Two big banks shun low-income housing

Two of the big four banks, the Commonwealth and ANZ, still refuse finance for small investors wanting to buy homes through the scheme, which was designed to boost low-income housing across the country.

That lack of interest was revealed in this column last week when it published details of a financial blacklist of "unacceptable" buildings circulated by one of the big four banks late last year, which specifically barred finance for NRAS projects.

Since then Westpac and NAB have changed their policies and begun lending on NRAS developments, joining a small list of second-tier lenders willing to finance the rent-subsidised housing program now entering its fourth year.

NAB changed its policy in January this year and Westpac began lending late last year.

Given their market dominance and access to small-scale private investors, estimated to provide 88 per cent of Melbourne's rental housing stock, the banks' slow response is likely to have had a proportionally large impact on the uptake by investors in the scheme.

NRAS was introduced by the Rudd government in 2008 to tackle the severe shortage of lower-end rental stock by giving investors tax incentives aimed at adding 50,000 new dwellings to the national housing pool by 2015.

The last census showed 330,835 rented homes in Melbourne but the severe rental shortage seen two years ago has eased somewhat as a flood of apartments hit the market.

City vacancy rates are edging above 4 per cent, while Melbourne overall is at a 2.8 per cent, according to SQM Research figures.

But that doesn't reflect more affordable stock, traditionally outside the city centre.

The NRAS homes, when complete, are leased to low-income tenants at 20 per cent below market rents, and on relatively generous terms.

A couple with three children earning up to $98,695 are eligible tenants, and that income can rise to $123,369 before they have to leave the scheme and, presumably, the house.

The sums can add up for investors, too, says Michael Sloan from property group The Successful Investor, but depend heavily on the quality of the consortium and development.

On a typical $400,000 NRAS home, investors can be up to $6000 better off every year once the CPI-indexed, 10-year, federal-and-state-funded tax subsidy ($9524 in the 2011-12 financial year) is included.

"There are few places in Australia with those sort of property returns, apart from mining towns," he says. And they have associated risk of exposure to commodity booms and busts.

The banks' NRAS caution may be in response to other setbacks.

Since its launch three years ago by then housing minister Tanya Plibersek, the scheme has hit some major hurdles.

In 2008, a Tax Office ruling warned non-profit groups their tax status as charities would be "in serious jeopardy" if they took part and the government was left scrambling for a solution.

Then the ATO ruled that individual investors would not be allowed to pocket the tax subsidy that underpins the cheap rental component of the scheme.

Again the government was left to find a hasty fix.

To counter that, amendments were made to the tax act to allow different NRAS consortiums to relinquish their entitlement to a tax offset and instead pass it on to individual investors.

Most recently, Treasurer Wayne Swan's May budget cuts in response to the Queensland floods slashed the number of homes to be built from 50,000 to 35,000, saving the government more than half of the scheme's $623 million allocation.

But the floods may be a smokescreen for the chronically slow delivery of new houses.

So far, only 4178 dwellings with low-income tenants have been delivered across the country.

Up to August this year, another 20,408 national rental incentives for a mix of housing from studios to three-bedroom homes were allocated to various groups.

Victoria has 534 NRAS homes, fewer than NSW (921), Queensland (928), South Australia (666) and the ACT (571), most developed by community housing organisations that target those most in need.

That may be because the scheme has failed to tempt the large-scale institutional investors it was originally designed to attract.

"The superannuation funds in Australia have still been keeping at a very significant arm's length," says Hal Bisset from Affordable Housing Solutions.

That has forced companies like his to look offshore for big investors willing to take on structure-securitised debt to underpin large NRAS investments. "We hope to make a significant announcement soon," he says.

Industry participants say the scheme is building momentum despite the setbacks, investor confusion and public misunderstanding.

But with the original mid-2012 deadline for 35,000 new homes fast approaching, it's unlikely to deliver its full potential. At this pace, it may not meet the government's new target of a similar number of homes by mid-2014.

And that's a pity.

Using institutional and private investment to stimulate low-income housing growth is sound policy and should provide a better outcome than it has for people most in need.

sjohanson@theage.com.au