It is also the support base for a number of other services. There is a problem here in that the housing costs associated with those services are not included in the costs of those services but are loaded onto the social housing system.

High rationing means means high need (read high cost)tenants end up in the social housing system. There are also equity issues. For example, at present there is a single system in NSW covering eligibility in both public and mainstream community housing. This means that an applicant can lodge a single application and go onto a central wait list that covers all providers. Allocation is then made by providers based on common principles.

The approach that has been followed in an attempt to develop new ideas is to map all the stages from eligibility through allocation to the different elements in tenancy and property management and then ask the question who might do what. A second element is to disentangle, redefine, the different elements in the service model.

Finishing by focusing just on your question. The aggregate rental subsidy in public housing is calculated on the difference between market rent and the amounts tenants actually pay. Rents are based on a proportion of income received by the household in aggregate. Something similar applies in mainstream community housing, although tenants there are eligible to receive rent assistance (CRA), allowing what are called CRA maximised rents to be charged (rent = tenant contribution plus 100% of the tenant's CRA). As incomes vary, so do payments.

I don't think that a private landlord or real estate agent could be expected to apply such a rental model so you couldn't simply pay what would be a shifting rental subsidy to them. So you would need to redefine the rent model.

As indicated, the shifts in the demography of social housing tenants, the increased proportion of high need high cost tenants, can make them an unattractive cohort from a private rental perspective in what is, after all, a very tight private rental marketplace. Real estate agents have neither the time nor the skills to manage this group. You could probably manage this by my separating the intense tenancy management function and providing a financial incentive to private owners/manager to compensate them for the risk. Even then, you may have problems.

There are two case studies that are also relevant. When the national community housing regulatory system was set up, provision was made for private sector entrants. So a private sector entrant could go through the regulatory process and thus become eligible to manage/own state funded properties and to receive state support. It hasn't happened.The money isn't there.

The second example is the NDIS. The NDIS represents a shift from "universal" state delivered services to individual packages. Because housing is central, the scheme includes an element where required housing modifications might be funded in some way in the private rental marketplace. The NDIS system architecture is very complex. My feeling is that the private sector component is likely to be problematic.

The NDIS is an interesting one from your viewpoint, Winton, because the principles on which the system architecture is based were define by the Productivity Commission!

Winton Bates said...

Thanks for your response, Jim.