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B «743 Notes for Brotherhood of St Laurence presentation to Senate community affair^reference committee Inquiry into housing assistance Monday 4 August 1997 Don Siemon and Mandy Leveratt LIBRARY BROTHERHOOD OF ST. LAURENCE 67 BRUNSWICK STREET FITZROY VICTORIA 3065 Introductions and thank you Three key questions for this inquiry: why should the Commonwealth provide housing assistance? • who needs assistance? what money is required? Why should the Commonwealth provide housing assistance? Housing is a key means to stability for people (eg young homeless, families) and to help them advance their lives. To achieve this we need to: provide or subsidise expenditure deeply to achieve affordability (cf income support) ensure enough people can get it—supply, access ensure people can keep it—security Commonwealth role: not just because of its role in ‘income support’ (states provide all sorts of expenditure support eg education, health subsidies) but Commonwealth has the ability to pay adequate subsidies also can guarantee national outcomes, planning and coordination. Major issue is more resources Public housing is direct provision by government: guarantees cost control (expenditure subsidies go to rent, prices are controlled), direct control over treatment of tenants seen by IC as most efficient and effective. Inquiry into housing assistance: notes for . ... Brotherhood o f St Laurence presentation p:\pohcy\housmg\houspres.not 2258743 ft
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    Notes for Brotherhood of St Laurence presentation to Senate community affair^reference committee

    Inquiry into housing assistance

    Monday 4 August 1997

    Don Siemon and Mandy Leveratt

    LIBRARYBROTHERHOOD OF ST. LAURENCE 67 BRUNSWICK STREET FITZROY VICTORIA 3065

    Introductions and thank you

    Three key questions for this inquiry:

    • why should the Commonwealth provide housing assistance?• who needs assistance?• what money is required?

    Why should the Commonwealth provide housing assistance?

    Housing is a key means to stability for people (eg young homeless, families) and to help them advance their lives. To achieve this we need to:• provide or subsidise expenditure deeply to achieve affordability

    (cf income support)• ensure enough people can get it—supply, access• ensure people can keep it—security

    Commonwealth role:• not just because of its role in ‘income support’ (states provide all

    sorts of expenditure support eg education, health subsidies)• but Commonwealth has the ability to pay adequate subsidies• also can guarantee national outcomes, planning and coordination.

    Major issue is more resources

    Public housing is direct provision by government:• guarantees cost control (expenditure subsidies go to rent, prices

    are controlled),• direct control over treatment of tenants• seen by IC as most efficient and effective.

    Inquiry into housing assistance: notes for . . . .Brotherhood o f St Laurence presentation p:\pohcy\housm g\houspres.not

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  • Presentation to Senate community affairs reference committee on Housing Assistance

    Who needs assistance?

    Current policies assume that private market suited to job seekers and public housing needed only for special needs, older people, emergencies.

    This division mainly reflects rationing of the very few public housing places.

    Targets for public housing should be both those in and outside labour market:

    unstable housing is a barrier to employment and will lead to longer periods outside work (eg young people) public housing location is not a work force barrier for most (particular locations)income testing may be more of a problemreflects stagnation in public housing (no relocation of stock, hard for tenants to move).

    Public tenants not ‘over-subsidised’.

    Horizontal equity—subsidies to home ownership are the correct comparison. Comparisons between tenant tenures misleading— ignores the purpose and long-term efficiency of public housing.

    Rent Assistance to private tenants valuable in short term but not most efficient or effective way of assisting (IC).

    Broader assistance needed if value of this is to be maximised: to assure affordability (rent controls) or expand low-cost supply (tax incentives).

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  • Presentation to Senate community affairs reference committee on Housing Assistance

    What money is required?

    Note the extent of decline in Commonwealth funding—halving of capital grants.

    Despite claims that Government wants to direct assistance to those most in need, have seen reductions in RA (eg to rooming house residents) as well as increase in public sector rents.

    Government roles and responsibility not so much an issue—key thing is to get long-term Commonwealth commitment to support subsidies at reasonable level of access in order to fund additional supply.

    Can be done with off-budget debt financing (Newman).

    Bottom lines for Brotherhood in reform:• low-income public tenants should not see rents rise,• far more people should get access to this level of affordability

    (through public housing),• RA valuable as complementary measure for those left in the

    private rental market.

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  • SENATE INQUIRY INTO HOUSING ASSISTANCE

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    1. INTRODUCTION

    The Brotherhood of St Laurence welcomes this opportunity to contribute to the Senate Inquiry into Housing Assistance.

    Although not a large provider of housing - the Brotherhood’s contribution here is restricted to accommodation for low income older persons such as rooming houses, hostels, nursing homes and some independent living units - the Brotherhood has a long-standing commitment to the achievement of secure, affordable housing for disadvantaged people in our society.

    The Brotherhood was formed during the Depression years. Its early years were therefore spent assisting families affected by unemployment. In the immediate postwar years its attention turned to the plight of low-income people living in rented slum dwellings in the inner urban region of Melbourne. The founder of the Brotherhood, Father Gerard Tucker, in concert with other religious leaders such as Oswald Barnett, was instrumental in the formation of the Victorian Housing Commission and the consequent development of public housing.

    In addition to this direct interest in housing, the Brotherhood has, through its longstanding policy and research unit, produced a number of publications concerned with the issue of housing and housing affordability for low income and disadvantaged people.

    Before addressing some specific Terms of Reference, the Brotherhood believes that an understanding and definition of housing assistance is required as there is little conceptual clarity in the debate as it has been conducted over the last three years since the “housing reform agenda” reared its head.

    2. THE MEANING OF HOUSING ASSISTANCE

    Currently, “housing assistance” in Australia is pursued through two separate systems: Rent Assistance (RA) payable to eligible social security recipients in the private rental sector, and rent rebates, which are sums of money deducted from the notional rents charged to tenants in public housing. These rebates are designed to ensure that low income households (again, commonly, pension and benefit recipients) do not pay more than a designated proportion of their income in rent. The former system is paid through the Federal Department of Social Security, whilst the latter is administered by State Housing Authorities.

    Rent rebates are a form of direct housing assistance because they not only incorporate a specific affordability benchmark - usually set somewhere between 19% and 25% of household income - but they are also tied to housing which is exogenous to the housing market proper. By contrast, because it is capped, RA does not relate significantly to the actual level of rents paid by low-income private tenants. RA

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  • evolved as an extension of income support in recognition of the higher costs private tenants face compared with other social security recipients. It is not designed to produce an affordability outcome.

    The Brotherhood believes that the Senate Inquiry needs to be particularly mindful of this important distinction between income support and direct housing assistance because the former system implicitly assumes minimal governmental responsibility for housing affordability and, indeed, devolves the responsibility for the risks associated with housing upon the individual through the operation of a largely unregulated private rental market. Direct housing assistance, however, only occurs in the public rental sector and has been predicated on the belief that the market will always fail some people (even if only temporarily) and that therefore governments have some responsibility to intervene through a combination of supply-side measures and affordability benchmarks.

    Housing subsidies more generally, are not, however, confined to either public housing or income support. With regard to investment in private rental housing, a sector which is composed primarily of very small investors with only one or two investment properties, governments intervene in market processes in two ways: through negative gearing and through depreciation schedules, of the which the former is arguably the most pertinent.

    A common argument used to explain the continuation of negative gearing for housing investment is by way of reference to the period 1985-87 when the tax was quarantined and there was an apparent drop in investment in this sector. According to this approach, negative gearing represents an essential plank in the policy' of encouraging and fostering the supply of private rental properties. However, Leigh has argued that the re-introduction of negative gearing was followed by the stock market crash just one month later and that, therefore, it is not possible to disentangle the impact of the two events on housing investment activity. (Leigh 1989: 5)

    Australia is somewhat unusual among OECD countries in that investor housing assistance through tax expenditures has not been accompanied by tenant housing assistance through rent controls. Thus tax expenditure measures in the investment market have acted to maximise the income of investors without a corresponding attention to either the issues of quality and affordability for tenants.

    Maximisation of income - or income support - is also evident in the tax treatment of home owners and purchasers. The non-imputation of rent may be regarded as a form of tax expenditure. Much of the assistance to home owners, however, occurs through the absence of capital gains tax on the family home even when a number of transactions may take place which result in significant financial gain to households when they trade their housing investment and to the transmission of inter-generational wealth.

    Again, Australia may be regarded as somewhat unusual here in that it does not make any allowance for low-income or first-time housing purchasers to claim part or all of their mortgage interest against their income tax.

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  • The criteria established by the Industry Commission make it apparent that public housing represents the most effective and efficient means of alleviating housing- related poverty for low income households. Such a conclusion should come as little surprise given that public housing represents both a supply and demand-side subsidy. Other approaches, such as cash payments, vouchers and headleasing each have their various drawbacks although it is noticeable that the major drawbacks are most likely to occur with either cash payments or through housing vouchers/allowances. The current model of Rent Assistance does not address a number of the key criteria for solving housing-related poverty.

    3.2 The equitable distribution of housing assistance with regard to:(i) levels of assistance provided

    In recent discussions over the “housing reform agenda” must has been made of the apparent disparity between the levels of subsidies received by public and private low income tenants. Thus, the argument runs, there are approximately 337,000 public renters who receive rent rebates at an average of $4,000 per annum; on the other hand, about 985,000 private renters receive Rent Assistance at an average subsidy of about $1,600 per annum.

    There are a number of problems with this argument. The first, is the manner in which the subsidy to public renters has been calculated. The $4,000 annual subsidy to public tenants has been constructed on the basis of the rental income the properties would fetch in an open market. What has not been clarified, however, is precisely how such “market” rents have been determined. Thus, it is not known whether this relates to location, quality, size, comparability or any combination of these factors. Such imprecision has not helped in recent debates.

    Second, and perhaps of greater concern, is the manner in which the debate over subsidy levels has been constructed. The choice of a market rent to determine levels of subsidy to public tenants has raised the suggestion that public tenants enjoy an unfair advantage over low-income private tenants, which carries with it the further connotation that such advantage must be diminished.

    The effect of this argument is already being felt within the public housing system in Victoria. The former Department of Planning and Development has been dismantled with the Office of Housing now joining forces with the large Human Services Department. The Human Services Department was itself the result of an amalgamation between the two former departments of Health and Community Services. With the addition of the Office responsible for the delivery of housing services, a quite clear link has been made between public housing and those who are also clients in the health and community services sector - namely, the aged and those with disabilities. Thus, the provision of public housing in Victoria is no longer just restricted to those on low incomes but has, instead, become even more targeted towards those who experience additional disadvantage. In other words, the perceived unfairness of the high subsidy accruing to public tenants will be nullified by restricting access to this tenure to only the most disadvantaged in Victoria. Low-

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  • income households without additional disadvantage will be forced to take their chances in the open market place.

    The third problem with the ‘inequitable subsidy’ argument is that the debate over the respective levels of assistance granted to public and private tenants has served to obscure the least transparent form of assistance, which is that granted to both investors and home owners. Moreover, such assistance is not merely a function of current taxation policies. In the past, home ownership has been actively facilitated by the Commonwealth Government through the Commonwealth State Housing Agreement.

    The renegotiation of the CSHA in 1956 under the auspices of the Menzies Government actively promoted home ownership through the .channelling of CSHA funds into a Home Builders Account. The consequence of this was that almost 30 percent of the funds for home ownership were provided by the Commonwealth Government. Overall, it has been estimated that “36 percent of all new homes and flats completed in Australia between 1945 and 1970 were funded on terms and conditions which made them much cheaper than if they had been produced by the private sector alone”. (Beer 1993: 154)

    More recently, direct assistance has been replaced by indirect assistance through the tax system. The available evidence tends to support the conclusion that this indirect system further advantages the already advantaged, particularly through the absence of capital gains tax on the family home, (ibid: 163)

    Subsidies occur across all housing tenures, thereby achieving some form of-horizontal equity. The subsidies to public housing tenants provide some equivalence to those given to home owners and produce two housing outcomes - housing which is secure and affordable for people who would not otherwise be able to achieve them. With regard to targeting and different levels of assistance, however, there is no evidence of any concerted government effort across all tenures to achieve vertical equity. The Brotherhood believes that this is an issue which requires urgent consideration.

    From the perspective of the Brotherhood, it is clear that an artificial notion of unfairness has been introduced into the debate over the subsidies in order to justify an overall lack of political commitment to the notion of housing affordability and the alleviation of housing-related poverty. The Brotherhood further believes that this justification for the contraction of the public sector (as this is what tighter targeting will result in) represents a cruel abandonment of those in our society who have borne the burden of industry restructuring and consequent high and prolonged levels of unemployment.

    (ii) relative housing outcomes from such assistance

    Supply-side measures in combination with rent rebates have proved to be the most effective and efficient means of alleviating housing-related poverty. To the extent that demand for public housing far outstrips supply, the housing outcomes relative to other sectors have proved to be restricted to those who have been fortunate to gain entry to this form of tenure. This restriction is entirely a legacy of political commitment and

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    governmental manipulation of the housing market and housing desires among the population.

    Home ownership, as we have seen, increased dramatically in the post-war period to become the largest tenure as a consequence of favourable government policies. However, current policies through the taxation system benefit those already within the system rather than those seeking entry into the system. Unfortunately, recent experiments by governments - notably in Queensland and New South Wales - to assist low-income people into home ownership have resulted in extremely poor outcomes for many.

    It is notable that in a number of OECD countries there are policies in place to assist first home buyers such as tax relief on all or part of their interest repayments up to a specified level. Whilst most of these schemes are poorly targeted, in the sense that all in that category gain from such a concession, it may be feasible for a more targeted relief scheme to be developed.

    Housing-related poverty is especially evident among low-income households renting privately. Because Rent Assistance is not directly linked to the actual rents paid by households, this form of assistance does not result in sufficient protection against rent increases. In Victoria, the problems with this form of assistance in terms of outcomes are dramatically exposed by the current state of the private rental market. In the December Quarter 1996 Rental Report, published by the Victorian Department of Human Services, it was reported that the vacancy rate in the private rental market had declined to 1.9% (a good market is considered to require a vacancy rate of around 3%); availability of properties have declined by 20.2% over the previous twelve months and median rents had risen in the metropolitan area by 7.9% over the same period, thereby outpacing rises in wages and benefits by almost 4%.

    Given the benefits which accrue to private investors, it is apparent that this is not the most efficient way of encouraging good housing outcomes for low income households. Neither Rent Assistance as it stands nor negative gearing are explicitly designed to address the question of housing affordability, if they were so structured, it would require governments to exercise a greater degree of cost control than currently (as is the case in delivery of other forms of expenditure support to, for example, nursing homes).

    The notion of rent control induces an emotional response based on the spectre of the long-term sitting tenant and declining property values as a consequence. For example, a number of commentators have pointed to the small size of the private rental sector in Britain as an example of what will happen when some form of rent control is introduced. However, such commentators have tended to ignore the fact that in Britain rent control was not accompanied by any form of tax advantages for landlords and they therefore had a double disincentive not to invest in housing. Nevertheless, the Brotherhood believes that social responsibility on the part of private landlords, in return for the benefits they gain, could be introduced through some notion of a fair rent which, while having regard in part for the market, also takes account of other factors.

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  • The notion that Rent Assistance alone will produce good housing outcomes is deeply misguided and can only lead to further diversion of away from the one sector that does produce good outcomes. The level of uncertainty and risk for governments and the possible increase in private benefits to landlords must outweigh any nominal shortterm gain for tenants themselves. The above suggestion of a contract of social responsibility through fair rents must accompany any reform of the private rental market if housing affordability is to be seriously tackled by governments.

    3.3 The responsibilities of Commonwealth and State Governments in the delivery of housing assistance.

    The Brotherhood of St Laurence is supportive of recent attempts to clarify the respective roles and responsibilities of the various tiers of government. In particular, the more localised nature of state governments - often covering populations less than municipal councils in other countries - makes that tier of government the clear candidate for the delivery of housing services and the co-ordination of tenancy and property management.

    The role of the Commonwealth Government in relation to general housing assistance is somewhat complicated. As we have already seen, Commonwealth involvement takes a number of different forms and measures such as the CSHA have been used for different purposes at different times. However, if housing assistance is assumed to have an explicit reference to housing affordability and the active alleviation of housing-related poverty then the role of the Commonwealth Government must guarantee levels of funding which are devoted to this purpose. Therefore, any proposal for a diminution or cessation of capital funding for public housing to the States under the CSHA would represent a retreat from housing assistance, strictly speaking, by the Commonwealth.

    From the perspectives of equity and efficiency Commonwealth involvement in income support through Rent Assistance and various tax expenditures require urgent attention. This urgency is heightened by the environment of public sector cut-backs in which any housing assistance is to be delivered. Whilst State Housing Authorities are being urged to become more efficient in their use of public hoilsing monies, which has necessitated greater targeting of disadvantaged tenants, the Commonwealth Government has applied neither a similar degree of urgency nor a policy of targeting to the less transparent subsidies to homeowners. This is the principle of vertical equity of which we spoke earlier. This disparity between the two levels of government is all the more glaring given the Commonwealth’s taxation and revenue raising powers compared with those of the States.

    In summary, the Brotherhood supports the arguments of state governments that adequate funding of housing assistance is a Commonwealth responsibility. However, we believe that the Commonwealth should accept responsibility for rent rebates not because these are ‘income support’ and axiomatically Canberra’s business (States often provide free or discounted services on an income-tested basis) but because only the Commonwealth has the capacity and the resources the ensure housing assistance

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  • measures which are designed to alleviate housing-related poverty - which must inevitably include supply-side measures and well as demand-side responses.

    The argument about government roles and income support versus capital grants is a somewhat artificial one. Operational subsidies (to cover the gap between the cost of supplying housing and income-tested rents for all public housing tenants) could be made sufficient to adequately cover the costs of capital servicing and depreciation; if they are not, then supplementary capital grants may be necessary to ensure supply. Current nursing home policies illustrate the risks of simply asserting that the Commonwealth can have only a minor role in providing capital grants.

    The Commonwealth has a further key role to play in the planning of housing resources within a national framework. The Brotherhood contends that housing assistance and other matters related to the housing markets cannot be divorced from either macro- or micro-economic effects. In short, housing is not a stand-alone commodity (despite Australians’ affection for detached properties) but rather is deeply affected by changes in unemployment rates, industry restructuring, industrial relations, financial de-regulation and a host of other social and economic reforms which have been occurring over the last fifteen years.

    4. The value and impact of housing assistance given to the private rental market

    Between 1982 and 1995, Rent Assistance payments rose from $163 million to $1.4 billion, representing an increase in real terms of 366%. (Keating 1995:4) Over the same period of time, waiting lists for public housing doubled in size and Commonwealth contributions declined by approximately 40%. In 1997, there are now around 250,000 people on the waiting lists. Whilst waiting lists are notoriously unreliable indicators of need because people regularly drop off them or their eligibility status alters over the duration, this increased demand for public housing at a time when Rent Assistance has also increased shows the dangers of an excessive reliance on rent assistance in supporting the housing needs of low-income and disadvantaged people.

    Indeed, there are a number of reasons why the private rental market will never be able to meet the needs of these people. Firstly, the private rental market can be very volatile. As mentioned above, the market in metropolitan Melbourne is currently characterised by low vacancy rates and increased rents. This situation firmly tilts all the advantages towards private landlords who are thereby enabled to pick and choose among tenants. Moreover, in a situation of rental scarcity, increases to Rent Assistance will not keep pace with rent increases.

    A second reason why the private rental market in combination with Rent Assistance cannot effectively assist low income people is that Rent Assistance has never been tied to either housing affordability or quality. There are currently no mechanisms in place to ensure that any increases to Rent Assistance are not absorbed by landlords in the form of higher rents and neither are there mechanisms in place to connect the tax

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    advantages to landlords of negative gearing with housing quality or security for tenants.

    Given the high levels of demand that already exist for public housing, any reductions in stock will only exacerbate the private rental market as it stands in a city such as Melbourne. With too many people looking for affordable accommodation, in competition with those for whom affordability is less of a factor, the private rental market will response by adjusting its prices upwards - as it has already done.

    There are a number of ways in which the private rental market could be structured to meet the needs of low-income people. The Brotherhood has already suggested that the rights of negative gearing could be linked to social responsibilities through the establishment of fair rents. However, this solution will not necessarily have any relationship to increased supply.

    Governments will need to intervene directly at the point of construction and development with a variety of schemes if such a thing as a low-cost end of the market is to be created. Such schemes could include a number of tax exemptions, such as land tax, in return for the reservation of low-cost units in particular developments on private land. With regard to land owned by governments, a significant price discount or site brokerage could be offered to developers in return for set quotas of low cost housing. Alternatively, governments, through their ability to borrow funds at concessional rates, could offer private developers these concessional rates in return for specific low-cost housing quotas.

    However, these schemes by themselves will not resolve the problem. As stated earlier, housing cannot be quarantined from other developments. In Melbourne, for example, the construction of major projects such as the Casino has had a detrimental effect upon the availability of low-cost permanent hotel accommodation in the same area of the city. Thus, governments need to be mindful of the flow-on effects of particular decisions they may make in one area.

    3.5 The appropriate mix of income support and supply assistance measures to ensure adequate affordability and supply of housing in the medium and long term for low-income households.

    From the foregoing discussion, it is apparent that the Brotherhood believes that the issue of housing assistance to low-income households cannot be solved by measures which only address one part of the problem and which, furthermore, may cause additional and unforeseen problems further down the track. Accordingly, the Brotherhood recommends that an holistic approach to housing must be adopted which attempts to address both horizontal and vertical equity across the various tenures. Many of those solutions have already been proposed in the above discussion.

    The Senate should be cautious of notions of equalising subsidies between public and private tenants. The last two Federal budgets used such ‘horizontal inequalities’ to justify tighter targeting within Rent Assistance to save money, despite the Government knowing full well that the affected tenants were on very low incomes.

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  • BROTHERHOOD OF ST. LAURENCE67 BRUNSWICK STREETFITZROY The real risk of a move to unify DSS Rent Assistance and rental rebate subsidies is VICTORIA 3065 pUblic tenant subsidies will be reduced with a corresponding increase in poverty.

    As discussed earlier, Rent Assistance alone seems inadequate to the task of ensuring affordability - indeed that has never been its express intention, if affordability is measured by some income and household type benchmark. Yates has estimated that Commonwealth outlays on income support in the form of Rent Assistance would have to increase by between $2 to $3 billion per year if private tenants were to reach the same affordability benchmark as public tenants. (Yates 1996) Even with this huge increase in outlays, there would still be no guarantees that private rental accommodation would not respond to these price signals by raising the level of rents. Therefore the Brotherhood has consistently argued that the priorities for Government spending should be:

    • first and foremost, a significant and sustained expansion of support for public housing;

    • a small increase in Rent Assistance as a short-term measure;• some specific funds for community housing development for special needs groups;

    and• recoupable assistance to enable first-home purchasers entry to home ownership.

    In the medium term, the Brotherhood believes that the Commonwealth would do well to look at its expenditure across all the various housing sectors and should seek to introduce some returns from those who benefit disproportionately - namely home owners and housing investors. Such returns could take the form of a contract of social responsibility, mentioned earlier. Alternatively, tax losses from negative gearing should be quarantined to like income sources, and the exemption from capital gains tax for the family home should be curtailed.

    REFERENCES

    Beer, A. (1993). ‘“ A Dream won, a crisis bom?’ Home Ownership and the Housing Market”, in C. Paris, Housing Australia. Macmillan, Melbourne.

    Department of Human Services. (1996). Rental Report. December Quarter. Office of Housing, Melbourne.

    Industry Commission. (1993). Inquiry into Public Housing. AGPS, Canberra.

    Keating, P. (1995). Community and Nation. AGPS, Canberra.

    Leigh, P. (1989). Investor Activity in Housing. Occasional paper No. 1, Housing Analysis Group. Ministry of Housing and Construction, Melbourne.

    Yates, J. (1996). Federal Housing Policy Directions. Speech delivered at the 1996 RJEIA Conference, Canberra.


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