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Monday, 24 November 2008
Page: 1

Senator PAYNE (12:31 PM) —I wish to resume discussion on the National Rental Affordability Scheme Bill 2008 and the National Rental Affordability Scheme (Consequential Amendments) Bill 2008, which were being discussed in the last sitting week. The debate was interrupted by question time, when we had, again, a larger presence than usual in the chamber, which was gratifying for those interested in the National Rental Affordability Scheme. I indicated at the time the details of the primary bill and the secondary bill.

Can I go on to say that, of the more than $600 million which has been allocated over four years for the scheme in this year’s budget, almost $500 million has been allocated to fund the tax offset. The balance has been allocated for direct financial grants and for administrative costs, and the majority of the funds allocated for the scheme have been earmarked for the final year of the scheme. That is four years away and, as I stated in my earlier remarks, over that period it seems, according to reports and assessments, that the accumulated undersupply could be as high as 200,000 housing units nationwide, which is a very significant gap.

This scheme is part of a number of measures being introduced by the government in a promoted effort to address the deterioration which Australia has been experiencing in housing affordability. The others, some of which have already been discussed in the chamber, include the first home saver accounts and the Housing Affordability Fund.

As the coalition has already made quite clear, we will not be opposing the bill. However, as I have also remarked, we do have a number of concerns—particularly in relation to certain aspects of the bill’s design—which I would like to put on the record briefly. The most significant of those is the likelihood that the scheme will fail to meet the government’s targets. Even if it does meet those targets, it still can only make up a very small proportion of the projected undersupply of housing. We had the opportunity to discuss those targets with the department in the estimates process, including how they were brought together in the promotion of the scheme—and we learnt at that stage that, as sophisticated as the government may now claim it to have been, it was merely a part of opposition policy at the time—and that they are not in fact modelled targets; they are not based on any research which the department was able to supply the committee with in that discussion.

We are also concerned at a potential flaw that might have the capacity to undermine the success of the scheme, and that is its fairly rigidly structured parameters, which we are concerned in a free market may have the impact of reducing the scheme’s appeal for the kind of investors that the government is hoping to attract to this new institutional investment asset class. As it happens, there is actually quite a low amount of institutional investment in residential stock in Australia, relatively speaking. That is for a number of reasons, which might include a lack of scalability, higher transaction costs and unwieldy asset management arrangements.

Another barrier to institutional investment in the NRAS, which we have identified through the work of the shadow minister, Mr Morrison, is a lack of compelling evidence that the scheme will produce a competitive rate of return. With all the best will in the world, investors and those people intending, not unreasonably, to make money out of their business will not participate if they are not going to find a reasonable and competitive rate of return. We have seen reports that under this scheme the passing yield could be as relatively low as 4.5 per cent. The residential property council has said that, in order to be competitive, a new asset class of this type would need to return a passing yield of a minimum of five per cent and total returns of closer to nine per cent, with some estimates going as high as 15 per cent.

There is another aspect of the design of this scheme which is probably quite constraining, and that is the value of the incentive being fixed at $6,000 per annum. The value of the incentive will be far greater for areas in which there is relatively low demand for housing than for areas in which there is relatively high demand—for example, the inner-city areas of the three large cities of Sydney, Melbourne and Brisbane. As we and the shadow minister have said, the value of the scheme’s incentives might be more beneficially tied to the value of the project and the projected rents, with a sliding scale offered for the incentive. The Australian Housing Industry Association made that suggestion, which we have reported with interest. That may assist in making projects more viable.

Another potential design issue we see is that the tax offsets are to be limited to those parties who will draw, as I understand it, a rental income from the investment, which might reduce the flexibility with which a potential investment itself might be managed. Of course, we will still see state and territory governments reaping significant revenue in stamp duty and GST. We believe they should at least match the Commonwealth’s contribution to the scheme to increase its viability.

So we do have a scheme in front of us but it does have tight parameters, and the risks to a potential investor are not insignificant. For example, consider dwelling vacancies, completion delays and turnover created by tenants moving in and out of the income band. The finer points of the management of those aspects may potentially lead to the withdrawal or suspension of the incentives. They are all factors that one would consider as an investor when comparing the scheme to other investment opportunities. So, as the incentives currently stand, it is certainly possible that the only projects which will be commercially viable will end up being those on the fringe of our cities or in smaller metropolitan and regional areas.

On the point relating to the fringes of our cities, I refer again to the report of the Senate Select Committee on Housing Affordability in Australia—and I see Senator Moore nodding with interest—because this was a subject that we considered at some length. Really, it becomes a rather self-defeating process to merely add housing to the fringes of those cities and not match that at the same time with the sorts of infrastructure and support that communities need to be viable and, most importantly, to have employment in situ.

I do note with interest that, in the initial rounds of the scheme, the requirement for a minimum of 100 lots has been relaxed. We have said that, in order to encourage the supply of housing in those areas of greatest demand, that requirement may require permanent relaxation, or the government may be risking potentially worthy projects.

We have also had a look at the eligibility criteria for tenants, and there seems to be a degree of rigidity in those parameters as well, particularly with regard to what are known colloquially as ‘key workers’. So we have a scheme from the government which is one of a number of measures to increase homeownership and housing affordability but, because those criteria for tenant eligibility in this regard are quite restrictive, we are concerned that a significant number of potential tenants in need of affordable housing may be locked out. So investors, for example, will want to be very sure that potential tenants have a reliable source of income. Potential tenants who are in need of affordable housing might be those who are saving a deposit to buy their first home or those who unexpectedly find themselves in need of housing in the private rental market. And if the scheme’s objective is to reduce rental stress in the private market then perhaps, for breadth of application, greater numbers of potential tenants, all potential tenants who are currently struggling in the private market, should be included in the scheme.

This is another point that the Residential Development Council highlights in a submission which refers to ‘key workers’. That would include teachers, childcare workers, nurses, police, firefighters and ambulance officers—all those emergency services personnel—who it seems would almost all, under the criteria as we read them, find themselves in a position of being ineligible for tenancy under the scheme. Key workers on award rates are often stationed in areas where housing costs are especially high. It is not really clear to us or to me how they are going to be able to compete in the local housing market and then compete on the other hand for eligibility in the NRAS. We think it would be inequitable for them to be excluded from the scheme, particularly if the affordable housing is located some distance from their employment. As we see it, the tenant eligibility criteria may be so prescriptive that perhaps the only tenants who will qualify are in fact current public housing tenants, and I am not sure that that is the best way to address the problems that the government is trying to solve.

We also had some concerns—which are ongoing and I know are shared by Senator Ludlam—in relation to the charitable status of not-for-profit organisations that may seek to participate in the scheme. Just before the bill was introduced into the Senate there was a consequential amendments bill produced by the government seeking to address that, and there was a media release by the Treasurer. It will be interesting to see where that takes us.

I also want to acknowledge the work of the Standing Committee on Community Affairs and the report that the committee has brought down under the chairmanship of Senator Moore, and note the valuable contribution of opposition senators in that report. It has certainly given us some interesting material to consider. I also move the amendment standing in my name on the Notice Paper:

   At the end of the motion, add:

   but the Senate calls on the Government to make such amendments to the National Rental Affordability Scheme as would:

(a)   provide for incentives to be given on a sliding scale to take account of the different development and land costs in different locations;

(b)   provide for successful applicants to transfer their tax offsets on a once-only basis to project financiers in return for a lower cost of funds, including providing such tax offsets to not for profit entities for this purpose;

(c)   require that State and Territory Governments match the incentives provided by the Commonwealth under the Scheme;

(d)   extend project eligibility criteria to include conversions to affordable housing from existing residential stock, particularly where such projects involve substantial redevelopment to provide for specific needs groups such as aged or disabled accommodation;

(e)   extend the upper level income limits for tenant income eligibility criteria by 30% in each band to ensure greater access for key workers and those seeking to save to buy their first homes;

(f)   provide ‘as of right’ eligibility for the Federal Government’s solar panel rebate and solar hot water rebate schemes; and

(g)   extend the establishment phase criteria that approximately 20% of incentives be available for projects of not less than 20 dwellings, to the entire Scheme.