Housing is fundamental to the welfare of all Australians. From a social perspective it promotes and improves employment, educational and health outcomes. From an economic perspective it is a driver of participation and productivity as well as consumption, investment and savings in the economy.

Recognising the importance of affordable housing, the role it plays in the welfare of lower income households and the current significant housing pressures these households face, the Council on Federal Financial Relations asked the Affordable Housing Working Group (‘the Working Group’) to investigate innovative financing models aimed at improving the supply of affordable housing. The Working Group was asked to focus on models that attract private and institutional investment at scale into affordable housing and to report back to Heads of Treasuries on its findings and recommended next steps.

The Working Group was tasked with looking at affordable rental housing, as distinct from the purchase of affordable housing. While not considered in this report, assisting lower income households with purchasing affordable housing remains an important and ongoing policy challenge, and may benefit from further consideration by governments.

In an Issues Paper, released in February 2016, the Working Group canvassed four possible innovative finance models – a housing bond aggregator, a housing trust, housing co-operatives and social impact investing bonds. Through the paper, the Working Group sought feedback from stakeholders on the merits of the proposed models and to provide opportunities for other models to be considered.

The Working Group has undertaken a comprehensive consultation process that included a public call for submissions, roundtables with stakeholders across the finance, industry and community housing sectors, and a workshop with State and Territory treasuries and housing departments.

Following this consultation, the Working Group has determined that the establishment of a financial intermediary to aggregate the borrowing requirements of affordable housing providers and issue bonds on their behalf (‘the bond aggregator model’) offers the best chance of facilitating institutional investment into affordable housing at scale, subject to the provision of additional government funding. By providing cheaper and longer-term finance for community and affordable housing providers, the model has several potential benefits:

 • It enables providers to refinance their existing borrowings and finance new developments at lower cost and longer tenor.

• It creates a market for private affordable housing investment that both normalises and expands flows of capital to the industry.

• It best addresses the barriers of return and liquidity by providing an instrument that is understood by sophisticated investors as a fixed income investment.

• Due to its financial profile, it can be easily traded in a secondary market and would be seen as an attractive low-risk financial product.

In addition, the bond aggregator model has been successfully implemented in the United Kingdom, where The Housing Finance Corporation was recently able to borrow at rates below that of the Government and in 2014-15 provided over £4 billion in loans to housing associations.

Notwithstanding this finding regarding the bond aggregator model, it is important to note that the housing trust model also attracted significant support in stakeholder consultations and warrants further investigation, particularly due to its ability to provide affordable housing at a significant scale. The other two models considered: housing co-operatives and impact investment models are important funding and delivery mechanisms, but were not capable of generating the required scale of investment.

In conducting is assessment of financing models, the Working Group finds that the major barrier to the supply of affordable housing is the ‘financing gap’ – that is, the difference between the rates of return available in affordable housing compared with the market rates of return available in other private developments. No innovative financing model will close this gap and a sustained increase in the investment by governments is required to stimulate affordable housing production and attract private and institutional investment. A key question for further work is the nature and extent of the gap relative to the desired policy outcomes and how it can be funded most efficiently.

The Report further notes the importance of a variety of complementary reforms, including through nationally consistent regulation of community housing providers, planning and zoning regulations, and taxation and concessions. Reforms in these areas would provide the right environment for innovative financial models to succeed, and strengthen the capacity of governments and community housing providers to increase the supply of affordable housing in an effective way. Without reforms to existing policy settings, the current undersupply of affordable housing is likely to intensify, placing ongoing pressure on the private rental market, community and public housing providers, and government expenditure on housing and other assistance.