Government subsidies for housing .
The Government at present is subsidising the Community Housing Providers for their operating costs rental subsidies and building of Affordable Housing. (See Session 31)
A company like Housing Choice gets a $80M per year subsidy which is fair enough because without that they would go broke.
The government is also subsidising First Home Buyers to make life easier to get a roof over their head.
How effective are those subsidies ?
The Housing and Rental Crisis can only be solved if we build more houses and reduce the price of those houses or their rent.
Government is very good in subsidising the medicine but not curing the disease.
Rarely are subsidies solving a long term problem. Politically they are popular.
To analyse property investment it is useful to use a rule that the rent per week in dollars should equal the value of the property in thousands of dollar. A $300,000 property should have a rent of $300/week and a $520,000 property should have a rent of $520/week.
This is a gross return of 5.2%.
If for the time being we assume that interest rates are 5.2% then a property investor would break even ( not taken into account running cost of the building) as the rent would cover the interest paid.
This is what a not-for-profit organization would do.
It also shows in the latter case that 1% of interest change is $100 per week in rent.
On a $300,000 property it would make a change of $60 per week.
Let us assume that a developer wants to build long term rental accommodation and has to borrow the full amount .
Affordable Rental accommodation is not a profitable business .The developer is in a risky business and a bank, aided and abetted by APRA will charge the developer at least 2% more thereby forcing the developer to increase rents by $200 per week. Add running cost and the developer has to charge $800/week just to break even.
Hardly affordable rent.
The developer is still determined to build long term rental accommodation but the only way that is possible if the government subsidises the interest rate. If the developer could get a long term loan at the same interest as a Government Bond (4.4%) he could reduce the rent by $300/week.
The developer would have to go into a 20 year agreement not to sell the property and that rents will not increase by more than CPI.
Now a developer will at least consider building long term rental accommodation. At present it is impossible unless he is prepared to lose a lot of money.
Subsidising interest rates will solve a large part of the Rental crisis.
Is it not better to subsidise the developer or builder who is prepared to build affordable rental housing than the ineffective subsidies to Community Housing Provers or first home buyer.
Subsidies to a first home buyer will only increase demand and increase prices. It does not build a single house.