Australia markets closed

    -83.90 (-1.04%)
  • ASX 200

    -84.20 (-1.08%)

    +0.0022 (+0.33%)
  • OIL

    +0.93 (+1.21%)
  • GOLD

    -2.00 (-0.09%)
  • Bitcoin AUD

    +561.70 (+0.54%)
  • CMC Crypto 200

    -12.50 (-0.85%)

    +0.0005 (+0.08%)

    -0.0005 (-0.04%)
  • NZX 50

    -26.09 (-0.22%)

    +184.96 (+0.99%)
  • FTSE

    -21.64 (-0.26%)
  • Dow Jones

    +4.33 (+0.01%)
  • DAX

    +2.05 (+0.01%)
  • Hang Seng

    -259.77 (-1.38%)
  • NIKKEI 225

    -457.11 (-1.17%)

To fix the housing problem, the government should become a landlord

The housing crisis cannot be resolved by the private sector alone.

Australian Prime Minister Anthony Albanese Treasurer Jim Chalmers, and a foreman on a housing construction site
The Albanese government has a good housing plan bit it won't be enough. (Source: Getty)

The problems in the Australian housing market are not being fixed by the private sector.

Even with very generous tax incentives, there are not enough private-sector landlords offering their properties for rent. Hence the rental shortage and the surge in rents.

At the same time, the private sector is in a cyclical construction slump. High building costs, scarce labour and cumbersome zoning rules are conspiring to see the new supply of dwellings fall well short of structural demand, which is getting additional impetus from the jump in immigration.

House prices are rising at a solid clip as a result.


Also by the Kouk:

Obviously, not enough private-sector construction firms are considering, or indeed, getting the finance for a new project in a climate where the costs are high, the availability of labour remains scare, and when rising interest rates and tighter credit conditions are working against the simple profit-and-loss assessment of whether or not to ramp up new building.

The answer to the rental and house crisis is clearly not solely with the private sector fixing the problem, which is showing up with new dwelling approvals hovering at or near their lowest level in a decade.

The role of the government

The Albanese government is trying to get a package that will fund new public-sector housing construction through the parliament. This is good news and welcome, but it is not enough.

The so-called Housing Australia Future Fund aims to use the investment returns from $10 billion invested by the Future Fund in a range of asset classes, to fund new construction. Assuming a return of around 5 per cent per annum, this will free up around $500 million per annum for the government to build and own social and affordable housing.

Male worker working at construction site on a new housing estate.
The government's plan to build 30,000 new homes will likely fall well short of the quantity needed to ease the pressure on housing. (Source: Getty) (xavierarnau via Getty Images)

The government estimates 30,000 new dwellings will be constructed over five years for these purposes – a good result but it is still likely to fall short of what is needed to ease pressure on the rental market and on house prices more generally.

An alternative

Instead of having the $10 billion invested in stocks, bonds, commercial property, foreign assets and the like, and using the likely 5 per cent investment returns to build new dwellings, why not use the $10 billion to build and accumulate government-owned housing?

The government can be a landlord and rent these houses at subsidised rates to those in need whilst accumulating an asset. It would help to fix a social problem with no cost to the government’s balance sheet.

While the structure of the scheme would need to be negotiated with the state and territory governments - in much the same way the health and education systems are - the federal government would maintain ownership of the properties, collect the rent, and use that rent to build more dwellings.

The federal government and its bureaucracy owns a lot of assets. Commercial property, government bonds, Defence equipment and houses, even gold, among many other things.

Adding a meaningful property portfolio can be done. And it makes economic sense.

Instead of having the Future Fund investing in shares in, say, Facebook and Telstra, or bonds issued by Germany, Japan or China and the like, it could buy and build property, get a return from rent and capital gains and not only address housing affordability, but also accumulate an asset like any landlord.

Let’s say, for example, the rental yield after all costs -including the borrowing costs - is around zero. This is probably a fair assumption given rents, by definition, will be below market rates, there will be maintenance and depreciation costs and the government will have to pay interest on the bonds it issues to fund the program.

This is a decent return given the huge long-run social benefits of such a scheme. It’s better than a missile which has a depreciation rate of 100 per cent as soon as it is shot up into the air.

Let’s also make a perfectly reasonable assumption that the price of houses trends higher over the long run. Like it has in every city, town and region in Australia for a few hundred years.

Over the past 50 years, the average annual increase in Australian house prices has been around 5 per cent.

Using this price growth, the government’s dwelling portfolio of $10 billion today would be valued at $15.6 billion in 10 years and $26 billion in 20 years.

Using an average annual return of just 3 per cent - which is more realistic in a climate where government action will dampen dwelling price growth - the government’s housing portfolio would be valued at $13.5 billion in 10 years and more than $18 billion in 20 years.

The Future Fund or some other body could manage the finances of the project. After all, it owns toll roads and airports and it manages them effectively.

Under the Housing Australia Future Fund scheme, the government’s assets will still be worth just $10 billion in both 10 and 20 years and the stock of new dwellings would be materially lower.

There are many issues to consider. The impact on private rentals, where to build, the cost of construction to name but a few.

But a financially sound strategy of dwelling construction and ownership, with a chunky cash injection rather than relying on uncertain investment returns, might just be an idea worth considering, especially as the pressures on housing continue to build.

Follow Yahoo Finance on Facebook, LinkedIn, Instagram and Twitter, and subscribe to our free daily newsletter.