Farrar, Adam --- "From public to not-for-profit: the transformation of the social housing system" [2009] ALRCRefJl 30; (2009) 94 Australian Law Reform Commission Reform Journal 10

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Reform Issue 94 Summer 2009

This article appears on pages 10–13 of the original journal.

From public to not-for-profit

The transformation of the social housing system

By Adam Farrar*

On 29 March this year, the Federal Minister for Housing, Ms Tanya Plibersek MP, in a speech to the Sydney Institute, signalled a major policy shift—the decline of the public housing model in favour of the not-for-profit sector or ‘community housing’.^[1]

Policy options now being modelled within the Department of Families, Housing, Community Services and Indigenous Affairs propose a medium term target of growing community housing from around 45,000 homes under management today to 150,000. Much of this would be achieved through the transfer of housing managed by state housing authorities to community housing.

This is a profound policy change; although Australia lags behind other countries like the United Kingdom and the United States by more than 25 years in making this move. Of course, it mirrors other changes in service provision, such as alternate care, from state run to community run and state regulated. However, it is important to see how this change might be effected and what the benefits will be for lower income households.

The housing policy challenge

For more than 20 years housing policy in Australia has been a backwater. Because of this the housing system—as it affects low and moderate income households—has sunk deeper and deeper into crisis.

The headline problem of housing affordability is now fairly well recognised. Australia has among the least affordable housing of developed countries. Surprisingly, the global financial crisis has so far produced little more than a small dip in house prices in Australia, while in the US and the UK the housing bubble has burst with disastrous results for the economy and overextended low income households.

But below this apparently good news, our ongoing affordability crisis has particularly serious consequences. At the most extreme, it has made it almost impossible for many of the 100,000 people who are homeless on any one night to find secure accommodation. At the other end, it has created a growing polarisation between the generation who achieved high levels of home ownership and the wealth provided by that asset, and a generation for whom homeownership is now an impossibly high hurdle. This produces lifelong differences in social outcomes. While there has been a recent surge in first home ownership, made possible by the increase in the First Home Owners Grant and lower interest rates as a result of the current financial crisis, it is likely that this will be temporary as interest rates again increase and unemployment rises sharply. The subsequent pressure on rental markets is pushing up rents and displacing low income households from the few affordable rental properties available. A major consequence of all this is polarisation in our cities and in access to employment, as low and moderate income households are forced to live further away from available jobs, which in turn means many crucial services cannot access the lower-paid workforce they rely on—such as care workers—in high cost areas.^[2]

The policy inertia in the face of the ‘housing affordability crisis’ over the past decade or more is made up of four linked policy failures.

• There has been a tragic failure to provide access to more appropriate community based accommodation as a process of deinstitutionalisation has been implemented over the past 20 years. The result has been an increased demand on public housing from people with complex needs and fewer alternatives for people who are homeless.

• In almost every Australian jurisdiction, there has been a reduction in the supply of public housing. Even as housing affordability has decreased, funding for public housing has fallen. In response to the scarce supply, public housing has become more tightly rationed to those on the lowest income. But because rents are based on household income, rental income also fell, forcing state housing authorities to sell off public housing just to raise funds to keep operating.

• There has been a failure to support the supply of low-cost rental housing for low and moderate income working households. Public housing, which once was a stepping stone for low income working families into home ownership, has been unavailable to this group so they have been forced to rent on the private market. The federal Government did provide tax incentives for investment in new rental housing—negative gearing and capital gains tax concessions. But these tax concessions pushed all new investment to the top of the market, while the supply of low cost rental housing fell. Low and moderate income private renters have been largely ignored in the housing crisis.

• Finally, most jurisdictions (except WA and SA) failed to support access to home ownership by lower income households following the collapse of the government funded home loans scheme HomeFund in NSW and similar agencies in other states.

All of this has begun to change with the policies put in place by the Rudd Labor Government. A new tax incentive, the National Rental Affordability Scheme (NRAS), has been introduced for affordable housing; a new National Affordable Housing Agreement between the states and the Australian Government has been signed; a National Partnership Agreement has been reached on homelessness; and more than $6 billion has been provided for new social housing as part of the economic stimulus measures. Title to the majority of the properties developed in this way will go to community housing providers.

But, of all these developments, perhaps the most far reaching—although the least explicit—is the policy objective of shifting from public housing to community housing as the main provider of low cost housing.

The contribution of the community housing sector

In the late 1970s not-for-profit housing providers began to emerge as a reaction to the one-size-fits-all approach to public housing. While public housing provided a volume response for low income working families, it largely excluded singles, people with disabilities, older people and other higher needs groups. These were the very people that the Commonwealth’s Commission of Inquiry into Poverty—led by Professor Ronald Henderson in the early 1970s—had just shown were the most disadvantaged in the private rental market.

In NSW, housing associations, formed in 1982, went a step further than public housing and aimed to have an impact on the private rental market by head leasing private stock, providing access to households that real estate agents often excluded and helping to hold down prices in local markets.

The establishment of a sector that is more responsive to previously excluded groups and influences the market more widely has led to a robust network of not-for-profit housing providers operating in local communities or regions across the state. These providers have established a wide range of partnerships to ensure that their tenants have access to the supports they need to sustain housing. They have brought a community development approach to their local communities and working with their tenants.

This ‘housing plus’ approach now is taking on other dimensions. Community housing associations are providing housing that is accessible to low to moderate income working households. This not only responds to the affordability crisis for this largely ignored group, but it also provides a far more diverse community of tenants, diluting what has become concentrations of disadvantage— particularly in public housing estates. The Rudd Government’s new NRAS will provide refundable tax credits^[3] to subsidise investment in new affordable housing.

And this is another way the sector has been changing. Community housing providers can, and have been, leveraging public investment or subsidies by borrowing to construct more housing. Unlike the public sector, the community sector can borrow to increase the supply of low cost housing. Similarly, the community sector can use the tax concessions—particularly GST exemptions—that are available to charities to reduce the cost of procurement and maintenance.

Perhaps the best way to conceptualise the potential of these changes is to envisage two important aspects. First, not-for-profit housing providers are moving away from being defined by government programs. Instead they are operating a particular, not-for-profit part of the housing market (or ‘housing system’ if the term ‘market’ causes any nervousness). Second, they are beginning to provide the full suite of housing products (in the UK, for example, they provide home ownership products like shared equity) available to households, but specifically for low and moderate income households—the very people the existing market is so badly failing to supply.

In the UK and the US, housing associations complement this business with activities often described as social enterprise. In response to the needs of their tenants and the communities in which they are housed, many also provide training, education, preschools and the like.

A more responsive system

If community housing is to become the solution to the combined market and policy failure of the past few decades, it will have to grow dramatically. In its first report last year, the National Supply Council (another initiative of the Rudd Government) projected the supply gap of affordable housing as 250,000 rental dwellings nationally.^[4] While not all of this could be expected to be met by community housing providers, it indicates what a well-functioning housing system needs to do. Considering community housing currently manages around 40,000 homes,^[5] very substantial growth is needed to meet demand.

Growth is also needed to build the kind of organisations that can operate successfully. Large balance sheets will help to support financing and provide confidence to private sector partners in larger development projects. But, far more importantly, growth is necessary to allow providers to employ staff with the specialist skills needed to deliver housing that will be sustainable for people with a range of needs; to undertake community building; and to design the innovate housing that will be sustainable into the future.

The largest housing association in the country today has a bit less than 3,000 homes. But the projections undertaken by the NSW Federation of Housing Associations suggest that some associations could be two to three times this size by the middle of next decade.^[6]

So far, the capacity to grow is based on four strategies:

• taking on the management of a substantial part of the homes built under the Government’s current economic stimulus package (around 20,000);

• managing a substantial part of the homes built using the NRAS tax subsidy (50,000);

• developing new homes by using the surpluses and leveraging the assets from the portfolio already managed; and

• transferring public housing stock to community housing.

The last strategy will, of course, not add directly to the supply of housing for low income households. However, by allowing tenants to receive rent assistance, it will add to income streams that can be used for future development. It will strengthen balance sheets. Finally, it will build stronger organisations that can operate effectively in the new environment.

More than these practical effects, however, the real impact of community housing will be to take affordable housing out of one paradigm—highly stigmatised, rationed more and more tightly, and subject to the short term policy decisions of government—into another that integrates this stock into a wider and growing affordable housing market.

Of course this transition also creates some tensions. Public housing providers, with their long waiting lists, are reluctant to lose the little resources they have to respond to this demand. These issues, however, can potentially be overcome.

With strong Commonwealth backing, a number of jurisdictions are creating shared waiting lists from which applicants can be drawn by both public and community housing providers. Better still, this can create a system in which consumers have no ‘wrong doors’ if they want to apply for low cost housing.

Any such system can be done well or badly. If community housing providers are simply required to house applicants based on the decisions of public housing systems, then many of the benefits of community housing are lost. But if there is a genuinely shared system, which provides easy access for applicants to a wide range of services, while allowing each provider to make their own allocations decisions, then we will have taken a great step forward. We are seeing both of these approaches emerge in different jurisdictions.

There is also another path that could ease the tension with public housing providers. That is to let them join the not-for-profit sector. As well as transferring management to existing not-for-profits, public housing management could be devolved to organisations at arms length from government created from the existing public housing operations in a particular area. These would, in effect, become not-for-profit housing associations.^[7]

The other tension is between not-for-profits and for-profit providers. We have seen some of the major risks associated with the entry of for-profits into areas such as child care with the collapse of ABC Learning. Is it possible that we will reproduce this in the affordable housing segment of the housing market? On one hand we want to see low cost housing become a natural part of the housing market, and so should welcome the involvement of-for-profits. But will it be at the expense of quality? Will it squeeze out the not-for-profit sector? Will it open the door to poorly regulated, high risk growth?

Legislative and regulatory changes

One answer is to extend the regulatory regime being required for not-for-profit housing providers to for-profits that deliver affordable housing using government subsidies such as NRAS or require them to contract out the management to not-for-profits if they wish to avoid this. Despite some advocacy, the Commonwealth did not go down this path with the introduction of NRAS.

Regulation has been a key underpinning of the growth of the not-for-profit sector. Four jurisdictions now have statutory regulation. NSW became the most recent when it moved from an administratively based registration system with a community housing amendment to the Housing Act.^[8] The Commonwealth is currently progressing the establishment of a national regulatory framework, which could result in a single national regulatory system or in harmonising the existing state and territory approaches.

Regulation is important for three reasons. If public housing is to be transferred, it is essential to protect the rights and level of service for tenants. From a government point of view, the protection of its assets and investments, and assurance that they will not be captured by providers, is crucial to winning central agency support. Thirdly, for the expansion of the system, appropriate regulation can make a big difference to the entry of financial institutions into low cost residential housing. In the UK, the knowledge that government was effectively ensuring the viability of organisations was crucial to the creation of a mortgage market and was calculated to be worth 100 basis points on the cost of funds.^[9]

However, the best form of regulation is far from settled. At the moment, regulatory systems in different jurisdictions range from minimum compliance standards, to extensive black letter regulation. A well-regarded approach introduced in NSW (and currently favoured at a national level) takes a risk-based approach by both focusing the Code on the main areas of risk, and by assuming an approach to regulatory oversight that seeks to identify emerging risks in order to provide active support or intervention to prevent them becoming critical. And it is this approach that is needed to assure lenders that—as in the UK over the past quarter of a century—‘no deal will fall over’.

Regulation of a new and expanding not-for-profit sector in housing markets is crucial. But there is just as strong an argument for extending regulation to the other parts of the system. This includes public housing as well as for-profit providers. Clearly, when regulating a fast evolving sector, there is a risk of over regulation. Other providers’ systems, such as aged care providers, are beginning to enter this sector and are expressing concern about overlapping regulatory requirements.

Charitable status

There is one final legislative reform challenge that could make or break this vision of a fundamentally new low cost segment of the housing market led by not-for-profits. This is overcoming a threat to their charitable status, which would rule them out of the wider affordable housing business. Most providers are public benevolent institutions and rely on this status, not only to reduce costs through GST exemptions, but also for access to fringe benefits tax exemptions which make it possible to ameliorate the relatively low wages in all community sector services. However, the basis of their charitable status is the ‘relief of poverty’ head—something that the ATO has interpreted in its narrowest, most residualised form. Unless this interpretation changes, most providers will be required to narrow their service provision—providing only for the poorest of the poor.

A lot now hangs on the outcome of the current review of the Australian tax system.^[10] If, as proposed by many from the sector, a new head of charity is introduced or the charitable purposes under the ‘other purposes beneficial to the community’ head is extended to explicitly identify the provision of affordable housing as a charitable purpose, a fundamental shift might be possible in the bottom end of our housing markets and in our approach to housing policy.

If not, Minister Plibersek’s bold aspirations may never get off the ground.

* Adam Farrar is the Executive Director of the NSW Federation of Housing Associations, the peak industry body for housing associations in NSW. Adam is currently the Principal Housing Policy Adviser for the Australian Council of Social Service (ACOSS) and has held directorships in many community sector organisations, including ACOSS, NSW Shelter, Australian Housing & Urban Research Institute, Australasian Housing Institute, and Community Housing Federation of Australia.

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[1] T Plibersek, Room for more: boosting providers of social housing, Sydney Institute, Sydney (2009).

[2] Bankwest, Second Annual Bankwest Key Worker Housing Affordability Report (2009).

[3] Or in the case of not-for-profits, who are not tax-paying, a direct payment.

[4] National Housing Supply Council, State of Supply Report 2008 (2009).

[5] AIHW Public Housing, Commonwealth State Housing Agreement National Data Report (2009).

[6] NSW Federation of Housing Associations, A Workforce Strategy for Housing Associations in NSW (forthcoming).

[7] In the UK this has led to the creation of a large number of ALMOS (arms length management organisations).

[8] Housing Amendment (Community Housing Providers) Act 2007 (NSW). The associated Housing Regulation 2009 was proclaimed on 1 May 2009.

[9] C Barbato, R Clough A Farrar and P Phibbs, Stakeholder requirements for enabling regulatory arrangements in Australia, Australian Housing & Urban Research Institute (2003).

[10] In May 2008, the Australian Government announced a review of Australia’s tax system, chaired by Secretary to the Treasury, Dr Ken Henry AC. The review is due to submit its final report in December 2009.