Show me the money: Government’s social housing reform risks being all talk without funding

The following commentary is provided by Dr Richard Norman, senior lecturer in Victoria University of Wellington’s School of Management, and Bernard Teahan, a former chief executive of Trust House Ltd.

Wellington housing

Recently, the Salvation Army announced it would not be purchasing state homes from the Government to become a major social housing landlord. According to its social housing spokesperson Major Campbell Roberts, the charity organisation lacked the “expertise, infrastructure and resources to successfully manage any social housing transfer of size”.

The announcement is a knock for the Government and its goal to shift some social housing from state-owned Housing New Zealand into the hands of community housing providers such as the Salvation Army.

Perhaps the greatest difficulty for Government to overcome is the overinflated value of the housing stock on its balance sheet – it is truly the elephant in the room in any negotiations.

Housing New Zealand (HNZ) currently owns or manages 68,700 rental units, compared with about 5000 in the community sector. In 2013, the Government announced its intention to increase the community’s share to 15,000 homes by 2020 as a way of focussing HNZ’s role to providing more meaningful support to a smaller pool of high needs tenants.

We supervised student research during the summer of 2013-14 that investigated the challenges for Government and community providers in growing community housing.

The research shows while the Government’s target is not impossible, it can be achieved only if it offers community providers substantial financial assistance.

One major concession would be selling HNZ homes to community housing providers at less than 40 per cent of their balance sheet valuation.

Social housing is, unsurprisingly, not a highly profitable business.  Returns on providing below market value rental accommodation is already low to non-existent, because that is its nature. Additionally, tenants have a wide range of support needs.

The experience of organisation Trust House illustrates the financial challenges social housing providers face. In 1999, Trust House bought 541 houses from the Government at arm’s length negotiation of 40 per cent of the valuation by Quotable Value’s valuation.

By 2014, Trust House’s housing estate was valued at $52 million, five times the 1999 purchase price, but its ability to draw a profit remains limited.

Even with occupancy rates averaging 95-98 per cent, Trust House’s operational return on investment has been almost non-existent.

It’s a similar story for Wellington Housing Trust. This trust, now Dwell Housing Trust, currently owns 27 houses, and manages a further 10 properties, which are rented at 70 per cent or less of market value.

Dwell has received financial assistance from central government in the form of low interest rate loans and a one-off grant.

Dwell has a modest trading profit for the 2014 financial year. But if an interest rate was applied, even at the most secure low cost mortgage, the trust would not be financially viable.

Despite both Trust House and Dwell indicating a desire to grow their housing portfolios, their aspirations are tempered by the financial realities. The current chief executive of Trust House believes it could comfortably manage 2000 houses, Dwell aspires to run 500 – but it is difficult to see this eventuating without Government concessions.

From these examples, we can deduce the Government’s social housing reform will remain nothing but political rhetoric unless it provides substantial financial support for community housing providers.

It needs to budget for major support through a significant write-down of its housing stock, of at least 40 per cent. And even then, social housing landlords should not expect the investments to be overly profitable.

Failure to offer such support will see more community providers follow the Salvation Army’s path and reject the Government’s invitation to have a greater stake in social housing.

Or worse, they will face similar challenges as HNZ, and become overburdened by the financial reality of helping those in the community who need it most.