Housing in Canberra should be affordable for all residents but it isn’t.
It is unaffordable because of the failure of the market to set reasonable prices for residents with little or no accumulated Capital. Governments can help overcome this market failure by tackling affordability for the most vulnerable in society.
Two factors affecting affordability are:
- The inflated cost of housing and land compared to historical norms.
- The excessive cost of money due to the compounding effect of traditional loans
The following outlines how these issues can be addressed through strategic use of government and private resources to move people from public housing into the private housing market. This can be achieved by using public housing as a way for some, not all, residents to accumulate enough housing capital to be able to afford to move from public housing to private housing.
The Inflated Price of Government Housing
Government housing could be valued on the basis of replacement cost and land servicing cost – not on market value. Rents and Capital value could be set according to those values and these should be reevaluated each year for each property.
Funding Government Housing
Government housing consists of existing housing stock plus new houses and dwellings built to supplement and increase stock. This housing can be financed through the use of fixed interest loans that act something like an annuity. That is, investors can purchase long term securities with the following rules.
The securities consist of two indivisible parts. A rent part and a Capital part. The Capital part earns interest at 6%. Accumulated rent does not earn interest.
Each month the total value of the security is increased to match CPI inflation.
If funds are withdrawn then the Capital part is reduced first and once all the Capital has been withdrawn then the Interest is withdrawn.
Occupants of houses pay at least ⅓ of their total income in rent. When they move into a property the property is valued as above based on the replacement cost of the property. The property is also revalued each year according to its replacement cost by quantity surveyors. This is deemed the capital value of the property. Rent on the Capital is set at 7% of the value of Capital outstanding. When rent is paid the value of rent is taken from the Capital part and rent accumulates. After some time all the Capital will be repaid. How much rent remains will depend on the difference between rent paid by the tenant and rent paid on capital. After some time the Rent on Capital remaining on the property will be less than the rent paid.
An occupant of public housing, when they leave, can take the difference between the Replacement Cost and amount owing and use these funds as a deposit on private housing funding using the same process. Once this difference is great enough for a person to be able to purchase into private housing then they will be required to leave public housing.
Properties of this System
Benefits for Tenants/Home owners
Tenants are encouraged to look after the residences because the better the condition of the house the greater the replacement value.
Tenants will have an exit path from public housing into private housing when they can afford to move.
The system will give new home buyers an entry into the housing market via public housing without the use of market distorting systems such as new home buyer grants.
Benefits to investors
Investors receive a government backed security with a fixed known return that is adjusted for inflation. These securities are suited to self managed, and other, super funds.
The investment is available to Islamic investors because it follows Sharia principles and there could be substantial overseas investments made in public housing.
Benefits to government
Private Housing can be funded using the same principles and will result in lifetime savings of at least ⅓ in the cost of providing a place to live using regular loans. This happens because buyers pay simple not compound interest while investors gain a fixed known inflation adjusted return.
Governments will have a method of adjusting the overall demand for private housing by increasing investments in public housing as required.
Governments will not have to put up funds for housing as they can leverage their existing housing stock. The government may choose to use funds to supplement rents to help people accumulate capital.
The system can operate with many providers and operators competing to provide affordable housing options.