policy options for stimulating private sector investment in … · 2015. 9. 30. · 1 m. berry and...

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Policy options for stimulating private sector investment in affordable housing across Australia

Stage 2 Report: Identifying and Evaluating the Policy Options

Prepared by the

Australian Housing and Urban Research Institute RMIT Research Centre and Sydney Research Centre

The Allen Consulting Group

Authored by Mike Berry, Jon Hall and The Allen Consulting Group For the Affordable Housing National Research Consortium

2001

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Table of Contents

List of Graphs 2 List of Tables 3 Executive Summary 4

Chapter 1 Introduction 22

Chapter 2 Policy Options for Stimulating Private Sector 23

Investment in Affordable Housing

2.1 Introduction 23

2.2 Delivery Mechanisms: Main Housing Assistance Options 26

2.3 Delivery Mechanisms and Financial Risks 27

2.4 Is there an Optimal Cost Effective Assistance Option? 34

2.5 Options for Government Support 38

2.6 Delivery Mechanisms and Government Support 39

2.7 Private Sector Financing Options 41

2.8 Financial Options and Delivery Mechanisms 47

2.9 Policy Options for the Provision of Affordable Housing 48

2.10 How The Options Would Be Operationalised 69

Chapter 3 Conclusion 70

Appendix 1 76

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List of Graphs

Graph 1 Housing Assistance Options: Case 1 36 Graph 2 Housing Assistance Options: Case 2 37 Graph 3 Credit Foncier and CPI Loan Repayments 42

Versus Client Payments

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List of Tables

Table 1 Debt Funding: Major Financing Risks 29 Table 2 Summary of Major Risks to Government 33

Table 3 Impact on Subsidy Costs of a Rise or Fall in 34

Each of the Systematic Risks Table 4 Taxation Treatment: Pre and Post Ralph, 44

21 September 1999

Table 5 Matrix of Policy Options 55 Table 6 Summary of ‘Preferred’ Policy Options 71

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Executive Summary This Report provides an assessment of the range of possible mechanisms or approaches to the stimulation of private sector finance for affordable housing.

Private sector financing is required because Governments do not have the necessary capital resources to expand the Commonwealth State Housing Agreement (CSHA) fully capital funded model and the Rent Assistance program to the level necessary to significantly deal with the deteriorating affordability situation identified in the Stage 1 report of this study. The only practicable way in which the required expansion of affordable housing might be achieved is by some form of gearing (extra) Commonwealth and State housing assistance funds to private sector finance. The most common approach to a gearing option would be where the housing assets are sold at the end of, say, a 25 year period and part of the proceeds used to repatriate any principal owed on any debt, or to provide equity to private owners. This option essentially involves gearing the required asset capital to the subsidy needed to top up the net income payments to either bond holders or equity investors.

Leveraging private sector investment into the provision of affordable housing would then be a third approach to delivering housing assistance, complementary to – not instead of -- the existing Rent Assistance and capital provision (CSHA) approaches. The level of unmet need identified in the first stage of this study would strongly suggest that government subsidies need to be increased across all three approaches. By mixing subsidy delivery in this way, the various systematic risks identified in this stage 2 report can be efficiently managed, minimising expected long term subsidy costs overall.

The primary purpose of this Report is to establish a short-list of policy options that will achieve this outcome in the most effective way.

A Framework for Analysis

This report presents a framework for deriving a well-grounded list of preferred options or ‘policy packages’. The Stage 1 report1 to this study established that significant barriers currently exist to expanding investment in affordable housing, especially in relation to the major institutional investors. Some form of government support is necessary to bridge the gap between actual and required rates of return to private investors (by raising net returns or reducing risk to investors or both). The framework developed in chapter 2 distinguishes the ways in which different forms of government support can be delivered and combined with the alternative forms of private financing to expand affordable housing supply in Australia. An exhaustive matrix of the various combinations of delivery mechanism, government support and financing option has been derived. This represents the universe of possible ‘policy packages’ -- combinations of delivery mechanism, government support measure and financing option -- from which is derived a smaller sub-set of options that deliver substantial advantages and minimal disadvantages in terms of the criteria of effectiveness applied.

The framework developed comprises three components:

• The delivery and management mechanisms: the ways in which housing assistance is provided by government. Four main mechanisms are distinguished: the capital provision of dwellings; subsidised home loan mortgage schemes; subsidised shared equity schemes, and; direct assistance in the form of rent assistance or housing allowances (e.g. ‘vouchers’).

��1 M. Berry and J. Hall (2001) Policy Options for Stimulating Private Sector Investment in Affordable Housing Across Australia: Stage 1 Report, Outlining the Need for Action, Report from the Australian Housing and Urban Research Institute to the Affordable Housing National Research Consortium, Sydney.

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• Government support options: the ways in which government can influence housing outcomes by changing the risk-return profile for potential private investors through fiscal, regulatory or incentive measures. Five options are distinguished:

• Outlays: cash payments made by Commonwealth or State Governments (or both) to either purchase stock or pay subsidies.

• Revenue foregone: taxation concessions (again, in theory, by either level of government but most importantly by the Commonwealth) delivered to private investors to reduce the cost of financing – i.e. to reduce the required rate of return.

• Credit support: the provision of capital and/or income guarantees to investors, reducing risk and therefore the cost of finance.

• Development levies (or inclusionary zoning): placing a requirement on developers of new housing to provide a specified proportion of dwellings at affordable prices, or payment of a levy in lieu.

• Financial Regulation: in this context, a government requirement for specified classes of investors to invest a minimum proportion of their funds in the provision of affordable housing (i.e. imposition of a prescribed assets ratio)

• Financing options: the forms in which private savings are advanced to finance affordable housing. These forms are debt, equity and combinations of debt and equity.

Every government approach to expanding private investment in affordable housing implies a particular way of delivering a particular type of government support, financed in a particular way. Each possible combination of delivery mechanism, support option and financing option represents a potential ‘policy package’ or option for the encouragement of private investment into affordable housing. In each case, for the package to succeed in attracting private investment, investors must receive an appropriate risk-adjusted rate of return. The cost of finance – and, therefore, the final price of housing to residents – will depend on the risks involved and their division between government and private investors. In general, the more risk taken on by government, the lower the cost of finance and the more affordable the resulting housing.

Risk Management and Transfer

The risks that face investors and governments are both systematic and unsystematic. Systematic risks are risks stemming from the general economic or natural environment – i.e. from movements in the economy (business cycle boom and bust) and natural disasters. These risks cannot be reduced by investors through diversifying their investments across a wide variety of assets. They must be ‘rewarded’ for bearing such risks in terms of a higher rate of return. Unsystematic risks are risks specific to the asset or investment sector in question (residential property) and to the agencies involved. Unsystematic risk can, in a perfect capital market, be eliminated by the investor by thoroughly diversifying investment across all assets. However, where imperfections or inefficiencies exist in financial markets, as is the case where there is incomplete or inaccurate market information on asset performance, investors may seek to reduce uncertainty by demanding a premium on the rate of return. Hence, wherever, government can reduce risk to investors –through reducing imperfections in the capital market and/or assuming the risk themselves – the investors’ required rate of return and, consequently, the cost of finance will fall. Government can assume risk by delivering subsidies through one or more of the mechanisms noted above.

The main systematic risks that can be assumed by government in this way relate to volatility in: dwelling price change; rental yield; income growth/loss, vacancy rates and (rent and/or mortgage repayment); change in inflation; interest rate changes, and; in the case of new

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construction, cost escalation. Movements in these factors, affected by broad changes in the economy, impose different subsidy costs on government. Unsystematic risks relate to the nature of the investment projects generated and the relationships between and within the private and public agencies participating.

The following two tables summarise (a) the incidence and severity of the impacts of these risks on required government subsidy levels and (b) the direction of impact, across the four ways of delivering subsidy support as risk rises or falls.

Perusal of these tables suggests that the subsidy cost to government is quite sensitive to the delivery mechanism utilised – for example, in some circumstances a subsidy delivered through capital provision will cost less than delivering a subsidy via rent assistance, and in other circumstances the reverse will be true. This raises the question – in the context of the various risks borne by government, is there any optimal cost effective delivery mechanism, any universal least cost way of delivering housing assistance?

The report demonstrates, with the aid of a simple model, that the answer is “no”. All four methods of delivery are the most cost effective option depending on the state of the economy and, especially, of housing and finance markets.

The basic principle that therefore applies to the assessment of delivery mechanisms for housing assistance is: if appropriateness and tenure considerations are equal there is no “best” cost delivery outcome for government as a whole. Of course, the support costs vary in their impact between the two levels of government across the four delivery mechanisms in the wake of the changes in the economy that give rise to risk.

Assuming that the minimisation of subsidy costs to government as a whole is a major consideration, the guiding rules that might apply to the choice of delivery mechanism are that in times of: • low to moderate interest rates and moderate to higher levels of gross private rental yields

and capital growth; public housing options will prove to be most cost-effective; • as interest rates rise, and capital growth declines shared equity will likely outperform public

housing as the most efficient delivery mechanism; • in periods of low housing interest rates, high gross rental yields and little capital growth

subsidies on home loans will come to the fore; • when rental yields are low dwelling prices are stagnant and mortgage rates are high,

headleasing supported by rent assistance will be most cost effective.

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Summary of Major Risks to Government

Risk Capital Provision

Subsidised Home Loans

Shared Equity Direct Assistance (RA or Vouchers)

Systematic Risks Dwelling Price/Asset

Yes (High) Yes (Moderate) Yes (Low) No

Rental Yield- ‘Real Rents’

Yes (Low) No Yes (Low) Yes (High)

Unemploy’mt Income Loss

Yes (Low) Yes (High) Yes (Moderate) Yes (Moderate)

Unemploy’mt Default


Interest Rate\Inflation

Yes (Moderate) Yes (High) Yes (Moderate) No

Constr. Cost Escalation

Yes (High) No No No

Structural and/or Financing Risks Prepayment\ Reinvestment

Possibly Possibly Possibly No

Earnings Possibly Possibly Possibly No Vacancy Yes (Low) No No No

Agency or Issue Specific Risks Political Yes Yes Yes Yes Project Management

Yes Yes Yes Yes

Project Delivery Yes Yes Yes Yes Human Error Yes Yes Yes Yes Organisational Yes Yes Yes Yes Systems Yes Yes Yes Yes

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Impact on Subsidy Costs of a Rise or Fall in Each of the Systematic Risks

Risk Capital Provision

Subsidised Home Loans

Shared Equity Direct Assistance (RA or Vouchers)

Rising Dwelling Price/Asset

Reduce Reduce Reduce No Impact


Reduce No Impact Reduce Increase


Increase Increase Increase Increase




Increase Increase Increase No Impact


Increase No Impact No Impact No Impact

Falling Dwelling Price/Asset



Increase No Impact Increase Reduce








Reduce No Impact No Impact No Impact

.Delivery Mechanisms and Government Support

Because of the risk profile associated with particular delivery mechanisms some forms of government support are best linked to particular types of delivery mechanism, if subsidies are to be provided in the most cost effective manner.

• Outlays can be applied to all of the delivery mechanisms, because they can be allocated, for example, as a cash subsidy or a capital injection or both.

• Support options other than outlays are really not applicable to a direct (rent) assistance program where the management of the dwellings is in the hands of individual landlords. By contrast, revenue foregone options (e.g. tax concessions) can be applied to a ‘packaged’ headleasing program where groups of dwellings are provided and the tenancy management and maintenance arrangements remain in the hands of the public or community sector, with ownership in the private sector. This is because revenue foregone options imply private sector ownership and investment but organisation and management by the public sector. In essence, they separate ownership from dwelling management.

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• Provision of tax exempt status on income earnings generated by a bond, i.e. interest earnings, would enable cheaper funds application to both capital provision programs (direct private investment via regulation, public housing, community housing) and home loan and shared equity programs. However, where clients are lower income wage earners, and because of evidence of declining nominal household incomes, a ‘credit foncier’ (straight line repayments) bond structure might be more appropriately applied to home loan programs, than an inflation indexed bond instrument (where payments and bond principal may increase under certain conditions).

• Credit Support in the form of government guarantees mostly relate to income (usually to cover such matters as losses on mortgage defaults in home loan schemes or to top up net rents to fixed returns in the case of privately owned packaged head leasing schemes), however they may apply to capital, i.e. a guarantee that the dwelling value at sale will not be less that the cost price indexed to the CPI.

Capital guarantees and capital insurance are really only appropriate for programs where the funds are applied to capital provision by dwelling acquisition (direct investment, public and community housing) or support dwelling yields (e.g. ‘packaged headleasing’ – as in the PEP 1 and 2 schemes involving the N.S.W. Department of Housing and AMP).

In the past in almost all of these cases the credit support has been provided by State Governments as Commonwealth Governments have insisted that their role is to provide a fiscal allocation and the State’s role is to accept any risk.

• Planning Levies form a support option that (in the current institutional environment) can only be imposed by State Government, and capital provision for dwelling acquisition and access to a client for rental is really the only suitable delivery mechanism.

• Regulatory Mechanisms that involve the application of something such as a prescribed

asset ratio requiring Superannuation Funds to invest in affordable housing raises a number of questions before issues such as the delivery mechanism can be resolved. For example, Superannuation Funds may argue that unless the price at which they will provide the funds is specified they are precluded under their trust deeds from investing at anything other than the market rate.

Once a price is specified it may advantage some Superannuation Funds over others. Funds with higher proportions of non performing assets may actually show an improvement in performance over time whilst high performance funds will show a decline. Whilst funds may be directed to private developers or to publicly managed but superannuation owned housing assets (capital provision) or delivered via home loan or shared equity schemes, government is likely to be concerned about the targeting of the assistance, that is: • are households eligible for mainstream housing program assistance obtaining access? • are they obtaining access on the same terms and conditions as they would have

received in government programs? • who is doing the credentialing? and • is there capacity for fraud?

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Private Sector Financing Options In combination with a range of the support options outlined above, seven main private sector financing options have been identified -- three debt and three equity and one comprising a mixture of both debt and equity. Other, more complex mixed options could be developed – e.g. options entailing mixtures of standard and indexed debt, subordinated debt, etc. Indeed, if and when new markets for residential financial instruments emerge, financial intermediaries will have a strong competitive incentive to tailor-design new options to maximise financing efficiencies, given the risk characteristics of the asset and the investment aims of investors. However, these developments are essentially derivative and do not change the underlying logic of the argument. For our purposes it is sufficient to focus on the seven basic financing options discussed below. They have been combined with the delivery mechanisms and support options, described above, to generate the full list of possible ‘policy packages’.

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�The debt options are: • floating rate: • fixed rate; and • real rate; whilst the equity options involve: • a stock exchange listed company (wholesale and retail funds); or • a retail property trust; or • a direct equity investment; or • a stock exchange listed company supplemented by substantial debt financing, i.e. either

floating, fixed or real rate. Floating rate debt usually involves what is termed a credit foncier loan structure; i.e. if interest rates do not change the amount of the repayment stays the same for the duration of the loan. Most fixed rate debt instruments have a similar structure. Real rate debt on the other hand involves a loan where real interest only is charged (i.e. the inflation component of the interest cost is striped out and the bond principal is indexed to inflation. Equity capital could be advanced in the form of a company, a (residential) property trust or a direct investment in the dwellings. In the case of a stock exchange listed company the government could subscribe (say) 20%, and 80% would be private shareholders’ funds. The government’s equity in the vehicle would be discounted to the extent that the asset price appreciation did not reach the cost base plus CPI. The dwellings in the vehicle would be valued each year and the underlying share price would reflect any move in property prices that has occurred plus the government support. Any shortfall between the guaranteed dividend payment and the net rentals received would be made up by a government grant or subsidy. In the property trust example the structure would essentially be the same, except that because of the cost base re-balancing introduced on the recommendation of the Ralph Inquiry on business taxation reform the value of the CGT indexation would be eroded over time. Both the company and trust examples were tested and accepted as viable by a tax lawyer and investment managers consulted. In the direct equity investment option a private sector investor would actually own the dwellings directly. In the case of the stock exchange listed company with debt, the government would subscribe (say) 20%, 50% would be debt and 30% would be shareholders funds. All other characteristics would be as outlined above. Pricing and Taxation Considerations It should be noted that from a pricing perspective and because of credit quality considerations, Commonwealth bonds will normally price about 50 basis points below State Treasury issued bonds whilst debt issued by State Government instrumentalities other than Treasury will carry a still higher premium for default risk, with the coupon being between 35 and 50 basis points higher than State Treasury debt. Of course, a government guarantee predominately removes this differential. In plain language, the interest rate on Commonwealth debt will be lower than for State debt. State Treasury debt will have a lower interest rate than debt issued by other

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State agencies, unless a State government guarantee is carried by the latter. On balance, there are very few circumstances where private sector financing will be cheaper than issuing government debt. Leaving aside policy considerations or Loan Council restraints, the only circumstances where private sector financing might be cheaper than government debt is where an equity instrument can be developed that passes on the value of the equity tax deductions (primarily lower rates on capital gains and depreciation allowances on residential buildings) and the credit quality is accepted by the market as the equivalent or near-equivalent of government debt. If private sector financing is to be attracted into providing affordable housing in other circumstances, the overall cost to government will exceed the public borrowing option. Such alternatives would, presumably, only be entertained where political constraints limit public borrowing. Under the old taxation regime the value of the deductions to private investors noted above would reduce the price (i.e. required rate of return on equity) normally in a range between 0.7 and 1.2 percentage points (depending on the rate of inflation, the higher the rate of inflation, the greater the CGT indexation benefit to total returns). Under the new (post-Ralph Report) taxation regime the pricing benefits of equity instruments have been somewhat reduced for companies, but not substantially for individuals (the difference in equity versus debt tax rates for taxpayers with high marginal rates is still very substantial) probably reducing the potential pricing differential in the case of companies to between 0.4% and 0.8%. This report compares the pre and post Ralph Report tax treatments applying to capital and income investments in residential property for different classes of investor (see Table 4 in the main report). This analysis clearly establishes that significant tax benefits can still be delivered to individual and corporate investors and superannuation funds with respect to equity and debt investments in residential property. This suggests that taxation concessions (revenue foregone) are an effective way of reducing the cost of finance for housing when delivered in appropriate ways. However, there are limits to the extent to which these government support measures can be drawn on to reduce the cost of finance for housing. Where affordability benchmarks require a larger reduction in the price of housing to low income residents, taxation concessions would need to be supplemented by other support or subsidy options, such as direct cash outlays. These considerations have been taken into account in framing the full list of policy options presented in the report and which form the basis for the selection of the preferred short list. Financial Options and Delivery Mechanisms Some methods of financing are really the only suitable instrument for the delivery mechanism that is being used. For example, if the delivery mechanism is home loan funding, it is simply not possible to obtain equity deductions for private investors, so government or quasi-government debt is most appropriate. For home loans clearly a debt instrument whereby the principal outstanding can be paid at the same time as the borrower redeems the loan eliminates the prospect of substantial reinvestment risk (where the repaid loan principal must be reinvested and paid at a later date when the loan matures). For these reasons either floating rate debt or, more preferably, fixed rate debt with “pass through” (i.e. principal payable to the bond holder at any time) characteristics carries less risk for government. A CPI indexed instrument may carry greater risks for government since there is emerging evidence that employed households with lower incomes may not be experiencing income growth that matches CPI; so CPI indexed payments would increase the risk of default.

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Conversely, if either social housing (through capital provision) or shared equity is preferred then there are some pricing and considerable risk advantages accruing from either equity mechanisms or real rate debt. Most tenants of public and community housing are recipients of pension and benefit income which is indexed to CPI. In addition, at least in Sydney and Melbourne long term dwelling prices have appreciated at or above CPI. Consequently, a debt structure where the bond principal is indexed to CPI and the coupon is only “real” rate, may provide a financing structure where either the client rent payment increases match bond payment increases, or the recurrent repayment is substantially reduced and the principal outstanding at redemption more closely matches asset values. A direct equity investment where risk is assumed by the private sector, and subsidy delivered in return for reduced rents or prices, could probably be applied to both home ownership and rental options and all delivery mechanisms might be appropriate. However, if private management is contemplated serious attention will need to focus on access or targeting to need and compatibility with mainstream housing program criteria, and fraud mitigation. Choosing the Preferred Policy Options A consideration of all the possible combinations of the delivery mechanisms, support options and private financing options outlined above resulted in a matrix of 121 ‘policy packages’ or options for consideration (see Table 5 in the main report). A set of general evaluation criteria was applied to the full list of options to arrive at a short list of ten or so options. The criteria are: • equity; • simplicity; • accessibility for mainstream housing providers; i.e. as well as private providers, government

housing authorities can also access funds; • compatibility with mainstream housing criteria; i.e. offering the same eligibility and benefits,

and directed to the same clients; • safety and security; i.e. the housing benefit being channeled to the ‘right recipients’ with no

chance of fraud; • maximising the volume of funds; • efficiency; i.e. low subsidy costs; and • minimising risks and volatility The short list of preferred options had to rank highly against as many of these criteria as possible. In particular, they had to:

• have the capacity to generate a large volume of private investment for affordable housing – and, hence, the capacity to make a significant and timely contribution towards reducing the scale of affordability problems identified in the Stage 1 report of this project.

• be accessible to housing providers and their low income clients – i.e. target households in housing stress.

• entail low subsidy costs through efficient targeting and risk management.

• Be simple and flexible in implementation, capable of contributing to desired housing outcomes in a range of economic and institutional circumstances.

The full list of options was evaluated by applying these criteria, on the basis of the judgment of the consultants, the current impact of taxation factors checked with a leading tax lawyer, and responses by a small sample of senior investment managers to relevant questions posed by the consultants (details are provided in appendices 1 and 2).

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Accordingly, a set of eleven preferred policy options has been proposed. This list was derived by a qualitative evaluation of each potential option in terms of the balance of advantages and disadvantages identified, the aim being to select options that offered maximum advantage and minimum disadvantage against the stated evaluation criteria. These judgments were based on the analysis of risks, taxation impacts and investor responsiveness detailed in chapter 2. It is – to repeat -- particularly important to propose options that have the potential to deliver a large volume of new private investment to this sector in ways which minimise the costs to government and maximise the access of households in housing stress to affordable housing.

The eleven options are summarised in the following table, drawn from Table 5 in the main report. This table lists, for each option, the delivery mechanism, type of support by both levels of government, the type of financing to be used, raised by either or both levels of government – and the advantages and disadvantage of the ‘package’ in terms of the criteria already noted.

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Summary of ‘Preferred’ Policy Options

Support Type Raised By Delivery Mechanism Commonwealth State

Financing Type Com’wealth State

Advantages Disadvantages

18

Capital Provision Of

Dwelling, Government Management

Taxation Concession

(income) Outlays Real Rate Debt No Yes

• Simple • Accessible to h’sing

provs. • Compatible/ Safe &

secure • High volume • Likely lowest subsidy

cost of debt options • Flexible for States • No conflict with CSHA

• Funding costs still higher than net revenues

• Dwelling price/CPI mismatch risk

• Subsidy costs 0.5% higher than if Com’wealth funds used

7*



Outlays Outlays Real Rate Debt Yes No


provs. • Compatible • Safe and secure • High volume

• Not as flexible as state based approaches

• Com’wealth do not directly fund

• Conflicts with CSHA

20*



Taxation Concession

(income) Outlays Float. Rate Debt No Yes



• As in 1 • Subsidy costs 0.5%

higher than if Commonwealth funded

59



Prescribed Assets Ratio Outlays Direct investment Yes No

• Guarantees volume of funds

• Possibility of access & compatibility problems

• Possibility of fraud • Targeting a problem • Differential

performance of super. Funds

• May encourage switch away of savings

• Allocation between States a problem

• Need to impose a price – how establish?

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62 Home Loans Outlays Float.Rate Debt No Yes

• Simple • Accessible to housing

providers • Compatible • Safe and secure • High volume

• Interest rate risk – greater than fixed rate option

• Higher default risk than fixed rate option


65

Home Loans Outlays Fixed rate debt No Yes


providers • Compatible • Safe and secure • High volume • Flexible for States • No confict with CSHA


• Significant reinvestment risk

69 Home Loans Taxation

Concession (income)

Outlays Float. Rate Debt Either Either





• 2% lower cost of finance than options 60 to 68


Concession (income)

Outlays Fixed rate debt No Yes


providers • Compatible • Safe and secure • High volume • Flexible for States • No conflict with CSHA



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18/ 65

Shared Equity

Taxation Concession (income)/

Home Loans

Outlays Fixed Rate Debt No Yes

• Mix of advantages list against options 18 and 65

• Mix of disadvantages list against options 18 and 65

94

Direct (e.g. rent)

Assistance

Taxation Concession

(income)

Outlays Direct investment No Yes

• Flexible structure

• High cost to govt. • Complex & not

replicable in all contexts

• Possible access & compatibility problems

• Targting a problem (& possibly fraud)

• High transaction costs • Variable subsidy

require-ments between States

• Problem of market acceptance of individual deals

121 Direct (e.g.

rent) Assistance

Prescribed assets ratio Outlays Direct investment Yes No



• Possibility of fraud • Targeting a problem • Could encourage

differential performance of super. Funds

• May encourage switch of savings to other investment types



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The eleven policy options summarised in the table above are further outlined below in relation to the four delivery mechanisms specified in the report. A. Capital provision

1. Option 18: real rate debt, carrying an interest income tax exemption, raised by either the Commonwealth or State Governments, with allocations determined annually by the Commonwealth.

This public borrowing option requires the Commonwealth to subsidise the cost of finance by delivering income taxation benefits to investors, allowing the lower borrowing costs by the SHA to be passed on to tenants in lower rents, while investors receive their required after tax rate of return. The option is simple to implement, tends to minimise total subsidy cost per household housed, can be closely targeted to need and has the potential to generate a large volume of investment. As a financial instrument it clearly meets the existing preferences of institutional investors, as outlined in section 2.9.2, above. However, it is noted in Table 5 that if the Commonwealth issued these securities (and on-lent to the States) then the cost of finance could be reduced further, by around 0.5 per cent. There is provision for the Commonwealth to cap the total cost to Commonwealth revenue (as is the case in the U.S. with the Low Income Housing Tax Credit Scheme). There is also a question as to how management (as opposed to financing) efficiencies can best be achieved. Should management of the dwelling stock and tenancies be left with the SHA, or shifted to community sector agencies via headleasing or commercial managers via out-sourcing?

2. Option 7 (modified): real rate debt, raised by either the Commonwealth or State

Governments, with allocations determined annually by the Commonwealth and subsidies provided from a new Commonwealth outlays program only available for privately owned dwellings.

This variant of option 7 specifies private sector rather than SHA ownership and possibly management of the stock. Commonwealth facilitation is in the form of cash outlays rather than revenue foregone through the taxation system with the advantages and disadvantages similar to option 18.

3. Option 20 (modified): Establishment of a Stock Exchange listed Company supported as previously outlined. In this example the Commonwealth government would subscribe 20%, 30% would be shareholders’ funds and 50% borrowed funds. The Commonwealth government’s equity in the vehicle would be discounted to the extent that the asset price appreciation did not reach the cost base plus CPI. The dwellings in the vehicle would be valued each year and the underlying share price would reflect any move in property prices that has occurred plus the government support. Any shortfall between the guaranteed dividend payment and the net rentals received would be made up by a government grant or subsidy. Management and Agency Agreements would be developed with each of the State Governments with the proportion of dwellings to be acquired or developed in each State part of an annual Commonwealth/ State agreement. Each year the States would be provided with a summary of the subsidy costs associated with the dwellings located in their State and they would be responsible for the income top-up.

This is a modification of option 20, with the Commonwealth tax concession replaced by a Commonwealth capital guarantee (capped by the size of the Commonwealth’s equity stake).

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The results of the investor survey suggest that this option has the potential to meet the requirements and priorities of institutional investors, particularly as it delivers high rated instruments with low volatility characteristics, while satisfying ATO rulings regarding equity investment, raising the likelihood that significant volumes of private investment can be attracted into affordable housing provision.

4. Option 59. The Commonwealth would prescribe a minimum proportion of the assets of

designated financial institutions, notably the superannuation funds, be held in ownership of rental dwellings managed by the SHAs (or agents in the community sector). The maximum price to be charged on new investments would be specified annually by the Commonwealth. Return on investment to the institution would depend on current market rent levels, maintenance and management costs. State rent rebates would go to tenants as occurs with public housing.

As Table 5 emphasises, the major advantage is that it provides access to a substantial and growing volume of funds for rental housing, giving government the capacity to vary the prescribed ratio over time in the light of changing perceived housing needs and housing stress levels. However, there are also a number of problems, also listed, notably to do with issues of targeting and perverse incentives within the broader financial sector. Targeting problems also have a geographic dimension – given mobility trends, housing needs to be delivered to low income tenants where they are located.

B. Home Loans 1. Options 62 and 65: Provision of a new outlays based subsidy program directed at

subsidizing mortgage repayments and supporting credit and other risks on State developed and managed but privately funded home loan programs targeted to households in housing stress who could afford to purchase. Annual allocations determined by a bi-partite agreement between the Commonwealth and the States.

These options would mark a return to significant State Government involvement in encouraging low income owner occupation. The only difference between the two options is with respect to the type of debt instrument used. The floating rate option means the State Government would bear downside risk if interest rates rose by having to increase subsidies to maintain the affordability benchmark. In the fixed rate option (if no ‘pass-through’ is achieved in the deal structure) the States would carry the risk of having to reinvest at lower current interest rates when the dwelling changes occupancy (assuming there are no early repayment limitations or significant costs).

2. Options 69 and 74: Provision of income tax concessions by the Commonwealth on interest

received for loan funds raised to support a program directed at subsidizing repayments and supporting credit and other risks on State developed and managed but privately funded home loan programs targeted to households in housing stress who could afford to purchase. In other words, house purchasers pay less than market interest rates for their home loans, since the interest received is tax exempt to the private lenders (bond holders). Annual allocations to be determined by a bi-partite agreement between the Commonwealth and the States.

The differences between the two options is: (1) in 69 debt could be raised by either or both levels of government, compared to just the States in 74 and (11) 69 proposes floating rate debt, while 74 is predicated on fixed rate debt. The relevant comments on fixed versus floating rate debt made above with respect to the first two options (62 and 65) also apply here.

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C. Shared Equity 1. An option based on combining options 18 and 65. The advantages and disadvantages

of this mixed option are a combination of those listed against each of the two primary options in Table 5.

This option specifies that:

• The SHA fund its share of the dwelling by selling real rate debt incorporating a

Commonwealth tax concession to the private lender, and • The low income purchaser takes out a fixed rate mortgage loan to finance the remaining

equity share. A fixed rate instrument is preferred in order to minimise income loss and default risk.

Subsidies are provided both through tax concessions by the Commonwealth (to reduce the cost of SHA borrowing) and as outlays by the State to reduce the mortgage repayment component of the resident’s housing costs to affordable levels. Hence, the resident benefits from both lower than market interest rates on the rental component of the dwelling and lower than market mortgage repayment rates on his or her equity share. However, it should be noted that this option does have the further disadvantage of relying on the close coordination of two subsidy schemes.

D. Direct Assistance 1. Option 94: Provision of a Commonwealth tax exemption on net rents received by private

suppliers of low cost housing to households in housing related stress referred by State Governments. Rents charged are also subsidised as necessary by augmentation by State government of the current Commonwealth Rent Assistance Program.

Dwellings would be owned by private landlords or investors. As Table 5 indicates, subsidy costs will be high relative to some of the other options and there may be problems of ensuring that the output – i.e. houses renting at moderate levels – are accessed by lower income households. As with all rent assistance or entitlement subsidies, there is a risk to government of fiscal blow-out.

2. Option 121: This option, utilising a prescribed assets ratio, is similar to 59 (above). This

option would simply entail a new rent assistance program targeted to non-pension and beneficiary households experiencing housing stress.

In most circumstances and options the total level of government support necessary to meet both the required rates of return of private investors and the affordability benchmark for residents will mean that outlay subsidies normally delivered by the States will be required to ‘top up’ the other form of support provided. For example, in option 20, the Commonwealth capital guarantee will normally not be sufficient by itself to meet investor return requirements. In such cases cash outlays will need to be paid by the states to ensure the required dividend is met. Of course, the ultimate source of this outlay subsidy could be the Commonwealth. However, given the current Federal nature of division of powers and the fact that the delivery mechanisms other than direct assistance are the responsibility of the States, these outlay subsidies will tend to be managed by the States. This factor has been reflected in the construction of Table 5.

Each of the eleven preferred option listed in the preceding section would require an implementation procedure. Chapter 2.10 outlines the main steps in operationalising those preferred options dependent on debt finance.

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Focusing on the Government Support Measures – the Levers

The eleven options are reproduced in the table below – this time presented in relation to the four forms of government support entailed. The proposed options (‘policy packages’) are presented in this form in order to focus attention on the required actions of government.

The table below illustrates that the first three policy approaches – by way of taxation subsidies, guarantees and a prescribed assets ratio – are primarily focused on action by the Commonwealth. Conversely, in most cases where outlay support will be required, the States will need to provide it – or, given the Federal structure within which the delivery mechanisms operate, manage the distribution of these outlays. Outlays will often be required in addition to the other forms of support because, as noted above, the delivery of taxation concessions or guarantees (say) may not reduce the rate of return required to investors to a level consistent with affordable housing outcomes for low income households. In short, the States may need to pay ‘top up’ subsidies in addition, in order to ensure that the housing provided does not cost low income households more than 30 per cent of their incomes. The source of these outlays can either be the States, the Commonwealth or both levels of government, the latter two possibilities involving bilateral agreement between the Commonwealth and the States.

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Summary of Proposed Policy Options for Government (in relation to the support measures required)

Government Support No. Level of Government

Delivery Mechanism

Financing Type

Taxation Concession 18 69 74 94 18*

Commonwealth Commonwealth Commonwealth Commonwealth Commonwealth

Capital Provision Home Loans Home Loans Direct Assistance Capital Provision

Real rate debt Floating rate debt Fixed rate debt Direct investment Real rate debt

Government Guarantee

20 Commonwealth Capital Provision

Company

Prescribed Assets Ratio 59 121

Commonwealth Commonwealth

Capital Provision Direct Assistance

Direct investment Direct investment

Outlays 7 20 59 62 65 65* 69 74 94 121

Commonwealth States States States States States States States States States

Capital Provision Capital Provision Capital Provision Home Loans Home Loans Home Loans Home Loans Home Loans Direct Assistance Direct Assistance

Real rate debt Company Direct investment Floating rate debt Fixed rate debt Fixed rate debt Floating rate debt Fixed rate debt Direct investment Direct investment

Note: The numbers in the second column refer to the option number in Table 5. Some options appear against more than one type of government support since they entail a mix of supports. The numbers marked with an asterisk refer to the shared equity option, a mix of two of the primary options (18 and 65).

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Chapter 1 Introduction This report presents the results and recommendations of Stage 2 of the study, Policy Options for Stimulating Private Sector Investment in Affordable Housing Across Australia. Stage 1 of this study2 identified the extent and serious nature of housing affordability problems in Australia, in spite of almost a decade of strong economic growth. The Stage 1 report also discussed the existing barriers to greater private sector involvement in the provision of affordable housing and broadly outlined the range of ways in which government could reduce or eliminate those barriers. The current report extends this analysis and provides a detailed specification of the policy options facing government, evaluates these options against a set of relevant criteria and derives a workable short list of options for more detailed evaluation in the third and final stage of the project. The structure of the report is at follows. Chapter 2 specifies the options in terms of the government support policies required, the ways in which housing assistance is delivered and the possible methods of financing in each case. The options described distinguish between which level of government is involved, Commonwealth, State or both. The nature of financial risks associated with each option is elucidated. The impacts of recent changes in the business taxation environment are also addressed. A set of criteria for evaluating the relevance and practicality of the potentially very large range of policy options involved is drawn upon. This set of criteria is applied in a qualitative evaluation of the detailed range of options presented in chapter 2. The aim is to provide a clearly argued rationale for the focus down on a relatively small number of policy options -- in the order of twelve – that will form the core of the detailed analysis in stage 3.

Chapter 3 will conclude by summarising the short list of preferred policy options and the process for deriving it and outline how these options will be evaluated in Stage 3 utilising the balanced scorecard approach.

��2 M. Berry and J. Hall (2001) Policy Options for Stimulating Private Sector Investment in Affordable Housing Across Australia: Stage 1 Report, Outlining the Need for Action, Report from the Australian Housing and Urban Research Institute to the Affordable Housing National Research Consortium, Sydney.

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Chapter 2 Policy Options for Stimulating Private Sector Investment in Affordable Housing

2.1 Introduction When looking at the issue of policy options for stimulating private sector investment in the provision of affordable housing it is important to recognise that such provision has a number of elements or components, each of which may be independent of the others. These components are: • the delivery and management mechanism; • the method of government support; and • the type of private sector financing or resource provision. For example, physical assets may be managed by the public sector but owned by the private sector. One example is the situation where dwellings are managed by a State Housing Authority or community housing organisation which allocates the tenancy and manages the dwelling on behalf of a direct investor such as a Superannuation Fund. Here the management is in the public or non-profit sector and ownership is in the private sector. Under this option there is absolutely no difference between the experience of a mainstream social housing tenant and a tenant housed in dwellings owned by the Fund. Similarly, the delivery mechanism, i.e. physical provision of a dwelling to a tenant whose rent is assisted, is in no way conditional on the method of private sector financing. Another example is where a developer provides cheaper than market dwellings to home purchasers, whereby the lower cost is achieved by way of government subsidies to the developer’s rate of return. In this case the delivery mechanism is home purchase, the government support is cash outlay subsidies, and the private sector financing is by way of a direct investment by the developer. However, there is no necessity to tie the three components together in a unique fashion: there are a variety of means by which government support can be provided to assisted home purchase, for example, and a number of methods for private sector financing in this case. In other words, it is not axiomatic that the way in which housing assistance is delivered requires only one method of government support and, similarly, one method of private sector financing. Concomitantly, private sector ‘stimulation’ can take many forms, the most common of which is to provide financing. It could, for example, be argued that one method of private sector ‘stimulation’ is the issuance of government debt to market investors, the proceeds of which are employed to provide affordable housing. There are a number of important issues that arise out of this conceptualisation. In order for governments to be persuaded that any option should be seriously considered it will be necessary to demonstrate that: • the proposed policy option is at least as efficient and effective as the range of options that

are currently used for the delivery of affordable housing, or if not there are a range of other social benefits (and/or absence of constraints) that are available from the option which are not provided by the currently used alternatives; and

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• within the realms of effectiveness, it is assured that the assistance can be effectively targeted to the client with eligibility conditions and access consistent with current mainstream housing assistance programs.

It is clear that governments will be most reluctant to provide assistance where it cannot be guaranteed that the assistance will be delivered to the same types of clients under the same kinds of conditions to that applying to mainstream housing programs. For this reason assistance targeted to say developers to provide lower cost housing immediately raises administrative questions associated with guaranteed targeting. Furthermore, this type of program is essentially targeting the dwelling rather than the client. All of these issues will immediately be raised on efficiency and effectiveness grounds and need to be anticipated in the development of a short list of options. In developing a method of analysis for identifying options for private sector investment in affordable housing it is therefore necessary to address the following questions: a. what are the range of possible delivery mechanisms? b. what are the financial risks to government inherent in each of the main delivery

mechanisms; c. is there a single, most cost-effective, affordable housing delivery mechanism? d. what are the options for government support? e. what options for government support are most suited to each of the main delivery

mechanisms? f. what are the financing options? and g. what are the optimal ‘matches’ between delivery mechanisms and financing options? To summarise:

• Delivery mechanisms refer to the ways in which (means through which) housing assistance is provided – e.g. social housing, rent assistance, etc.

• government support options refer to the ways in which government can influence

housing outcomes through fiscal, regulatory or incentive measures.

• Financing options refer to the ways in which private finance can intervene in housing provision – e.g. fixed or variable rate debt.

This chapter first identifies the main delivery mechanisms and the types of financial risk facing government attaching to each. These risks include both systematic risks associated with global conditions and economy-wide trends and unsystematic risks tied to structural relationships between public and private sector actors and organisational factors specific to the public agencies themselves. The analysis summarises the direction of impact on subsidy costs of changes in key economic variables like interest rates and rental yields. A simple model is utilised to demonstrate that there is no universally least-cost housing assistance option (i.e. delivery mechanism). Depending on movements in the key economic variables, one mechanism or another will prove to be the least-cost option. The chapter then discusses the range of government support options and the extent to which particular options suit specific delivery mechanisms. The following section presents the seven financing options and discusses factors – in particular taxation – which impact on the pricing of financial instruments, that is, factors that influence the cost of finance. The discussion then takes up the issue of the extent to which particular financing options suit or require specific delivery mechanisms. The final section introduces a set of criteria for evaluating the potentially large range of policy options defined by combining the various delivery mechanisms, support approaches and

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financing options. These criteria are used to identify the advantages and disadvantages of each policy option and applied to derive a manageable list of options that will be further developed, analysed and evaluated in stage 3 of this project.

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2.2 Delivery Mechanisms: Main Housing Assistance Options This analysis confines itself to an examination of the main types of housing assistance These types of assistance are referred to by housing professionals as either ‘supply’ side or ‘demand’, (housing allowances, headleasing etc) side assistance. Supply side assistance is targeted initially at increasing the stock of dwellings available for either assisted purchase or rental. Funds are made available for the physical delivery of dwelling stock, subsidisation of the return on new dwellings owned in the private sector but managed in the public sector (public rental housing, community housing programs), subsidisation of the mortgage repayment, deposit costs or risks (Government home loan schemes), and in the case of shared equity, subsidisation of the rent or mortgage repayment (or both). Demand side assistance is targeted directly at the low income housing consumer and takes the form of either the provision of a cash payment (Rent Assistance) or a ‘voucher’ (to buy housing services) in the hands of the housing consumer. Proponents of this form of assistance argue that, given markets are efficient, then the provision of allowances will bring about an increase in the supply of low cost housing at the most competitive price (subsidy). They also argue that this form of assistance permits closer and tighter targeting and removes the inequities associated with the differential levels of assistance available to public tenants viz a viz private tenants (enhancing ‘horizontal equity’). Proponents of supply side programs argue that demand side assistance is inefficient and that the number of households supported will never be able to be maintained or increased (because of rising real rents). They also argue that demand side assistance cannot provide the same quality of housing support, because the standard of housing provided cannot be effectively guaranteed and security of tenure assured. Furthermore, as an entitlement-based benefit, the growth in the cost to government of demand side assistance may be difficult to limit or cap. To summarise, notwithstanding special financing arrangements, the main forms of assistance comprise (one or variations of) the following: • capital funding or asset allocation for the physical provision of dwellings which are managed

in the public or non-profit sectors with subsidies to reduce rents (public housing, community, pensioner, and aboriginal housing, including subsidised but community non profit managed housing, public-private joint ventures);

• directly and indirectly subsidised home loans (including mortgage assistance); • directly and indirectly subsidised shared equity (or joint ownership arrangements with

residents); and • direct assistance to private and public renters via untied (cash) or tied (vouchers) payments. Other government support policies, such as planning levies, the provision of land in support of a capital transaction, the provision of government guarantees, or the imposition of a prescribed assets ratio are enhancements to the financing of affordable housing, not the delivery mechanism.

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2.3 Delivery Mechanisms and Financial Risks There are four main types of risk which affect housing assistance options. These are: a) systematic risks including:

• general economic risks, which includes such variables as inflation, capital growth or contraction rates, rental yield or real rental change, unemployment and income growth or contraction, changes in nominal and real interest rates, and construction cost escalation rates;

• natural disasters, such as landslip, earthquake, fire, flood, lightning, wind and weather; b) unsystematic risks including

• structural and financial risks, including funding sources, financing costs, ownership, and residual risks to Authority where there is private sector involvement; contractual risks, and procurement planning.

• agency of issue specific risk, including political, project management, project delivery

(contract selection, tendering, negligence etc.), human error, organisational (including industrial relations, resources shortage, management, work practices etc.), and systems (including communications failure, hardware and software failure, etc.).

Each of the four delivery mechanisms is analysed below with respect to these risk categories. 2.3.1 Capital Funding Risks Systematic Risks When any social housing provider makes a direct investment in housing for on-renting to low to moderate income earners it assumes a number of systematic risks. In Australia these risks are borne directly by the State governments (state housing authorities – SHAs) as the primary owner of social housing assets. However, the Commonwealth is indirectly impacted through the funding demands of the States in the context of the Commonwealth State Housing Agreement (CSHA). Some of the risk can also be transferred to other social housing providers, as in the case of the small Community Housing Program in the first half of the 1990s. These risks are: Dwelling Price or Asset Risk Any dwelling purchased by social housing providers may gain or lose value according to market price movements. Consequently, it is possible that at different times the asset base of SHAs and other providers may actually fall. Rental Yield Risk Many SHAs “mark to market”, that is, unrebated rents are set at the prevailing private rental market yields. For SHAs with any significant proportion of unrebated tenants, there is a risk that the unrebated rental income may either fall, or not increase, affecting the rent income received.

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Rental Payment: There are three payment risks associated with social rental housing and these are:

a) Unemployment and/or Income Loss Risk

Research on low to moderate income earners has indicated that their income is highly volatile and in times of recession a significant proportion of this group may suffer substantial income loss. For a very high proportion of public housing tenants’ pensions and benefits are the primary source of income and this risk may not be very high. However for employed tenants in public or community housing there is a risk of income loss and the consequent reduction in rent received as a result of downward adjustments in rent paid. b) Unemployment and/or Default Risk The second payment risk is the risk that tenants’ may completely default, and rental income is lost. c) Vacancy Risk Finally, higher than anticipated vacancies may result in loss of rent income received, although this risk is not very high in public housing due to the large waiting lists. Interest Rate Risk If debt financing is used, whether directly by SHAs or on-passed as grants from central borrowing authorities, interest rate risk is present. If rates rise the cost of subsidies increases or (where the rate of capital growth outweighs the subsidy cost) the rate of return will be reduced . Cost Escalation Risk Finally, social housing providers face the risk that maintenance and other costs may escalate at a faster rate than anticipated with consequent higher expenditures. Structural and Financing Risks Prepayment/Reinvestment Risk In debt structures such as CPI indexed or fixed rate bonds there is usually either a fixed amortisation schedule or the bond principal is repaid at the end of the term. If the eligible provider wishes to sell part or all of the assets funded during the course of the transaction (i.e. within say 10 years) the proceeds of any sale must be reinvested in order to ensure sufficient funds are available to meet the debt obligations. In this context the provider runs the risk that the earnings rate that applies to the reinvested funds will be less than the rate that applies to its debt obligation, with a consequent short fall. Interest Rate/ Earnings Risk The provider may wish to establish a reserve fund to cover future subsidy obligations. In this case the provider runs the risk that the interest earned on the fund may be lower than anticipated. Table 1 sets out the major financing risks according to the type of financial instrument utilised.

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Table 1

Debt Funding: Major Financing Risks

Risk Variable Rate Debt

Nominal Fixed Rate Debt

“Real” Rate Debt

Prepayment/ Reinvestment Risk

No Yes Yes

Interest Rate/ Earnings Risk

Yes Yes Yes

Agency or Issue Specific Risks Agency or issue specific risks will be the same whichever housing assistance option is utilised and are: • political; • project planning; • project management; • project delivery (contract selection, tendering, negligence etc.), • human error; • organisational (including industrial relations, resources shortage, management, work

practices etc.); and • systems (including communications failure, hardware and software failure, etc.). 2.3.2 Home Purchase Programs Systematic Risks When providing home purchase finance under Home Purchase Programs governments face a number of similar systematic risks but crystallisation results in somewhat different consequences. To date, these schemes have been implemented by the States but funded by the States and Commonwealth through the CSHA and by accessing the loan market. Dwelling Price or Asset Risk And Defaults In the case of these programs SHAs normally underwrite the risk of mortgage default even when the programs are privately financed. Mortgage defaults will only result in a loss where the outstanding balances plus termination costs are greater than the dwelling value. Consequently, if dwelling prices fall significantly the SHA is exposed to a potential loss. Mortgage Repayment The repayment risks associated with home purchase programs are similar to those applying to public and community housing but because home loan portfolios usually consist of wage earners, income is not indexed to the CPI (as in the case of pensioners and beneficiaries) or protected from a reduction. For the employed assisted home owner there is a risk of income loss or decline with a consequent inability to met the mortgage repayment. This will either mean a default or provision of additional subsidy support to bridge the gap between affordable repayments and the mortgage repayment requirement.

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Interest Rate Where Variable or CPI Indexed debt is used to fund the mortgages SHAs face a further risk that interest rate or inflationary increases will result in unaffordable payments for borrowers with increased subsidy or default the result. Structural and Financing Risks Prepayment/Reinvestment Risk As noted previously in debt structures such as CPI indexed bonds or fixed rate bonds there is usually either a fixed amortisation schedule or the bond principal is repaid at the end of the term. Where SHAs have borrowed funds for fixed terms and on passed them to home borrowers they face a very high risk associated with possible early mortgage prepayment. The proceeds of any discharge must either be reinvested or the bonds repurchased. If market interest rates have fallen between the time of mortgage origination and discharge the earnings rate that applies to the reinvested funds will be less than the rate that applies to the debt obligation, with a consequent short fall. Alternatively, repurchasing the higher yielding bonds will require a premium to face value also generating a shortfall. Interest Rate/ Earnings Risk The provider may wish to establish a reserve fund to cover future subsidy obligations. In this case the provider runs the risk that the interest earned on the fund may be lower than anticipated. In home purchase programs all these crystallised risks appear as actual payments, as losses on property defaults, subsidies on repayment reductions and arrears support. Agency or Specific Risks Agency or Issue Specific Risks will be the same as outlined under the capital provision mechanism. 2.3.3 Shared Equity Systematic Risks Systematic risks will be the same as those for both capital provision and home purchase programs but depending on the relationships between the variables, the risks if crystallised, may have a lesser impact. To date, shared equity schemes have been seen to be the responsibility of State governments. Dwelling Price or Asset Risk and Defaults Mortgage defaults will only result in a loss where the outstanding balances plus termination costs are greater than the value of the clients equity share. Consequently if dwelling prices fall significantly the SHA is exposed to a potential loss. Mortgage Repayment For the employed assisted home owner there is a risk of income loss or decline with a consequent inability to met the mortgage repayment. This will either mean a default or provision of additional subsidy support to bridge the gap between affordable repayments and the mortgage payment requirement.

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Rental Payment Usually the rental repayment component of shared equity programs commences as a certain percentage of the investor’s share and is indexed to CPI. Again, if incomes do not grow as fast as CPI additional subsidy will result. Alternatively, if market rents increase faster than CPI and incomes also increase at the same rate, the housing provider will be foregoing the difference between the CPI indexed rent and the market rent. Interest Rate Where variable or CPI Indexed debt is used to fund the mortgages SHAs face a further risk that interest rate or inflationary increases will result in unaffordable payments for borrowers with increased subsidy or default the result. Structural and Financing Risks Prepayment/Reinvestment Risk SHAs face the same risks as outlined under home purchase. Interest Rate/ Earnings Risk SHAs face the same risks as outlined under home purchase. Agency or Issue Specific Risks Agency or issue specific risks will be the same as outlined under capital provision mechanism. 2.3.4 Direct Assistance: Rent Assistance or Housing Allowances Systematic Risks Direct assistance in the form of rent assistance has, to date, been a primary Commonwealth responsibility. This form of assistance has grown substantially since the late 1980s and now exceeds supply side capital subsidies delivered through the CSHA. In the case of housing allowances whilst the provider faces no dwelling price asset or construction risk the other systematic risks will have a much greater impact than in the case of capital provision through public or community housing. Rental Yield, Real Rent Risk Unlike the case of capital provision, where only a portion of the portfolio is subject to rental yield risk, in the case of direct assistance the amount of assistance required to support any given number of households will directly increase or fall according to changes in real rents or rental yields. If real rents increase faster than inflation, then for the majority of households on pensions and benefits, the ‘gap’ between an affordable (i.e. income related) rent payment and the market rent will increase necessitating a major increase in the amount of assistance provided, or a reduction in the quality of housing which can be rented. This gap will also grow for low income tenants employed in occupations where incomes are not rising as fast as inflation – the so called ‘working poor’. This risk is borne by the Commonwealth and is considerable.

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Rental Payment

The payment risks associated with capital provision also apply to direct assistance. a) Unemployment and/or Income Loss Risk

For employed tenants there is a risk of income loss or decline and the consequent reduction in rent received as a result of downward adjustments in rent required. b) Unemployment and/or Default Risk. The second payment risk is the risk that tenants’ may completely default, and rental income is lost. In the case of direct assistance it is unlikely that any private investor would provide housing for assisted tenants unless the default risk is assumed by Federal or State Housing Authorities. Structural and Agency Specific Risks There are no structural or financing risks associated with housing allowances although some agency specific risks remain such as contractual errors, fraud etc. 2.3.5 Risk Conclusions It can be seen that under each of the various options currently available (with the exception of housing allowances) governments face very similar systematic risks, with the main differences being related to the method of financing. In the current institutional environment the main risks associated with capital provision, home loans and shared equity reside with State government, while the risks of direct assistance programs are borne by the Commonwealth. Table 2 sets out a summary of the major risks associated with the various housing assistance options and classifies these risks according to the likely severity of the impact on government subsidy costs.

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Table 2: Summary of Major Risks to Government

Risk Capital

Provision Subsidised

Home Loans Shared Equity

Direct Assistance (RA or Vouchers)

Systematic Risks Dwelling Price/Asset

Yes (High) Yes (Moderate) Yes (Low) No


Yes (Low) No Yes (Low) Yes (High)






Yes (Moderate) Yes (High) Yes (Moderate) No


Yes (High) No No No

Structural and/Or Financing Risks Prepayment\ Reinvestment

Possibly Possibly Possibly No

Earnings Possibly Possibly Possibly No Vacancy Yes (Low) No No No

Agency or Issue Specific Risks Political Yes Yes Yes Yes Project Management

Yes Yes Yes Yes

Project Delivery Yes Yes Yes Yes Human Error Yes Yes Yes Yes Organisational Yes Yes Yes Yes Systems Yes Yes Yes Yes

To restate, the main systematic risks associated with housing assistance options are: • dwelling price growth or contraction; • rental yield - ‘real rents’ • income growth/loss, vacancy rates and defaults and therefore reduced payments; • inflation; • interest rates; and • cost escalation.

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Table 3 sets out the impact on subsidy costs to government of variations in the main risks.

Table 3: Impact on Subsidy Costs of a Rise or Fall in Each of the Systematic Risks

Risk Capital

Provision Subsidised

Home Loans Shared Equity

Direct Assistance (RA or Vouchers)

Rising Dwelling Price/Asset



Reduce No Impact Reduce Increase








Increase No Impact No Impact No Impact

Falling Dwelling Price/Asset



Increase No Impact Increase Reduce








Reduce No Impact No Impact No Impact

2.4 Is There An Optimal Cost Effective Assistance Option? A simple way to test this question is to construct a basic model of the four main assistance options and compare the subsidy cost to government under different economic conditions. Graphs 1 and 2 set out the result of such analysis. 2.4.1 Model Assumptions General In all cases the client has an annual income of $20,800. The client pays a rent, mortgage payment or combined rent/mortgage payment equivalent to 25% of income, ie $100 per week. The difference between the payment required and $100 is subsidised. Dwelling value at commencement is $100,000.

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Client Related Issues Under all of the delivery mechanisms it is assumed that if client income rises or falls then the difference between 25% of income and the required repayment is subsidised. The only situation in which the client is at risk of losing the accommodation is if no payment is made at all. This is the same for all mechanisms. Under the purchase and shared equity options the client faces the risk of either capital losses or capital profits according to dwelling price movements (this is the same for the housing provider). However, the loan financing structure has no influence on whether capital gains or losses accrue. The delivery mechanisms are therefore outcome neutral for the client. 2.4.2 Capital Funding (Social Housing, Direct Equity) Option The assumptions are: • purchasing and selling transaction costs: 4% of dwelling value; • maintenance rates: 1.8% of dwelling value; and • housing authority cost of funds: same as home loan borrowing rate. In this and all cases subsidy cost is simply the difference between net rent payment ($100) and outgoings after sale; i.e. -- public housing maintenance, rates, interest costs on costs of funds plus or minus capital profits or losses. At the end of 12 months the property is sold. 2.4.3 Home Loan Option In this example the housing authority pays the difference between the required mortgage payment and $100 per week. The loan is credit foncier for a 25 year term with 95% loan-to-value ratio (LVR). At the end of 12 months the property is sold. The dwelling value, transaction costs and mortgage interest rate are the same as those applying to the capital provision and shared equity cases. 2.4.4 Shared Equity Option In this case the client purchases a 50% share and pays 50% of maintenance, rates and transaction costs. The home loan rate is the same as the state housing authority cost of funds rate and is for 25 years with a 95% loan to value ratio on the client share, i.e. $50,000. Only the rent payment component is subsidised. The difference between the rent payment received ($100 per week minus mortgage payment) and housing authority costs on the 50% equity is treated as subsidy. At the end of 12 months the property is sold. Dwelling value, transaction costs, maintenance and rates costs, and housing authority cost of funds rate are the same as the capital provision option. 2.4.5 Direct Assistance Option In this option the dwellings are headleased by social housing providers from private landlords. The Commonwealth pays the difference between the gross rental yield (gross rents) required and $100 per week in the form of rent assistance. Commencing dwelling value is (as in all cases) $100,000.

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2.4.6 Cases Examined And Results All of these cases are externally consistent, one the each other, with the only difference being that in the mortgage and direct assistance/headleasing options the impact of transaction costs and maintenance and rates does not affect the subsidy calculation because they are to the account of the borrower. Conversely, the benefit or cost of capital growth/loss is to the account of the client (home loan) or the lessor (headleasing). Twelve possible variations to economic variables were tested: These involved two cases and three capital growth options. The cases are: • Case 1: 4% mortgage and housing authority cost of funds, 10% gross rental yields, capital

growth rates of –10%, 0%, and +15%p.a.; • Case 2: in reverse, 10% mortgage and housing authority cost of funds, 4% gross rental

yields, with the same capital growth outcomes, -10%, 0%, and +15%p.a. Graphs 1 and 2 set out the results of the subsidy per year per client.

GRAPH 1

-1300

-300

700

1700

2700

3700

4700

5700

Zero Capital Growth 10% Capital Loss 15% Capital Gain

HOUSING ASSISTANCE OPTIONS: BEST CASE: LOWEST SUBSIDY/HIGHEST NET PROFITS: CASE 1: (Home Loan and

Housing Provider Funds Rate 4%, Gross Headleasing Yield 10%)

Home Loan Capital Provision

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GRAPH 2

The graphs present the ‘best case’ option from the twelve scenarios drawn for each case. In case 1, if the capital growth of the dwelling is zero or negative, the cheapest subsidy option for government (both levels taken as a whole) is to provide mortgage loans. If, on the other hand, substantial capital growth occurs (15% in this example) then the best option from a strictly fiscal viewpoint is capital (e.g. public housing) provision, which in this case produces a negative subsidy or profit to government. This ‘profit’, of course, accrues in the form an appreciating asset portfolio. In other words, if dwelling values are increasing at even moderate rates, social housing not only delivers the most cost–effective outcome but it also may actually deliver a surplus when the value of the equity is taken into account; in the case above this option delivers a $5,600 surplus. This assumes that the social housing stock is managed in an efficient and effective manner. In case 2, on the other hand, direct assistance minimises subsidy costs in the negative or zero capital growth situations, while shared equity generates maximum profits in the high capital growth case. In the former situation, direct assistance and headleasing actually delivers a $1,200 surplus per client because the payment being generated is 1% more than the assumed market yield of 4%. In the latter situation, shared equity is the most efficient option generating net surpluses for the housing authority of $2,581 per annum per dwelling. These graphs demonstrate why there is no “first/best” cost effective delivery mechanism. All four methods of delivery are the most cost effective option depending on the state of the economy and, especially, of housing and finance markets. The basic principle that therefore applies to the assessment of delivery mechanisms for housing assistance is: if appropriateness and tenure considerations are equal there is no “best” cost delivery outcome for government as a whole. Of course, the support costs vary in their impact between the two levels of government across the four delivery mechanisms in the wake of the changes in the economy that give rise to risk.

0

400

800

1200

1600

2000

2400

Zero Capital Growth 10% Capital Loss 15% Capital Gain

HOUSING ASSISTANCE OPTIONS: BEST CASE: LOWEST SUBSIDY/HIGHEST NET PROFITS: CASE 2: (Home Loan and Housing Authority Funds Rate 10%, Gross Headleasing Yield 4%)

Direct Assistance Shared Equity

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Assuming that the minimisation of subsidy costs to government as a whole is a major consideration, the guiding rules that might apply to the choice of delivery mechanism are that in times of: • low to moderate interest rates and moderate to higher levels of gross private rental yields

and capital growth; public and community housing options will prove to be most cost-effective;

• as interest rates rise, and capital growth declines shared equity will likely outperform public housing as the most efficient delivery mechanism;

• in periods of low housing interest rates, high gross rental yields and little capital growth subsidies on home loans will come to the fore;

• when rental yields are low dwelling prices are stagnant and mortgage rates are high, direct assistance will be most cost effective.

2.5 Options for Government Support There are five main types of potential government support delivered through the mechanisms described above that can used to subsidise housing provision: • outlays (cash); • revenue foregone; (tax and duty concessions); • credit support (government guarantees, partial capital provision); • development levies or additional taxes tied to affordable housing; (planning levies); and • regulatory initiatives (prescribed assets ratio or level). Some of the possible support options are only suitable for particular types of delivery mechanisms and/or only apply to particular levels of government. The discussion below illustrates these issues. 2.5.1 Outlays Outlays are cash payments made by either the Commonwealth or the State or both, and are used to either purchase stock or pay subsidies or shortfalls. They may also be used to provide credit support by way of a cash injection into an underlying Fund or a Trust set up to support private financing initiatives. The latter process is almost exclusively provided by State Governments and has been most often applied to support for home loan programs (NMMC in Victoria). 2.5.2 Revenue Foregone This option involves the provision of a tax concession in order to reduce the pricing of a private financial instrument or to reduce transaction or other costs associated with the activity. There are two Australian examples of the use of these concessions. These are: • a bond where either no tax is paid on income received (almost the same as the American

‘tax-credits’ approach), or where capital growth is subject to CGT treatment (Infrastructure Bonds are an example of the former, whilst a CPI Indexed Bond would be an example of the latter); and

• waiving of stamp duty; some State Governments have waived or are currently waiving

stamp duty on dwellings purchased by first home buyers. Similarly where private financing of public housing is being achieved by the purchase of existing new public housing stock, State Governments have waived the stamp duty cost to the purchaser (the PEP and 2 schemes in N.S.W.3).

��3 See the Stage 1 Report of this project for more detail.

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2.5.3 Credit Support In this approach no actual outlays may be required at the start of the transaction but there may be an implied cost at some stage during the operation of the arrangement. The options are: • the provision of government income guarantees on client payments by either

Commonwealth or State Treasuries or State Housing Authorities. These guarantees mostly relate to income;

• capital guarantees that take the form of underwriting a prescribed rate of capital appreciation on the dwellings, indexed to CPI, exercised at realisation;

• payment of the premium and assistance with the arranging of commercial insurance underwriting the rate of capital appreciation;

• the purchase of some equity in the underlying dwellings, such that at realisation, if the prescribed rate of capital appreciation is not achieved the investor has first call on the government’s equity up to the prescribed capital return, thereafter the investor absorbs a capital loss (a partial guarantee up to catastrophe risk).

2.5.4 New Development Levies The third option is the imposition of development levies where, say, 5% of new housing must be built as affordable housing and deeded to either the Local Authority or the State Housing Authority to own and manage the tenancy. 2.5.5 Financial Regulation The only conceivable regulatory initiative is one where the Commonwealth requires Superannuation Funds (and possibly insurance companies) to invest a prescribed percentage of their assets in social or affordable housing. 2.6 Delivery Mechanisms and Government Support Because of the risk profile associated with particular delivery mechanisms some forms of government support are best linked to particular types of delivery mechanism. 2.6.1 Outlays Outlays can be applied to all of the delivery options, because they can be allocated, for example, as a subsidy or a capital injection or both. Outlays can be delivered as a stream of recurrent payments through time or capitalised ‘up front’ in a single grant. An example of the latter approach is offered by the Commonwealth Government’s decision in early March to double the first home buyers’ grant to $14,000 for people buying new dwellings in the period 9 March to the end of 2001. 2.6.2 Revenue Foregone Options other than outlay support are really not applicable to a rent assistance program where the management of the dwellings is in the hands of individual landlords. By contrast, revenue foregone options can be applied to a ‘packaged’ headleasing program where groups of dwellings are provided and the tenancy management and maintenance arrangements remain in the hands of the public and community sectors, with ownership in the private sector. This is because revenue foregone options imply private sector ownership and investment but organisation and management by the public sector. In essence they separate ownership from dwelling management.

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Provision of tax exempt status on income earnings generated by a bond, i.e. interest, would enable cheaper funds application to both capital programs (direct private investment via regulation, public housing, community housing) and home loan programs and shared equity. However, where clients are lower income wage earners, and because of evidence of declining nominal household incomes, a ‘credit foncier’ (straight line repayments) bond structure might be more appropriately applied to home loan programs, than an inflation indexed bond instrument (where payments and bond principal may increase under certain conditions). In the case of the second option for revenue foregone, where Capital Gains Tax indexation provisions are applied to the capital indexed component of real rate bonds, these are normally targeted at options which involve the provision of capital for the acquisition of public housing, or a packaged deal of long term leasing of new stock (and of course the housing authority’s equity in a shared equity transaction) and it is difficult to conceive of how they might be modified to apply to home purchase arrangements. Similarly, whilst the first revenue foregone option requires Commonwealth execution, the second is essentially a State Government responsibility. For certain policy options it may be appropriate that both types of support are provided – e.g. an income tax concession and a stamp duty exemption. 2.6.3 Credit Support Government guarantees mostly relate to income (usually to cover such matters as losses on mortgage defaults in home loan schemes or to top up net rents to fixed returns in the case of privately owned packaged head leasing schemes), however they may apply to capital, i.e. a guarantee that the dwelling value at sale will not be less than the dwelling acquisition cost price indexed to the CPI. Capital guarantee and capital insurance are really only appropriate for programs where the funds are applied to dwelling acquisition (direct investment, public and community housing) or support dwelling yields (e.g. ‘packaged headleasing’ – as in PEP 1 and 2) In the past in almost all of these cases the credit support has been provided by State Governments as Commonwealth Governments have insisted that their role is to provide an allocation and the State’s role is to accept any risk. 2.6.4 Planning Levies This option can only be imposed by State Government and capital provision for dwelling acquisition and provision to a client for rental is really the only suitable delivery mechanism. 2.6.5 Regulatory Mechanisms The introduction of something such as a prescribed asset ratio requiring Superannuation Funds to invest in affordable housing raises a number of questions before issues such as the delivery mechanism can be resolved. For example, Superannuation Funds may argue that unless the price at which they will provide the funds is specified they are precluded under their trust deeds from investing at anything other than the market rate. Once a price is specified it may advantage some Superannuation Funds over others. Funds with higher proportions of non performing assets may actually show an improvement in performance over time whilst high performance funds will show a decline. Whilst funds may be directed to private developers or to publicly managed but superannuation owned housing assets (capital provision) or delivered via home loan or shared equity schemes, government is likely to be concerned about the targeting of the assistance, that is:

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• are households eligible for mainstream housing program assistance obtaining access? • are they obtaining access on the same terms and conditions as they would have received

in government programs? • who is doing the credentialing? and • is there capacity for fraud?

2.7 Private Sector Financing Options In combination with the range of support options outlined above we have identified seven main private sector financing options, three debt and three equity and one comprising a mixture of both debt and equity. Other, more complex mixed options could be developed – e.g. options entailing mixtures of standard and indexed debt, subordinated debt, etc. Indeed, if and when new markets for residential financial instruments emerge, financial intermediaries will have a strong competitive incentive to tailor-design new options to maximise financing efficiencies, given the risk characteristics of the asset and the investment aims of investors. However, these developments are essentially derivative and do not change the underlying logic of the argument. For our purposes it is sufficient to focus on the seven basic options discussed below. The debt options are: • floating rate; • fixed rate; and • real rate; whilst the equity options involve either: • a stock exchange listed company (wholesale and retail funds); or • a retail property trust; or • a direct equity investment; or • a stock exchange listed company supplemented by substantial debt financing, i.e. floating,

fixed or real rate. 2.7.1 Debt Options Floating rate debt usually involves what is termed a credit foncier loan structure; i.e. if interest rates do not change the amount of the repayment stays the same for the duration of the loan. Most fixed rate debt instruments have a similar structure. Real rate debt on the other hand involves a loan where real interest only is charged (i.e. the inflation component of the interest cost is striped out and the bond principal is indexed to inflation. The quarterly interest and payment calculation is expressed by the formula Bond Principal End Of Period = [BP+(BP*n] +{[BP+(BP*n] *i} – r Where BP = Initial Bond Principal n =annual inflation rate divided by 4 i = annual real interest rate divided by 4 r = quarterly repayment. In most CPI indexed cases the repayment is also indexed to inflation. Graph 3 sets out the difference between the repayment structures on a credit foncier loan and a CPI indexed loan. The inflation rate is assumed as 2%, the real interest rate is 4% and the client is assumed to be receiving a pension and benefit payment indexed to CPI.

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GRAPH 3

2.7.2 Equity Options Equity capital could be advanced in the form of a company, a (residential) property trust or a direct investment in the dwellings. In the case of a stock exchange listed company the government could subscribe (say) 20%, and 80% would be private shareholders’ funds. The government’s equity in the vehicle could be discounted to the extent that the asset price appreciation did not reach the cost base plus CPI (i.e. a capital guarantee). The dwellings in the vehicle would be valued each year and the underlying share price would reflect any move in property prices that has occurred plus the government support. Any shortfall between the guaranteed dividend payment and the net rentals received would be made up by a government grant or subsidy (i.e. an income guarantee). In the property trust example the structure would essentially be the same, except that because of the cost base re-balancing outlined in the tax discussion (see the next section) the value of the CGT indexation would be eroded over time. In the direct equity investment a private sector investor would actually own the dwellings directly. In the case of the stock exchange listed company with debt, the government would subscribe (say) 20%, 50% would be debt and 30% would be private shareholders funds. All other characteristics would be as outlined above. As already noted, combinations of these main financing types can be developed and also be combined with a range of credit support arrangements.

CREDIT FONCIER AND CPI LOAN REPAYMENTS VERSUS CLIENT PAYMENTS ( Loan Amount $100,000 - Annual Commencing Income $20,800 -25% Income In Payments)

400.0

425.0

450.0

475.0

500.0

525.0

550.0

575.0

600.0

625.0

650.0

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

Years

Ave

rag

e M

on

thly

Pay

men

t: $

Client Payment Credit Foncier Payment CPI Indexed Payment

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2.7.3 Pricing and Taxation Considerations It should be noted that from a pricing perspective and because of credit quality considerations, Commonwealth bonds will normally price about 50 basis points below State Treasury issued bonds whilst debt issued by State Government instrumentalities other than Treasury will carry a still higher premium for default risk, with the coupon being between 35 and 50 basis points higher than State Treasury debt. Of course, a government guarantee predominately removes this differential. On balance there are very few circumstances where private sector financing will be cheaper than issuing government debt. Leaving aside policy considerations or Loan Council restraints, the only circumstances where private sector financing might be cheaper than government debt is where an equity instrument can be developed that passes on the value of the equity tax deductions (primarily, lower rates on capital gains and depreciation allowances on residential buildings) and the credit quality is accepted by the market as the equivalent or near-equivalent of government debt. If private sector financing is to be attracted into providing affordable housing in other circumstances, the overall cost to government will exceed the public borrowing option. Such alternatives would, presumably, only be entertained where political constraints limit public borrowing. Under the old taxation regime the value of the deductions noted above would reduce the price (i.e. the required rate of return on equity) normally in a range between 0.7 and 1.2 percentage points (depending on the rate of inflation; the higher the rate of inflation, the greater the CGT indexation benefit to total returns). Under the new taxation regime, following implementation of recommendations from the Ralph Inquiry on business taxation reform, the pricing benefits of equity instruments have been somewhat reduced for companies, but not substantially for individuals (the difference in equity versus debt tax rates for taxpayers with high marginal rates is still very substantial) probably reducing the potential pricing differential in the case of companies to between 0.4% and 0.8%. Table 4 compares the pre and post Ralph Report tax treatments applying to capital and income investments in residential property for different classes of investor, summarising discussions undertaken with Mr. Stephen Gates, Principal tax partner at the legal firm, Clayton Utz, in December 2000. A number of specific questions covered are also addressed immediately below, in question-answer format; the questions are italicised followed by a summary of Mr. Gates’ responses. Table 4 indicates where recent change has occurred (and, conversely, where is hasn’t). Clearly, for any discussion of future investment and policy options, it is the post-Ralph situation that must be considered.

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Table 4: Taxation Treatment : Pre and Post Ralph: 21st September 1999

Period Income Or Div. Tax Rate

CGT Indexation1

Capital Tax Rate1

Negative Gearing

Depreciation

Individuals - Shares

Pre Ralph Marginal Tax

Rate after franking

Cost base indexed to

inflation

48% on difference

between indexed cost base and actual value

Yes-deductability applies to

interest paid on amount borrowed

for investment

Not Applicable

Post Ralph As Above Not Applicable*

Capital gain reduced by 50% discount where asset held more than 12 months

As Above Not Applicable

Individuals – Rental Residential

Pre Ralph Net rental

proceeds taxed at Marginal Rate


inflation

48% on difference




for investment

2.5% of the value of the building based upon asset life of 40 years.



Yes but qualified- must show

intention to pay for loan principal

from sources other than sale of

asset

Can now self assess on asset life and pro-rata

depreciation accordingly–but

must be reasonable

Listed Companies & Limited Partnerships

Pre Ralph Income at 39% Not Applicable

Treated as trading profit – income tax rate

applies


interest paid on amount borrowed for investment or capital purchase


Post Ralph Income at 30% Not Applicable As Above but

30%




asset



must be reasonable

Superannuation Funds

Pre Ralph 15% on entry to fund and 15% on

exit


inflation

15% on difference



interest paid on amount borrowed for investment or capital purchase



Capital gain reduced by 33%

discount (10% of nominal

gain)




asset



must be reasonable

Pooled Development Funds (PDF’s)

Pre Ralph As For Super Funds

As For Super Funds

As For Super Funds

As For Super Funds

As For Super Funds

Post Ralph As For Super Funds

As For Super Funds

As For Super Funds

As For Super Funds

As For Super Funds

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Taxation Treatment : Pre and Post Ralph: 21st September 1999 (continued)

Property Trusts (All Income and Capital Fully Distributed To Unit Holders-

Tax In The Hands Of Unit Holders)

Pre Ralph Marginal Tax

Rate after franking


inflation

Marginal Tax Rate on

difference between indexed

cost base and actual value



for investment

Not Applicable

Post Ralph As Above Optional as above or Nil


As Above Not Applicable

Infrastructure Bonds

Pre Ralph No tax Cost base indexed to

inflation

Marginal Tax Rate on

difference between indexed

cost base and actual value



for investment

Not Applicable

Post Ralph No tax but tax

rights cannot be sold on

Optional as above or Nil As Above As Above Not Applicable

1: For Shares * Individuals and superannuation funds only have a choice between the indexed cost base and a discounted nominal tax rate for CGT in the case of assets acquired before the recent changes. For new acquisitions the indexed cost base is not applicable.

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1. How is the negative gearing of residential property now treated? Negative gearing of property and other assets is still permitted but the investor must be able to demonstrate that the sale of the asset is not the only source for repaying the principal on the loan. These changed arrangements are primarily aimed at certain margin lending arrangements applying to share transactions, and not residential property investments. 2. How is depreciation of residential property now treated? The treatment of depreciation has also changed slightly, with the taxpayer being able to set the asset life for depreciation purposes for residential buildings. However the previous test was 40 years and it is unlikely that in the case of a building, significantly shorter periods would be permitted. 3. Are any more issues of infrastructure bonds permitted? No. The Commonwealth has abolished infrastructure bonds and no new issues will be permitted. In addition, if investors wish to sell the bonds to a third party, the tax benefits terminate. This has had the effect of eliminating any trading in the instrument, which has been an objective of the Commonwealth, the clear message being that these types of tax preferred debt instruments will not be repeated. 4. Are share investments and property trusts now more attractive to individual investors? Yes. The change in the CGT treatment has effectively reduced the tax burden by half for most share and property investors. 5. Would a bond providing a capital guarantee (i.e. principal indexed to CPI) qualify as an equity investment? It is very likely that the Tax Office would treat this instrument as quasi-debt and tax it accordingly - that is any capital appreciation paid would be fully taxed at the investor’s marginal tax rate. 6. Would a stock exchange listed company providing specific guaranteed dividends and provided with a government capital investment qualify as an equity investment? In this example the government would subscribe 20%, 30% would be shareholders’ funds and 50% borrowed funds. The government’s equity in the vehicle would be discounted to the extent that the asset price appreciation did reach the cost base plus CPI. The dwellings in the vehicle would be valued each year and the underlying share price would reflect any move in property prices that has occurred plus the government support. Any shortfall between the guaranteed dividend payment and the net rentals received would be made up by a government grant or subsidy. Yes. The section of the 1997 Act that makes "bounties and subsidies" assessable is section 15-10. The terms "bounty" and "subsidy" are not defined and their meanings are taken from case law. However, the cases suggest that grants of money or financial assistance will fall within these terms. It is then a question of whether the purpose of assisting the carrying on, or commencement, of a business, is met. The actual wording of the section has a carve-out for grants that are assessable as "ordinary income" under section 6-5. This is merely a drafting stratagem, since any such amounts (i.e. grants considered to be inherently ordinary income) would be included in assessable income under section 6-5. The 1997 Act now distinguishes between "ordinary income" (which is assessable under section 6-5) and "statutory income" (which is assessable under a specific provision such as section 15-10).

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7. Would a listed property trust providing specific guaranteed dividends and provided with a government capital investment qualify as an equity investment? As in the previous example the government would subscribe 20%, 30% would be unit-holders funds and 50% borrowed funds. The government’s equity in the vehicle would be discounted to the extent that the asset price appreciation did reach the cost base plus CPI. The dwellings in the vehicle would be valued each year and the underlying unit price would reflect any move in property prices that has occurred plus the government support. Any shortfall between the guaranteed dividend payment and the net rentals received would be made up by a government grant or subsidy. Yes and no. It would be treated as an equity investment but to the extent that some part of the income distribution depended on a government grant then this would reduce the cost base of the unit and therefore attract more capital gains tax on sale of the unit. For example: Guaranteed Income Return $70 Government support $10 Original Cost Base $1000 New Cost Base $900 Sale Value Of Units $1600 Tax Under Original Cost Base = $600 * 0.22 = $132 Tax Under New Cost Base = $700 * 0.22 = $154 Finally, it is worth noting that there are also potential housing investors who might be differentially affected by taxation reform. For example, some community sector providers have charitable status and would be GST exempt. This enables them to claim input credits on the purchase of new housing for rental, savings that could be passed onto the tenant in lower rents. Private investors cannot claim input credits as rental housing is, for them, an input taxed service. However, this is likely to be small-scale and specific to the aims of the institution and to particular client groups. 2.8 Financial Options And Delivery Mechanisms Some methods of financing are really the only suitable instrument for the delivery mechanism that is being used. For example, if the delivery mechanism is home loan funding, it is simply not possible to obtain equity deductions for private investors, so government or quasi-government debt is most appropriate. For home loans clearly a debt instrument whereby the principal outstanding can be paid at the same time as the borrower redeems the loan eliminates the prospect of substantial reinvestment risk (where the repaid loan principal must be reinvested and paid at a later date when the loan matures). For these reasons either floating rate debt or more preferably fixed rate debt with “pass through” (i.e. principal payable to the bond holder at any time) characteristics carries less risk for government. However, because a 1% rise in interest rates brings about a 6% rise in repayments, a floating rate debt facility carries more risk of defaults for marginal home purchasers than a fixed rate facility (with no penalty for early repayments). A CPI indexed instrument as outlined above may carry greater risks for government since there is emerging evidence that employed households with lower incomes may not be experiencing income growth that matches CPI; so CPI indexed payments would increase the risk of default. Conversely, if either social housing through capital provision or shared equity is preferred then there are some pricing and considerable risk advantages accruing from either equity mechanisms or real rate debt. Most tenants of public and community housing are recipients of

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pension and benefit income which is indexed to CPI. In addition, at least in Sydney and Melbourne long term dwelling prices have appreciated at or above CPI. Consequently, a debt structure where the bond principal is indexed to CPI and the coupon is only “real” rate, may provide a financing structure where either the client’s rent payment increases match bond payment increases, or the recurrent repayment is substantially reduced and the principal outstanding at redemption more closely matches asset values. A direct equity investment where risk is assumed by the private sector, and subsidy delivered in return for reduced rents or prices, could probably be applied to both home ownership and rental options and all delivery mechanisms might be appropriate. However, if private management is contemplated serious attention will need to focus on access or targeting to need and compatibility with mainstream housing program criteria, and fraud mitigation. 2.9 Policy Options for the Provision of Affordable Housing 2.9.1 Assessment Criteria for Policy Options The criteria for option assessment outlined in the adopted project brief are: • equity; • simplicity; • accessibility for mainstream housing providers; i.e. as well as private providers, government

housing authorities can also access funds; • compatibility with mainstream housing criteria; i.e. the same eligibility and benefits, and

directed to same clients; • safety and security; i.e. the housing benefit being channeled to the ‘right recipients’ with no

chance of fraud; • volume of funds; • efficiency; i.e. subsidy costs; and • risks and volatility. The knowledge, sentiments and perspectives of active investors and investment managers are critically relevant to the criteria concerning the volume and cost of finance for affordable housing schemes. Before directly applying the criteria to the selection of a short-list of ‘preferred’ policy options (in section 2.9.3, below), the next section summarises the key responses of interviews with several senior investment managers located in large financial institutions based in Sydney and Melbourne. These responses cast light on the likelihood that particular options will or will not generate sufficient investor interest to be effective. The interview schedule is reproduced in Appendix 1 and the interviewees listed in Confidential Appendix 2. 2.9.2 Investment Manager Interviews The interviews were held in February 2001. The following points summarise the main responses and comments offered by investment managers. (It must be stressed that the investor survey is focused on a limited number of managers – though strategically located – and does not provide an exhaustive source of the range and strength of views across the financial sector.) • The most important factor in investment decision making continues to be the achievement

of profit or return on a risk adjusted basis. Credit risk is manageable, the critical issue is the volatility of returns. Investors must be rewarded for bearing systematic risk.

• Perhaps the clearest message coming through from the investors is that they are primarily

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interested, in this context, in yield rather than capital growth. Housing is of (potential) interest only to the extent it can generate a future income stream that can be accurately forecast. This suggests that they are not concerned with the ownership and eventual sale of the dwellings as real assets – and indeed would rather see final ownership in government or other hands, along with the responsibilities of managing tenancies and ensuring residual value. Nevertheless, for equity investors, capital gains provide an enhancement to basic income yield and are attractive as secondary benefits. The combined value of the dwelling portfolio after bond holders and other creditors’ demands are met also provides the asset base supporting equity value.

• A number of serious barriers exist limiting institutional investment in residential property as

a class – although there is no clear hierarchy of importance with respect to those barriers. Investment managers connected with the large banks are more sensitive to the potential for adverse publicity in the residential sector. Small unit size of investment opportunities is generally seen as a significant barrier – the institutions are keen to invest in larger rather than smaller tranches in order to spread transaction costs and facilitate monitoring and valuation.

• Institutional investors will and do invest a significant proportion of funds in capital indexed

securities. The required premium on return for a highly rated inflation indexed security would be at least 2% above government bonds (a little higher than for commercial property). A significantly higher premium would be demanded for bonds indexed to housing values (i.e. where capital risk is held) and would probably need to be restricted to dwellings located in Sydney and Melbourne. At least one respondent suggested that the required premium could vary with the current stage of the property cycle. A cautionary note is necessary at this stage. There may be a gap between what the institutions would like to get by way of premium and what they will actually accept. A skillfully constructed CPI based instrument that is rated at AAA may require a premium as small as 1 per cent, providing low cost finance that can be factored into affordable housing outcomes.

• There is a relatively low level of knowledge about housing as a current investment option

and an acknowledgment that existing market data on the performance of residential property is patchy and generally inadequate. Lack of knowledge reinforces lack of interest in this potential asset class, further reducing the incentive to construct better data resources.

• There is some recognition that the current exclusion of rental (as opposed to owner

occupied) dwellings from the effective investment universe of the institutions may mean that potential gains in portfolio performance due to fuller diversification are being foregone. However, respondents saw the (theoretical) ‘underweighting’ of Australian investors in international assets as a more serious inefficiency. (Of course, these are not mutually exclusive factors – diversification benefits might be achieved by extending investment more across both rental dwellings and international equities, etc.)

• Australian institutions are particularly keen to develop new investment opportunities at the

low risk-low return end of the spectrum. They have plentiful high return-high risk opportunities, especially in the international context, but may be underweight in assets with characteristics similar to government debt. This follows, of course, from the trend in Australia and many OECD countries for governments to move from selling new debt to paying off old debt as budgets are run into structural surplus. This suggests that the institutions may be particularly responsive to housing related semi debt investment instruments and vehicles that provide steady, secure returns delivered though income and/or capital guarantees by government. The institutions will consider structured finance arrangements with the margin spread highly sensitive to credit rating. The spread or premium rises sharply if the investment drops below investment grade (BBB).

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• On the whole the institutions will accept all taxation risks (as on all their investments), although the possibility of future changes in the taxation regime will generally mean that prospective taxation benefits, though welcome, will not over-rule the fundamental drivers of investment valuation. This implies that policy options reliant on delivering subsidies to the investor through the tax system will also need to stack up on the fundamentals. However, at least one respondent suggested that he may look for some guarantee or indemnity on future capital gains tax changes.

• Institutions will generally impose exposure constraints on specific investment products –

e.g. limiting equity investment in a private motorway to 20 per cent of total capital. This is consistent with their overall diversification and risk management strategies.

• The institutions would consider investing in the company and property trust vehicles outlined

in section 2.7.2, above, and discussed in relation to the taxation treatment of the equity component (2.7.3). In general, investors would favour vehicles that invested in the major regional property markets and would therefore also require adequate property market data being collected on that geographic basis, preferably at quarterly intervals. A property trust might be favoured over the company option due to the different taxation treatment of income. However, there may be volume constraints on property trust investment, as opposed to the company vehicle, since a trust would be categorised as a property asset class and institutions allocate a much smaller proportion of their total funds to property compared to equities and bonds.

• Property and tenancy management deficiencies are seen as significant barriers to

investment, especially where investors are required to bear all or most vacancy risk. This suggests that options that transfer this risk, at least in part, to government by way of income guarantee is likely to increase investor interest and reduce the cost of finance. Any reduction in financing costs can be passed on to residents in lower housing costs.

• The institutions do not fully trust governments not to ‘change the rules’. The career of

infrastructure bonds, where policy changes first ended new issues and subsequently undercut a secondary market, offers a clear example of the difficulties investors face in embracing new instruments that include tax benefits. Political bipartisanship may reduce these concerns.

• When considering investing in new, illiquid assets the institutions require an appropriate

premium and would prefer an investment term in the 2 to 5 year range, although there are no hard and fast norms here and earlier evidence suggests that some institutions are prepared to consider such terms up to 20 years. A direct property investment would probably be held longer than that, in the order of at least ten years.

• All respondents were aware of the recent increase in interest in socially responsible

investment (SRI), in Australia and internationally. In general, they were skeptical of the prospects of SRI; on the conventional view of modern portfolio theory, any limitation or screening out of opportunities in the investment universe necessarily reduces maximum portfolio performance, since some potential diversification benefits will be missed. In passing and by contrast, it is worth noting that (as stated above) the same managers seemed unworried by the possible loss of diversification benefits from the current exclusion of rental housing from institutional portfolios. However, the critical point made by these respondents was that regardless of their professional opinions, if a market for SRI products continued to grow in Australia, driven by savers, following trends in the other Anglo-Democracies, then they would seek to develop and offer appropriate products.

• Not surprisingly, the investment managers interviewed were opposed to the option of

reintroduction by government of a prescribed assets ratio for one or more types of investor,

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which would stipulate a minimum proportion of total investment to be directed to particular asset types, such as affordable housing. Some respondents thought that this would compromise their fiduciary responsibilities to their members or clients since it would (as noted above) reduce overall investor returns. They thought this option would be unlikely to eventuate in the current and foreseeable future. On the other hand, all respondents clearly believed that it was in the power of government to move in this direction, if it chose to and was willing to bear the opposition of the financial sector and other interests.

2.9.3 A Short List of Policy Options recommended for Further Analysis The matrix (Table 5) in the following pages details the policy options and assesses the advantages and disadvantages according to the criteria listed in 2.9.1 and the information collected on the current taxation regime (2.7.3) and from the targeted investor survey (2.9.2). It is proposed that Stage 3 of this project analyse the advantages and disadvantages of each of these options in a more detailed way. The relevant parts of Table 5 (especially the advantages/disadvantages columns) should be read in conjunction with the summary descriptions of the options, below. The options which are recommended for short listing based on the stated criteria are: 1. Capital provision 1: Option 18: real rate debt, carrying an interest income tax exemption,

raised by either Commonwealth or State Governments, with allocations determined annually by the Commonwealth.

This public borrowing option requires the Commonwealth to subsidise the cost of finance by delivering income taxation benefits to investors, allowing the lower borrowing costs by the SHA to be passed on to tenants in lower rents, while investors receive their required after tax rate of return. The option is simple to implement, tends to minimise total subsidy cost per household housed, can be closely targeted to need and has the potential to generate a large volume of investment. As a financial instrument it clearly meets the existing preferences of institutional investors, as outlined in section 2.9.2, above. However, it is noted in Table 5 that if the Commonwealth issued these securities (and on-lent to the States) then the cost of finance could be reduced further, by around 0.5 per cent. There is provision for the Commonwealth to cap the total cost to Commonwealth revenue (as is the case in the U.S. with the Low Income Housing Tax Credit Scheme). There is also a question as to how management (as opposed to financing) efficiencies can best be achieved. Should management of the dwelling stock and tenancies be left with the SHA, or shifted to community sector agencies via headleasing or commercial managers via out-sourcing?

2. Capital provision 2: Option 7 (modified): real rate debt, raised by either the

Commonwealth or the State Governments, with allocations determined annually by the Commonwealth and subsidies provided from a new Commonwealth outlays program only available for privately owned dwellings.

This variant of option 7 specifies private sector rather than SHA ownership and possibly management of the stock. Commonwealth facilitation is in the form of cash outlays rather than revenue foregone through the taxation system with the advantages and disadvantages similar to option 18.

3. Capital Provision 3: Option 20 (modified): Establishment of a Stock Exchange listed

Company supported as previously outlined. In this example the Commonwealth government would subscribe 20%, 30% would be shareholders funds and 50% borrowed funds. The Commonwealth government’s equity in the vehicle would be discounted to the extent that the asset price appreciation did not reach the cost base plus CPI. The

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dwellings in the vehicle would be valued each year and the underlying share price would reflect any move in property prices that has occurred plus the government support. Any shortfall between the guaranteed dividend payment and the net rentals received would be made up by a government grant or subsidy. Management and Agency Agreements would be developed with each of the State Governments with the proportion of dwellings to be acquired or developed in each State part of an annual Commonwealth/ State agreement. Each year the States would be provided with a summary of the subsidy costs associated with the dwellings located in their State and they would be responsible for the income top-up.

This is a modification of option 20, with the Commonwealth tax concession replaced by a Commonwealth capital guarantee (capped by the size of the Commonwealth’s equity stake).

The results of the investor survey suggest that this option has the potential to meet the requirements and priorities of institutional investors, particularly as it delivers high rated instruments with low volatility characteristics, while satisfying ATO rulings regarding equity investment, raising the likelihood that significant volumes of private investment can be attracted into affordable housing provision.

4. Capital Provision 4: Option 59. The Commonwealth would prescribe a minimum proportion of the assets of designated financial institutions, notably the superannuation funds, be held in ownership of rental dwellings managed by the SHAs (or agents in the community sector). The maximum price to be charged on new investments would be specified annually by the Commonwealth. Return on investment to the institution would depend on current market rent levels, maintenance and management costs. State rent rebates would go to tenants as occurs with public housing. As Table 5 emphasises, the major advantage is that it provides access to a substantial and growing volume of funds for rental housing, giving government the capacity to vary the prescribed ratio over time in the light of changing perceived housing needs and housing stress levels. However, there are also a number of problems, also listed, notably to do with issues of targeting and perverse incentives within the broader financial sector. Targeting problems also have a geographic dimension – given mobility trends, housing needs to be delivered to low income tenants where they are located.

5. Home Loans 1: Option 62 and 65: Provision of a new outlays based subsidy program

directed at subsidizing repayments and supporting credit and other risks on State developed and managed but privately funded home loan programs targeted to households in housing stress who could afford to purchase. Annual allocations determined by a bi-partite agreement between the Commonwealth and the States.

These options would mark a return to significant State Government involvement in encouraging low income owner occupation. The only difference between the two options is with respect to the type of debt instrument used. The floating rate option means the State Government would bear downside risk if interest rates rose by having to increase subsidies to maintain the affordability benchmark. In the fixed rate option (if no ‘pass-through’ is achieved in the deal structuring) the States would carry the risk of having to reinvest at lower current interest rates when the dwelling changes occupancy (assuming there are no early repayment limitations or significant costs).

6. Home Loans 2, Options 69 and 74: Provision of income tax concessions by the Commonwealth on interest received for loan funds raised to support a program directed at subsidizing repayments and supporting credit and other risks on State developed and managed but privately funded home loan programs targeted to households in housing

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stress who could afford to purchase. In other words, house purchasers pay less than market interest rates for their home loans, since the interest received is tax exempt to the private lenders (bond holders). Annual allocations to be determined by a bi-partite agreement between the Commonwealth and the States.

The differences between the two options is: (1) in 69 debt could be raised by either or both levels of government, compared to just the States in 74 and (11) 69 proposes floating rate debt, while 74 is predicated on fixed rate debt. The relevant comments on fixed versus floating rate debt made above with respect to the first two options (62 and 65) also apply here.

7. Shared Equity: an option based on combining options 18 and 65. The advantages and disadvantages of this mixed option are a combination of those listed against each of those specific options in Table 5.

This option specifies that: • The SHA fund its share of the dwelling by selling real rate debt incorporating a

Commonwealth tax concession to the private lender, and • The low income purchaser takes out a fixed rate mortgage loan to finance the

remaining equity share. A fixed rate instrument is preferred in order to minimise income loss and default risk.

Subsidies are provided both through tax concessions by the Commonwealth (to reduce the cost of SHA borrowing) and as outlays by the State to reduce the mortgage repayment component of the resident’s housing costs to affordable levels. Hence, the resident benefits from both lower than market interest rates on the rental component of the dwelling and lower than market mortgage repayment rates on his or her equity share. However, it should be noted that this option does have the further disadvantage of relying on the coordination of two subsidy schemes.

8. Direct Assistance 1: Option 94: Provision of a Commonwealth tax exemption on net rents

received by private suppliers of low cost housing to households in housing related stress referred by State Governments. Rents charged are also subsidised as necessary by augmentation by State government of the current Commonwealth Rent Assistance Program.

Dwellings would be owned by private landlords or investors. As Table 5 indicates, subsidy costs will be high relative to some of the other options and there may be problems of ensuring that the output – i.e. houses renting at moderate levels – are accessed by lower income households. As with all rent assistance or entitlement subsidies, there is a risk to government of fiscal blow-out.

9. Direct Assistance 2: Option 121: This option, utilising a prescribed assets ratio, is similar

to 59 (see point 4, above). This option would simply entail a new rent assistance program targeted to non-pension and beneficiary households experiencing housing related stress.

In most cases the total level of government support necessary to meet both the required rates of return of private investors and the affordability benchmark will mean that outlay subsidies delivered by the States will be required to ‘top up’ the other form of support provided. For example, in option 20, the Commonwealth capital guarantee will normally not be sufficient by itself to meet investor return requirements. In such cases cash outlays will need to be paid by the states to ensure the required dividend is met. Of course, the ultimate source of this outlay subsidy could be the Commonwealth. However, given the current Federal nature of division of

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powers and the fact that the delivery mechanisms other than direct assistance are the responsibility of the States, these outlay subsidies will be managed by the States. This factor has been reflected in the construction of Table 5. In summary, this short list gives a total of eleven policy options, drawn from Table 5, to be closely analysed and compared in Stage 3 of this project. A final note on Table 5: since shared equity options are combinations of capital provision and home loan delivery mechanisms, they have not been separately listed. Shared equity options are characterised by the particular mix chosen and their advantages and disadvantages can be read off the relevant options listed in Table 5 under the two primary delivery mechanisms (capital provision and home loans).

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TABLE 5: MATRIX OF POLICY OPTIONS Support Type Raised By Delivery Mechanism

Commonwealth State Financing Type

Com’wealth State Advantages Disadvantages

1



Outlays Outlays Float. Rate Debt Either Either



• Subsidy costs higher than real rate option

• Greater financial risks than real rate option

2



Outlays Float. Rate Debt Yes No

• As Above • As in 1 • Not as flexible as State

based outcomes. • Commonwealth do not

directly fund capital for housing

• Conflict with CSHA

3 Cap. Prov. Of

Dwelling, Gov’t Management

Outlays Float. Rate Debt No Yes

• As in 1 • Flexible for States • No Conflict with CSHA



4 Cap. Prov. Of


Outlays Outlays Fixed Rate Debt Either Either • As In 1 • As In 1


5



Outlays Fixed Rate Debt Yes No

• As in 1 • As in 1 • Not as flexible as State



• Conflict with CSHA • Significant reinvestment

risk

6








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TABLE 5: MATRIX OF POLICY OPTIONS (continued)




7



Outlays Outlays Real Rate Debt Either Either



• Funding costs still significantly higher than net revenues

• Dwelling price CPI mismatch risk

8



Outlays Real Rate Debt Yes No





9 Cap. Prov. Of


Outlays Real Rate Debt No Yes • As in 7 • Flexible for States • No conflict with CSHA



10



Tax Conc. Income Outlays Float. Rate Debt Either Either


providers • Compatible • Safe and secure • High volume • 2% cheaper funding

cost than 1

• Subsidy costs higher than real rate option with same concession

• Greater financial risks than real rate option.

• Precedent for other safety net services

• Distort investment decisions

11



Tax Conc. Income Float. Rate Debt Yes No

• As in 10 • Control concession cost

• As In 10 • Not as flexible as State




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12 Cap. Prov. Of


Tax Conc. Income Outlays Float. Rate Debt No Yes

• As in 10 • Flexible for States • No conflict with CSHA



13 Cap. Prov. Of


Tax Conc. Income Outlays Fixed Rate Debt Either Either • As in 10 • As in 10


14



Tax Conc. Income Outlays Fixed Rate Debt Yes No

• As In 10 • As in 10 • Not as flexible as State

based outcomes. • Commonwealth do no

directly fund • Conflict with CSHA • Significant reinvestment

risk

15



Tax Conc. Income Outlays Fixed Rate Debt No Yes





16



Tax Conc. Income Outlays Real Rate Debt Either Either


providers • Compatible • Safe and secure • High volume • Likely lowest subsidy

cost of debt options


• Dwelling price CPI mismatch risk

17



Tax Conc. Income Outlays Real Rate Debt Yes No



directly fund • Conflict with CSHA

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18 Cap. Prov. Of


Tax Conc. Income Outlays Real Rate Debt No Yes



higher than if Com’wealth funded

19



Tax Conc. Income Outlays Company Either Either



• More complex than other arrangements

• Requires management agreement with SHA’s

• Higher aggregate funding cost

• Will probably require gov’t capital injection

• Higher capital risk to Government than debt options

20



Tax Conc. Income Outlays Company Yes No

• As in 19

• Not as flexible as State based outcomes.

• Commonwealth do no directly fund


21



Tax Conc. Income Outlays Company No Yes


providers • Compatible

• As in 19 • Lower volume • Problem of market

acceptance of six State companies

22 Cap. Prov. Of


Tax Conc. Income Outlays Property Trust Either Either



• As in 19 • Low volume

23



Tax Conc. Income Outlays Property Trust Yes No

• As In 21 • As in 19 • Inflexible • Com’wealth do no


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24



Tax Conc. Income Outlays Property Trust No Yes






• Will probably require gov’t capital injection

• Higher capital risk to Government than debt options

• Lower volume • Problem of market

acceptance of six State Trusts

25



Tax Conc. Income Outlays Direct Invest. Either Either

• Flexible Structure • Likely to be highest cost • Most complex • Not replicable in all

contexts • Possibility of access

and compatibility problems

• Possibility of fraud • Targeting a problem • Very high transaction

costs • Low volume • Will probably require

gov’t capital injection • Higher capital risk to

Government than debt options

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26

Capital Provision Of Dwelling, Government Management

Tax Conc. Income Direct Invest. Yes No

• As in 25 • As in 25 • Inflexible • Com’wealth do no


27


Tax Conc. Income Outlays Direct Invest. No Yes

• As in 25 • As in 25 • Lower volume • Problem of market

acceptance of different deals.

• Problem of variable cost structures between States where uniformity of assistance amount per household may be required

28 to 39


Tax Conc. Capital -

-Real Rate Debt –Company, Property

Trust and Direct Invest

- -

• Same as 16 – 27 • Same as 16 to 27 • Higher cost of funds

40 to 48


Tax Conc. Capital Income Guarantee

Company, Property Trust and Direct

Invest - -

• Same as 18 – 27 • Slightly lower price than

28-39 • Better credit quality

• Same as 18 – 27 • Greater risk to

government than 28-39

49 to 57


Tax Conc. Capital Capital Guarantee

Company, Property Trust, and Direct

Invest - - • Same as 18 – 27

• Better credit quality

• Same as 18 – 27 • Slightly higher price

than 40 to 48 • Greater risk to


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58

Capital Provision of Dwelling, Government Management

N/A Planning Levy N/A No Yes

• No direct cost to government

• Not replicable in all contexts

• Possibility of access and compatibility problems

• Possibility of fraud • Targeting a problem • Lowest volume

59

Capital Provision of Dwelling, Government Management

Prescrib. Assets Reg. Outlays Direct Invest. Yes No

• Guarantees volume of Funds


• Possibility of fraud • Targeting could be a

problem • Could give rise to

differential performance results for Super Funds

• May result in transfer of funds to other investments such as Insurance, Bonds, Managed Funds

• Allocation between States a procedural problem

• Need to impose a price to be paid – how establish?

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60 Home Loans Outlays Outlays Float. Rate Debt Either Either



• Interest rate risk– greater repayment support than fixed rate option


61 Home Loans Outlays Float. Rate Debt Yes No





62 Home Loans Outlays Float. Rate Debt No Yes




63 Home Loans Outlays Outlays Fixed Rate Debt Either Either • As In 60 • Significant reinvestment risk

64 Home Loans Outlays Fixed Rate Debt Yes No

• As in 60 • Not as flexible as State based outcomes.

• Commonwealth do not directly fund capital for housing

• Conflict with CSHA • Significant reinvestment

risk

65 Home Loans Outlays Fixed Rate Debt No Yes


• Subsidy costs 0.5% higher than if Commonwealth funded


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66 Home Loans Outlays Outlays Real Rate Debt Either Either



• Funding costs significantly higher than net revenues

• Income growth/CPI mismatch risk –higher default risk than Fixed Rate option

67 Home Loans Outlays Real Rate Debt Yes No





68 Home Loans Outlays Real Rate Debt No Yes • As in 66 • Flexible for States • No conflict with CSHA



69 Home Loans Tax Conc. Income Outlays Float. Rate Debt Either Either



• Interest rate risk– greater repayment support than fixed rate option


• 2% lower cost than 61-69

70 Home Loans Tax Conc. Income Outlays Float. Rate Debt Yes No





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71 Home Loans Tax Conc. Income Outlays Float. Rate Debt No Yes




72 Home Loans Tax Conc. Income Outlays Fixed Rate Debt Either Either



• Significant reinvestment risk – need ‘passthrough’

73 Home Loans Tax Conc. Income Outlays Fixed Rate Debt Yes No



directly fund • Conflict with CSHA • Significant reinvestment

risk

74 Home Loans Tax Conc. Income Outlays Fixed Rate Debt No Yes





75 Home Loans Tax Conc. Income Outlays Real Rate Debt Either Either




• Income growth/CPI mismatch risk –higher default risk than Fixed Rate option

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76 Home Loans Tax Conc. Income Outlays Real Rate Debt Yes No




77 Home Loans Tax Conc. Income Outlays Real Rate Debt No Yes



higher than if Com’wealth funded

78 Home Loans Tax Conc. Income Outlays Direct Invest. Either Either





costs • Low volume

79 Home Loans Tax Conc. Income Outlays Direct Invest. Yes No



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80 Home Loans Tax Conc. Income Outlays Direct Invest. No Yes


acceptance • Problem of variable cost

structures between States where uniformity of assistance amount per household may be required

81 to 84

Home Loans Tax Conc. Income Income Guarantee Direct Invest - -

• Same as 78-80 • Slightly lower price than


• Same as 78-80 • Greater risk to


85 Home Loans Prescrib. Assets Reg. Outlays Direct Invest. Yes No

• Guarantees volume of Funds


• Possibility of fraud • Targeting could be a

problem • Could give rise to

differential performance results for Super Funds

• May result in transfer of funds to other investments such as Insurance, Bonds, Managed Funds

• Allocation between States a procedural problem

• Need to impose a price to be paid – how establish?

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Support Type Raised By Delivery Mechanism

Commonwealth State Financing Type

Com’wealth State Advantages Disadvantages

86 Rent

Assistance Tax Conc. Income Outlays Company Either Either






87 Rent

Assistance Tax Conc. Income Outlays Company Yes No

• As in 86

• Not as flexible as State based outcomes.

• Commonwealth do no directly fund

88 Rent

Assistance Tax Conc. Income Outlays Company No Yes



• As in 86 • Lower volume • Problem of market

acceptance of six State companies

89 Rent

Assistance Tax Conc. Income Outlays Property Trust Either Either



• As in 86 • Low volume

90 Rent

Assistance Tax Conc. Income Outlays Property Trust Yes No

• As In 86 • As in 86 • Inflexible • Com’wealth do no

directly fund

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91 Rent

Assistance Tax Conc. Income Outlays Property Trust No Yes






• Lower volume • Problem of market

acceptance of six State Trusts

92 Rent

Assistance Tax Conc. Income Outlays Direct Invest. Either Either





costs • Low volume

93 Rent

Assistance Tax Conc. Income Direct Invest. Yes No


directly fund

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94 Rent Assistance Tax Conc. Income Outlays Direct Invest. No Yes


acceptance of different deals.

• Problem of variable cost structures between States where uniformity of assistance amount per household may be required

95 to

103 Rent Assistance Tax Conc. Capital -

-Real Rate Debt –Company, Property

Trust and Direct Invest

- -

• Same as 86-92 • Same as 86-92 • Higher cost of funds

104 to 112

Rent Assistance Tax Conc. Capital Income Guarantee

Company, Property Trust and Direct

Invest - -

• Same as 95-103 • Slightly lower price than


• Same as 95-103 • Greater risk to


113 to 120

Rent Assistance Tax Conc. Capital Capital Guarantee

Company, Property Trust, and Direct

Invest - - • Same as 95-103

• Better credit quality

• Same as 95-103 • Slightly higher price

than 104-112 • Greater risk to


121 Rent Assistance Prescrib. Assets Reg. Outlays Direct Invest. Yes No • Guarantees volume of

Funds • As outlined in 59

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2.10 How the Options Would Be Operationalised Each of the nine preferred option sets listed in the preceding section would require a specific implementation procedure. For example, for those options dependent on debt financing, the main steps in operationalising them are: 2.10.1 The Commonwealth analyses the potential gearing for each State based upon the

following criteria:

• the cheapest priced funding instrument is to be used by the Commonwealth or State;

• establishment costs for the assumed financing structure (underwriting, trust administration, legal and marketing, production) are calculated at industry norms;

• housing costs structures applying to each State’s public housing are used to assess the housing cost base (i.e. acquisition and transaction costs, maintenance rates and administration);

• ad-hoc repayments of principal are permitted: i.e. no reinvestment risk is calculated; • principal repayments are provided for from realisation of the assets at the end of the

transaction, say 25 years; • dwelling appreciation is calculated at the prevailing real rate average applying to

each metropolitan area for the last twenty five years; • tenant income and repayments are assessed as the top of the bottom income

quintile and at 25% of income, indexed to CPI; • potential subsidy is calculated for each year and a present value assessed

according to the weighted average of the public authority discount rates for all States;

• the net tax take and before and after tax subsidy is established; and • a gearing ratio is established by the Commonwealth.

2.10.2 An annual Commonwealth allocation of funds is determined for each State based on the

current CSHA formula. 2.10.3 These funds are offered to each state for the provision of affordable housing based

upon the gearing ratios (determined as outlined in 2.10.1) and the establishment of an appropriate affordable housing trust structure. The Structure is to legally quarantine the funds to support the subsidy payments for affordable housing, such that funds cannot be removed from the Trust (except for the payment of subsidies and operating expenses), until the winding up of the transaction (although funds could be put in).

2.10.4 States may add their own funds to cover additional risks or a more expensive pricing

structure, including ownership of the dwellings in the private sector. That is, if the States wish to own the dwellings at the end of the, say, 25 year period, they will need to commit their own funds towards purchase.

2.10.5 Either the Commonwealth or the State raises funds, the State establishes the delivery

mechanism and determines management arrangements in conjunction with the private or community sectors.

2.10.6 As assisted tenants voluntarily vacate, private tenants may be inserted in each

transaction, permitting flexibility of asset disposal, and limiting the refinancing risk for the residual assisted tenants at the end of the transaction. These decisions are at the States’ discretion. Each year, or period, assisted tenants are simply incorporated in a new transaction (it works like a revolving fund).

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Chapter 3 Conclusion

This Report has provided an initial assessment of the range of possible mechanisms for the stimulation of private sector finance for affordable housing. The paper has aimed to cover the full range of delivery, support and funding options and subject them to an evaluation against criteria outlined in section 2.9.1.

The primary purpose of this Report has therefore been to establish a short-list of options that will warrant further investigation in detail in the next and final stage of the project.

This report presents a framework for deriving a well-grounded list of preferred options or ‘policy packages’. The Stage 1 report to this study established that significant barriers currently exist to expanding investment in affordable housing, especially in relation to the major institutions. Some form of government support is necessary to bridge the gap between actual and required rates of return to private investors (by raising net returns or reducing risk or both). The framework presented here distinguishes the ways in which different forms of government support can be delivered and combined with the alternative forms of private financing to expand affordable housing supply in Australia. An exhaustive matrix of the various combinations of delivery mechanism, government support and financing option has been derived – and presented in Table 5, above. Although it would be possible to go on multiplying options by modifying one or more of the options in Table 5, little of practical use would be achieved. For our purposes, the universe of possible ‘policy packages’ -- combinations of delivery mechanism, government support measure and financing option -- is encapsulated in Table 5, which provides the platform for deriving a smaller sub-set of options that deliver substantial advantages and minimal disadvantages in terms of the criteria applied.

A set of eleven policy options has been proposed, based on the criteria stated in section 2.9.1. This list was derived by a qualitative evaluation of each potential option in terms of the balance of advantages and disadvantages identified, the aim being to select options that offered maximum advantage and minimum disadvantage against the stated evaluation criteria. These judgments were based on the analysis of risks, taxation impacts and investor responsiveness detailed in chapter 2. It is – to repeat -- particularly important to choose options that have the potential to deliver a large volume of new private investment to this sector in ways which minimise the costs to government and maximise the access of households in housing stress to affordable housing.

The eleven options are reproduced in Table 6, below.

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Table 6: Summary of ‘Preferred’ Policy Options




18



Taxation Concession

(income) Outlays Real Rate Debt No Yes


provs. • Compatible/ Safe &

secure • High volume • Likely lowest subsidy

cost of debt options • Flexible for States • No conflict with CSHA

• Funding costs still higher than net revenues

• Dwelling price/CPI mismatch risk


7*



Outlays Outlays Real Rate Debt Yes No



• Not as flexible as state based approaches

• Com’wealth do not directly fund

• Conflicts with CSHA

20*



Taxation Concession

(income) Outlays Float. Rate Debt No Yes





59



Prescribed Assets Ratio Outlays Direct investment Yes No



• Possibility of fraud • Targeting a problem • Differential

performance of super. Funds

• May encourage switch away of savings



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62 Home Loans Outlays Float.Rate Debt No Yes






65

Home Loans Outlays Fixed rate debt No Yes


providers • Compatible • Safe and secure • High volume • Flexible for States • No confict with CSHA




Concession (income)

Outlays Float. Rate Debt Either Either





• 2% lower cost of finance than options 60 to 68


Concession (income)

Outlays Fixed rate debt No Yes


providers • Compatible • Safe and secure • High volume • Flexible for States • No conflict with CSHA



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18/ 65

Shared Equity

Taxation Concession (income)/

Home Loans


• Mix of advantages list against options 18 and 65

• Mix of disadvantages list against options 18 and 65

94

Direct (e.g. rent)

Assistance

Taxation Concession

(income)

Outlays Direct investment No Yes

• Flexible structure

• High cost to govt. • Complex & not

replicable in all contexts

• Possible access & compatibility problems

• Targting a problem (& possibly fraud)

• High transaction costs • Variable subsidy

require-ments between States

• Problem of market acceptance of individual deals

121 Direct (e.g.

rent) Assistance

Prescribed assets ratio Outlays Direct investment Yes No



• Possibility of fraud • Targeting a problem • Could encourage

differential performance of super. Funds

• May encourage switch of savings to other investment types



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Tables 5 and 6 illustrate that support approaches by way of taxation subsidies, guarantees and a prescribed assets ratio are primarily focused on action by the Commonwealth. Conversely, in most cases where outlay support will be required, the States will need to provide it – or, given the Federal structure within which the delivery mechanisms operate, manage the distribution of these outlays. Outlays will often be required in addition to the other forms of support because the delivery of taxation concessions or guarantees (say) may not reduce the rate of return required to investors to a level consistent with affordable housing outcomes for low income households. In short, the States may need to pay ‘top up’ subsidies in addition, in order to ensure that the housing provided does not cost low income households more than 30 per cent of their incomes. The source of these outlays can either be the States, the Commonwealth or both levels of government, the latter two possibilities involving bilateral agreement between the Commonwealth and the States.

The Next Report (Stage 3) The next Report will involve analysing the costs and benefits of the short list of policy measures identified in this Report, with a view to presenting a coherent and well-grounded case for policy change to the Commonwealth, and where appropriate to state and territory governments, and calls to industry for a change of direction.

In addition, the Report will provide recommendations for policy change to the Consortium. This stage will involve the following:

¾�identifying and ranking the short list of possible mechanisms; and

¾�evaluating these mechanisms using the balanced scorecard approach.

The Balanced Scorecard The balanced scorecard will be used to assess the short-list of options.

The balanced scorecard is designed to result in a transparent, flexible and multi-disciplined evaluation of the measures with respect to the identified criteria, while ensuring that the views of all interested parties are taken into consideration in the analysis. That is, the balanced scorecard provides a means of ensuring that all considerations are taken into account while helping to balance and take into account competing objectives. The balanced scorecard also ensures that both qualitative and quantitative factors are taken into account in the assessment.

The balanced scorecards works as follows:

First, each option is given a qualitative score that depends on its effects on the variables of interest. A simple version would be to assign a score of 1,0 or –1 depending on whether the effect was ‘good’, ‘moderate’ or ‘bad’.

This immediately raises the issue of what is mean by a ‘good’, ‘moderate’ or ‘bad’ effect. The advantage of this approach is that such judgments would be transparent.

Second, each variable would be assigned a relative weight, depending on its relative importance in making an overall policy judgment. Again, such a method would have the advantage of transparency. Moreover, the robustness of the methodology for choosing a financing option could be easily checked by changing the weights for each variable, or indeed changing the criteria for judging whether a change to a variable caused by a particular scheme was ‘significant’ or not.

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The Criteria Ideally the criteria to be adopted in the next Report will be designed to undertake a detailed assessment of the short list of options. The criteria adopted in the next Report will not necessarily precisely mirror the criteria used to devise the short list in this Report, although it is likely that some of the criterion will be adopted.

The criteria for the next stage of the project will contain a broad range of variables which will focus on the practical implementation of the options (including economic, social and political considerations) as opposed to purely technical considerations related to the options. Once the criteria is determined, weighting of the criteria will be assigned. Generally, via such weightings, it is recognised that final objectives are inherently more important than intermediate objectives.

By using this balanced scorecard approach, the team of consultants will rank the short list of options from ‘most preferred’ to ‘least preferred’.

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Appendix 1: Institutional Investor Questionnaire

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OUESTIONNAIRE FOR INSTITUTIONAL INVESTORS

Question Answer a) Has any fund which your organisation manages ever invested in Residential Property.

…..Yes …...No

b) Can you provide a best estimate of the exposure to residential property as a percentage of investments for the portfolios under your control.

….. Less than 10% … ..10-20% ……20-30% ……30-50% ……more than 50%

c) What was the relationship between investments in residential mortgage product and equity investments in residential property Under each category include indirect investments. ie. where you invest in mortgage securities include such investments in residential mortgage product category.

……% Mortgage Product …….% Equity Investments

d) Are you aware of any equity residential product which you could buy for your fund which you would consider acceptable.

…..Yes …...No

e).Do you consider that you know enough about the performance of the residential market to make an investment decision about where, when and what type of property to invest in.

…..Yes …...No

f) Using your knowledge and judgement can you rank in order of return over the last 10 years. the following asset groups.

….…Average residential property returns across all Australian Capital Cities

….…Average commercial property returns across all Australian Capital Cities

…….The Bond Market …….The Capital Indexed Bond Market …….The Australian Stock Exchange

g) We have identified a number of issues which may cause investors to have a negative view about an equity investment in residential property. Can you rank these issues and add any other issues you consider relevant.

…….Perceived potential for adverse publicity

…….Small unit size. …….High Government cost structure …….High management cost requirement …….The high potential for government

manipulation of the asset sector given its political importance

…….Other

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h) Can you rank in order of priority the key issues which you consider when making an investment.

…….Profit Potential …….Credit Risk …….Investment Term …….Liquidity …….Ongoing Management …….Cost …….Legal Simplicity …….Asset Category Exposure …….Credit Risk Limit …….Exposure …….Community Social Issues …….Community Environ. Issues …….Negative Publicity …….Positive Publicity …….Other (Specify)………………….

i) Do you invest in Capital Indexed securities …….Yes ….….No

j) What percentage of total assets under management are invested in Capital Indexed Securities

……..%

k) If you are investing in a new market instrument with limited liquidity what is the preferred investment term.

…….1 year …….2 to 3 years …….4 to 6 years …….7 to 12 years …….13 to 16 years …….16 years plus

1) If you were to make a direct investment in a vehicle which owned residential property what investment term would you consider appropriate.

…….years

m) In real return terms what would you consider to be an acceptable rate of return for residential assets. That is, what real rate return attribute would the asset have to have to cause you to consider making an investment. Assume the risk is "AAA" and the security is a simple bond.

…….% for Federal Government paper …….% for State Government paper

n) Do you make investments in structured finance arrangements such as equity partnerships. If yes, then what margin generally do you require above the returns provided in m) above to compensate for the following factors:

…….% Documentation complexity …….% Illiquidity …….% Taxation risks i.e. Tax rate and

changing tax legislation …….% Unique Cash Flow Structure

i.e. irregular cash flows …….% Use of tax shelter where shelter

used is significant o) Do you make investments in unlisted trust vehicles. If yes, then what margin do you generally require above the return provided in n) above to compensate for the following factors:

…….% Documentation complexity …….% Illiquidity …….% Taxation risks where

indemnities provided …….% Taxation risks where no

indemnities provided …….% Unique Cash Flow Structure

i.e. irregular cash flows

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p) What taxation risks will you generally accept. a. Changing Tax Rates…….Yes/No b. Changing Depreciation

Rates……Yes/No c. Changes to Tax Legislation …….

Yes/No d. Changes to CGT tax calculations

…….Yes/No q) Is there a limitation on the volume of investments you could make in either of the following and can you describe this limitation.

Partnership …….Yes/No $ or % of funds limit……

Trust …….Yes/No $ or % of funds limit……

r) Do you believe financial institutions should make equity investments in Housing

…….Yes ….….No

s) Do you believe, that provided the risks and returns are acceptable that financial institutions should make equity investments in Social Housing

…….Yes ….….No

t) Can you identify the risks which you believe need to be provided for to allow a financial institution to make an investment in Social Housing

a)………………………………. b) ………………………………. c) ………………………………. d) ………………………………. e) ……………………………….

u) Would you accept Capital Risk for an investment in Social Housing, if income returns were guaranteed and an appropriate premium was available.

…….Yes ….….No

v) What do you consider an appropriate premium …….% w) Would you accept Income Risk for an investment in Social Housing, if capital returns were guaranteed and an appropriate premium was available.

…….Yes ….….No

x) What do you consider an appropriate premium …….% y) Would you accept Income and Capital Risk for an investment in Social Housing, if an appropriate premium was available.

…….Yes ….….No

z) What do you consider an appropriate premium …….% aa) Would you invest in a Bond linked to a housing index provided it was properly constructed.

…….Yes ….….No If Yes what volume would you consider as an upper limit for exposure $…….

ab) Do you believe an index for each city or a single national average housing index would be appropriate.

A national average Housing Index …….Yes ….….No An Index for each City …….Yes ….….No

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ac) Would you invest in a bond providing a capital guarantee, i.e. principal indexed to CPI, which qualified as an equity investment?

…….Yes ….….No

ad) What discount in the yield to debt instruments would you be prepared to accept?

…….%

ae) Would you invest in a listed stock market company of residential property where the government would subscribe 20%, 30% would be shareholder funds and 50% borrowed funds? The government’s equity in the vehicle would be discounted to the extent that the asset price appreciation did not reach the cost base plus CPI. The dwellings in the vehicle would be valued each year and the underlying share price would reflect any move in property prices that has occurred plus the government support. Any shortfall between the guaranteed dividend payment and the net rentals received would be made up by a government subsidy.

…….Yes ….….No

af) In ae) is 20% asset support sufficient? If no, what do you think the market would require as asset support?.

…….Yes ….….No ……..%

ag) In ae) what guaranteed dividend would be necessary?

…….%

ah) In ae) could the dwellings acquired have national coverage or would it be necessary to restrict the portfolio to specific locations and regions (e.g. Sydney and Melbourne)?

…….national coverage ….….geographically restricted

ai) Would you invest in a listed property trust of residential property where the government would subscribe 20%, 30% would be shareholder funds and 50% borrowed funds? The government’s equity in the vehicle would be discounted to the extent that the asset price appreciation did not reach the cost base plus CPI. The dwellings in the vehicle would be valued each year and the underlying share price would reflect any move in property prices that has occurred plus the government support. Any shortfall between the guaranteed dividend payment and the net rentals received would be made up by a government subsidy.

…….Yes ….….No

aj) In ai) is 20% asset support sufficient? If no, what do you think the market would require as asset support?.

…….Yes ….….No ……...%

ak) In ai) what guaranteed dividend would be necessary?

…….% p.a.

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al) What investment information on residential property would assist you to make an investment and consider additional investments in housing?

am) How often should this information be provided to the market?

policy options for stimulating private sector investment in … · 2015. 9. 30. · 1 m. berry and...

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