Government's bond aggregator will fail without more key funding, says head of UK version

A key federal government measure to boost the supply of affordable housing has little chance of success without additional support funding, experts say. 

The affordable housing bond aggregator will provide long-term loans to community housing providers, funded by investment from institutional players like superannuation funds. 

However, with affordable housing rents set at below market rates, the government will need to bridge the gap to make the returns appealing to investors, according to British expert Piers Williamson.

“Subsidised housing needs subsidy,” said the chief executive of The Housing Finance Corporation (THFC). “[Government grants] are one of the things that are missing over here, it’s pretty key.”

As head of the THFC, an affordable housing bond aggregator operating in the UK for 30 years, Mr Williamson has been advising the Turnbull government on its National Housing Finance and Investment Corporation (NHFIC).

“What we are prescribing is not sufficient to solve your problem, it is one of the elements,” he said speaking at the Australian Housing and Urban Research Institute‘s National Housing Conference last week.

In addition to a much-need housing subsidy, Mr Williamson said getting the majority of community housing providers on board, to ensure lower financing costs, and having standardised regulation nationally, would be key. 

“To an investor homogeneity is good,” he said. “There needs to be one standard.”

Related: More housing needed for key workers
Related: Calls for higher affordable housing targets
Related: Subsidy needed to boost affordable housing

While no institutional investor or bank has lost money lending to a UK housing association in 30 years, Mr Williamson said a government guarantee was also vital for encouraging investment. 

“That helped us when the last property crash happened in the UK in 1992 … we were writing business like it was going out of fashion, we were counter cyclical to the banks,” he said.

“Banks are cyclical and I suspect both nations are going to go through a property cycle fall or two … investors get more conservative at that point, that might be where a guarantee in the context of the aggregators actually helps.”

Calls for a government guarantee and subsidy were backed by Jon Ross, the global head of public sector at Westpac, and Michael Swan, a senior portfolio manager for fixed interest and cash at Cbus.

“We do believe super funds should and can play a role in increasing the supply of affordable housing,” Mr Swan said. 

“[But] it’s well understood that affordable housing falls short on investment return in comparison to other types of real estate investment, so we believe some form of government contribution, assistance or support would be typically required to bridge the gap between commercial and non-commercial returns.” 

Mr Swan said as a consequence CBUS would encourage the government to guarantee bonds, which could help secure a larger pool of investors. 

Mr Ross agreed, saying growth in the UK had been facilitated by government-backed bonds and funding to help close the gap.

“We can debate for a long time what form that funding takes. In the UK it was done through stock transfers and grants, in the US it’s through tax concessions … it doesn’t matter as long as we close the gap,” he said.

“When we close the gap the capital will flow, the market needs market returns,” Mr Ross added. 

Calls for the guarantee were answered at the conference on Friday, when Assistant Minister to the Treasurer Michael Sukkar announced that to provide stability and confidence, the government would guarantee the bonds. He also announced that the NHFIC would no longer terminate after five years. 

However, there was no announcement regarding further subsidies, which Housing Action Network associate Carrie Hamilton said was critical to the scheme’s success.

“[There’s] the silver bullet fallacy, that we can solve everything with this bright, shiny new finance mechanism, but the only silver bullet really would be reintroducing stable and robust government investment to fund the feasibility gap and increase the supply of affordable housing,” she said.

“We’ve had some brief one-offs [in recent decades] during the GFC stimulus and with the NRAS [National Rental Affordability Scheme] but that’s the silver bullet we really need.”