The wolves are out and I wouldn’t give the wounded NRAS scheme much chance. It’s a puzzle as to why it’s so difficult to bring housing supply to the market in Australia, but until it’s solved, prices will keep on increasing.
The Australian has had a few pieces over the past few days sinking the boot into the former ALP government and the limping National Rental Affordability Scheme (NRAS).
You can almost hear the glee as they trash the scheme, trash the ministers, trash K-Rudd. Does anyone take The Australian seriously anymore? They seem to take a pretty liberal approach to media bias.
But while their ‘news’ coverage reads more like an op-ed, the op-ed is right. NRAS is a mess. It’s become a massive rort, and most importantly it’s failed to bring substantial supply to a supply-constrained housing market.
The basic idea wasn’t bad – provide subsidies to developers of housing that would be rented to “low- and middle-income households at a rate that is at least 20 per cent below the market value rent”.
At a cost of $4.5 billion it was a major piece of policy, one of Labor’s flagships, and it gave us the impression that the government was on to it and doing something about Australia’s “affordability crisis.”
But the devil is, as always, in the detail, and the details aren’t pretty.
At first I welcomed the change in focus. Until then, most public policy responses to the ‘affordability crisis’ were to give the poor folks more spending power – like working rent assistance into welfare payments.
The trouble with this of course is that the money you pay out in rental assistance just becomes more demand in the market. And if the reason why rents are so high in the first place is because demand is outstripping supply, adding more demand to the equation won’t solve anything. You’ll only push rents up further.
The poor end up exactly in the same position, rents are higher, and all you’ve done is execute a massive transfer of tax-payer funds to landlords via poor renters.
The same can be said about the first home-owner grants.
So you can’t fix demand-supply imbalances with more demand. You’ve got to think about the supply side too.
So that’s why the shift in emphasis embodied in NRAS was a good thing. As the policy stated, the aim of NRAS was to “stimulate the construction of 50,000 high-quality homes and apartments, providing affordable private rental properties for Australians and their families”
They recognised that they needed to bring more affordable housing to the market. And that they needed to get the developers on board.
Trouble is, you generally can’t trust developers as far as you can throw them, so you need to get the rules and regulations in place. This is where the real ‘art’ of government comes in, and where the Rudd-Gillard government, like in so many other areas, just didn’t come up with the goods.
And the trouble seemed to be with the definition of dwelling. According to the legislation:
An NRAS dwelling must be self-contained. It must be demonstrated that a tenant, or tenants, would be able to live independently within the dwelling and not need to access external or common facilities.
But that sets up the situation where, in the eyes of NRAS, a shoe-box with a kitchenette and a bucket is the same as three-bedroom house. And because the subsidy attaches to the dwelling, developers get the same subsidy for each.
So you can see where the incentive lies – forget about houses, build as many shoeboxes as you can.
But who wants to live in a shoebox?
… students.
Particularly foreign students.
And this is the rort that The Australian has uncovered. Australian universities have won thousands of NRAS grants and are filling them with fee-paying international students.
The Australian singles out a giant 823-bed development in the heart of Sydney, right next to the rail-way station. They’ve received $80 million in government grants, and their promotional material puts a lot of emphasis on ‘international students’ and how the project is “NRAS-advantaged”.
The Australian goes on to cite an un-named construction industry insider, who was “uncomfortable that it did not meet the original intent of the policy.”
In general, I am not adverse to government incentives being used to encourage developers to provide a certain type of product that the market needs; however, NRAS in this case provides very little benefit to its target market and is predominantly benefiting the developer — at a cost to the taxpayer.
(Seriously? Where’d they find such a self-righteous developer? I’m always a bit suspicious of these ‘unnamed sources’ that tow the paper line so perfectly.)
But it’s not a good look. NRAS was set up to help firefighters and nurses live where they wanted to, not help international students (with wealthy parents) live in the inner-city.
The Australian’s attack dogs are on to it, and with a bipartisan consensus that everything the Rudd-Gillard government did was a disaster, nobody’s going to try and step in and save it.
So my bet would be that once it reaches its 50,000 target, the scheme will be scrapped – if not sooner.
And Australia loses one of the few (albeit flawed) serious policy attempts to fix the undersupply of housing in Australia.
And with the housing market in recovery, interest rates low, and price expectations soaring, demand is only going from strength to strength.
So if you’re worried about affordability now, just wait 5 years.
My hope is that the government will take the time to get supply policy right, rather than relying on knee-jerk responses to media ‘crises’.
But I’m not holding my breath.
Daniel says
It is not all bad thing about NRAS. I’ve got a NRAS property in Ballarat. My tenant paid 20% less rant than the market value. And I got the incentive from the Federal and State government. My tenant would have been struggle to pay the rent if it is not 20% cheaper. So, I don’t think it failed in this case.
Patrick says
NRAS meant to supply subsidised housing to nurses and firefighters? Nurses and firefighters are among the highest paid workers, typically $60 to 100K (100K not unusual).
Danny says
The Problem is ,while your tenant is subsidised rent ie: cheaper rent , they have no incentive to save or be responsible for their living standards & continue to live beyond their means
Andy says
Where do you get off Danny, saying the tenant continues to live beyond their means. So you prefer living on the street? This has probably given the tenant a chance to save some money, dignity and given them their self respect back.
Mickey says
so you have to agreed that it is a great scheme for the rich with incomes of 100k + a year they can literally buy 6-7 of these and reduce their tax to 0.
Peter says
You want to fix the supply side then get councils to stop wasting 40000 man years in forcing developers to wait for approval. 40000 man years wasted is 40000 manyyears of interist that the private industry and the final customer has to pay so that developers can maintain the same margin.
Adam says
Long time reader, first time poster. Really enjoy your blog even if I don’t always totally agree with you.
I have 3 NRAS properties and would dearly like more but have run out of equity for now. Personally I think it is a great scheme that is win-win. Cheaper rent for people who(except the occasional rorter) really need it and an incentive to the developer/investor to bring new stock to the market. The fact some people or institutions rort it doesn’t mean the policy itself is flawed.
@Danny – just because someone is getting subsidized rent, it does not automatically follow that they continue to live beyond their means and don’t save anything. Your assertion is nothing but your own unsupported opinion. It is just as likely that by getting cheaper rent they are able to put some money away and are better off for it.
Susie says
Unfortunately, there are people like me who are in need of affordable housing however, even some of the listed prices were at market rate and not affordable unless you’d like to live in one of the many self-storage units available. Beware the multi-billion dollar boarding house black market. I’ve seen them.
Flynn De Freitas says
Jon, doesn’t it follow that if thousands of students are in shoeboxes that they are not in the general rental market (albeit, 8 students to a house)? This then reduces demand in the open rental market, meaning prices do not rise as much or fall – therefore having a ripple effect to nurses and firefighters and other ‘Aussie battlers’?
Your post also seems to imply that the university building developers somehow ‘pocket’ the $10k tax free NRAS incentive, which is not the case – the end buyer of the student accommodation (whether this is the university buying in bulk from the developer or a normal property investor) receives the 10 year annual incentive.
NRAS has been a wonderful tool for developers to build developments, as NRAS H&L or apartment packages sell so well getting them their presales hurdles. This all brings new supply into the market and either directly (eg, H&L packages, apartments) or indirectly (eg, student accommodation removing students for the general rental market) applies downward pressure on rental prices.
Naturally NRAS best suits cheap product (as the incentive paid to the end buyer is the same, therefore lower priced product have better yields), so this is why there is a lot of student accommodation (though I am not sure if investors can actually buy NRAS student accommodation, I think it is the uni’s pocketing the incentive).
And what’s wrong with this – more fee paying students means universities are better funded and less reliant on government (ie, tax payer) funding. The cost of the $10k incentive would be outweighed by its multiplier effect – firstly in creating construction jobs, profit for developers, contributions for councils etc and the secondly ongoing through uni fees, uni jobs, stimulation to the retail economy, tourism from families visiting their children etc. Thirdly, some uni’s are getting the actual incentive meaning over 10 years (when you build 800+) you nearly fully pay for the student accommodation.
Potentially there is a bit of xenophobia here (sorry, “please explain”) against ‘foreign’ students and class envy (‘rich’ parents).
As several investors have posted, investors are generally quite happy with their NRAS investments. No comments yet about people saying they were sold a lemon when they bought an NRAS investment.
john smith says
I attended a couple of investment meetings when the NRAS proposal was announced, by an incompetent government that was incapeable of implementing a home insulation programme. Incapeable of implementing a school hall building programme. Incapeable of doing anything worthwhile really, and all at the stupid taxpayers expense.
A government incapeable of implementing anything, let alone the massive complexity of administering of a policy of renting out a property and administering its occupants. Another case of Labour mismanagement and incompetence.. What a joke !!!! Johnny Smith Cairns
Philip Parsons says
The primary problem is affordability of suitable land. Governments (both state and local) should earmark suitable crown land holdings and offer them to developers on a joint venture basis. That way they can remain as stakeholders and sell them to investors on the condition that the tenancy complies with the NRAS guidlines and the developer takes his percentage of profit without having to pay for the land. Land is freed up which reduces demand on outer suburbs and no one has to worry about devilish developers being paid financial incentives. There would be less red tape as the joint venture would cover multi unit developments in one action rather than dealing with the lot on an individual basis. In simple terms I see this approach as a win win situation for all.
Andy says
i’m an NRAS tenant. I’m also a single mother of a 5yr old. I had to move out of my previous rental property due to domestic issues. I found my property the a not for profit agency and thus was given a 30% rent reduction which allowed me to move closer to my parents and has allowed me to save money aswell. I live in a 3 bedroom ensuite bathroom house with a courtyard. Close to my son’s school, shops and playgrounds. I hit the jackpot, Thankyou NRAS
michaelsloantsiMichael Sloan says
Great article and well written, but to me the Australian missed the major part of the story, forget about students living in these places what about the poor investors who bought them. Thousands of people trying to improve their life invested in these apartment on the advice of so called wealth creators and now own a terrible investment property.
Michael Sloan
External property advisor to NAB
The Man says
Go SouFFS