Scrapping NRAS: Should the affordability scheme continue?
The National Rental Affordability Scheme (NRAS) is again under fire. Does it deserve to be scrapped?
Earlier this month, The Australian published a series of pieces drawing attention to developments that are marketing properties as “NRAS supported” while suggesting that they can accommodate international students. The News Limited articles largely suggest that the scheme’s failures are largely the fault of the previous Labor government, highlighting one development that had received $80 million in subsidies which, as is mentioned in more than one article, is located “just two blocks” from the electoral office of former housing minister Tanya Plibersek, who oversaw the implementation of the scheme.
However, the Tenants Union of New South Wales (TUNSW) responded in defence of the scheme with a post on their blog claiming that while the NRAS has provided affordable housing for tenants, some of whom had previously been homeless, the government’s “other tax settings do nothing but encourage speculation and make housing unaffordable.”
The scheme certainly seems to illicit passionate reactions from its defenders and detractors alike. Buyers’ agent Todd Hunter once wrote “I’d rather stick a fork in my eye than buy an NRAS property”, prompting a number of responses in defence of the NRAS from our readers. Many have raised questions over the scheme’s regulations (and loopholes) – some are calling for the NRAS to be scrapped, while bodies such as SQM Research and the Urban Development Institute of Australia (UDIA) support the scheme but say it requires improvements.
Under the NRAS, developers and investors are provided a tax free financial incentive for renting out approved properties to eligible tenants at at least 20% below current market rates. Developers receive subsidies, while investors who purchase and lease out NRAS supported properties receive annual payments that are indexed to CPI. The scheme only covers new developments in areas in which the government has identified a need for affordable housing.
To weigh up the costs and benefits of the NRAS, first one must distinguish the interested parties: tenants, buyers and developers.
For tenants
To rent NRAS properties, the first adult of household must earn no more than $45,956, with each additional adult earning no more than $17,579. This threshold is higher for sole parents, who must earn no more than $48,336 a year to be eligible. However, concern is mounting that the rental affordability scheme is being utilised by students, rather than low income families or workers. While it’s true that students require affordable housing just like everyone else, some have claimed that a significant proportion of students who lease NRAS properties are international students. These students are often subsidised by their family members, and are not the intended recipients of reduced rents, so the argument goes. Queensland thus far is the only state to restrict access to NRAS properties to tenants who are permanent Australian residents.
Market analyst Catherine Cashmore says there are doubts over whether the scheme is achieving its intended outcomes.
“The NRAS policy was design to alleviate the shortage of rental accommodation for key workers in the community through large scale investment, and to a fairly limited degree, it has achieved its purpose,” says Cashmore.
“However, unsurprisingly, as Grace Mutual Limited outline in their senate submission, not only have ‘unduly complex’ regulations disadvantaged investors, but ‘large numbers of NRAS incentives (at least 4,000) were awarded for the construction of student housing,’ yet ‘there appears little evidence that this has any positive impact on the middle to low-income families that were the target of the original policy.’”
The TUNSW has come out swinging for the NRAS, as has the UDIA, who say that scheme, while requiring improvements, is “fundamentally sound”.
UDIA national president Cameron Shephard says the scheme is integral in improving the supply of affordable housing.
“Australia has for many years suffered from a severe shortage of affordable housing, particularly at the lower end of the market,” said Shephard in a statement from the UDIA.
“This is contributing to homelessness, and putting an increasing number of lower and moderate income households under undue financial strain.
“It’s absolutely essential for the Federal government take action to improve the supply of affordable housing, and the National Rental Affordability scheme provides a cost effective way to achieve that.
“In its 2011 State of Supply report, the National Housing Supply Council estimated that there was a national shortage of almost half a million dwellings affordable to low income households, and warned that the situation would worsen with inaction.
“Since its establishment in 2008, NRAS has delivered 14,575 new homes for low and moderate income households, and is currently on track to provide 23,884 more,” Shephard noted.
“It would be extremely disappointing to see the scheme end, considering how successful it has been to date, and also given the growing housing affordability problems facing Australian cities.
“UDIA acknowledges that there is room for improvement in the administration of the scheme, however the program has been successful in delivering thousands of affordable new homes, and the government’s focus should be on ensuring that what is already a good scheme becomes even better.”
For buyers and developers
Given the substantial subsidies developers can receive for NRAS eligible projects, developers in general are likely to benefit from the NRAS scheme, so long as market conditions and financial incentives are strong enough to support demand from investors. The response to NRAS properties from investors and buyers agents thus far has been mixed.
As Cashmore notes, some buyers of NRAS properties have been “duped” into bad investments.
“Like every other scheme that's introduced to encourage investment into housing, it has been monopolised by a proportion of 'advisors' in sales industry who have built a model of business around encouraging small 'mum and dad' investors into poor acquisitions which hold little scope of the 'promise' they were sold with – significantly, the ability to achieve strong capital growth,” says Cashmore.
“In my own experience, buyers who were duped into the scheme paid too much for pre-assigned dwellings, which are now valued below the nominal amount, and are locked into a scheme where they are unable to sell prior to the ten year nominated period - or if they do, they must find a 'greater fool' willing to take on what was, in most cases, a poor investment in the first place.”
As with any property purchase, buyers of NRAS properties must go into their deals with clear eyes – many experts have noted that NRAS supported properties may be overvalued, given high kickbacks for spruikers. Others argue that NRAS properties make sense for investors after good cash flow, not for capital gain potential.
However, whether the NRAS is continued or scrapped should ultimately come down to whether the scheme achieves its intended outcome – providing affordable housing at a reasonable public cost. As Mark Armstrong and Xavier Perronnet have argued, the scheme is intended to address housing affordability, not benefit investors.
For Cashmore, on this account, the NRAS does not go far enough.
“As all who read my columns are aware, I am one of the strongest advocates for policy reform to enable Australia to move away from its hamstrung dependence on ever increasing house prices as the prime driver of economic growth.
"But the NRAS scheme is simply tinkering at the edges of what needs to be wide spread and radical policy reform, on both the tax and supply side - as I and others, such as Prosper Australia, have addressed in our submissions to the Senate housing affordability enquiry.
"Until this is achieved, the NRAS will make little impact for future generations of disillusioned Australians wanting affordable housing and good options without becoming a 30 year slave to servicing a dual income mortgage.”
