Crowds of angry protestors, “sit-ins” resulting in police-led evictions, impassioned community representatives and screaming media headlines…State housing reform and sales have long been an emotive issue – and approached gingerly by politicians.

Yet, in January, after months of speculation, the Government announced its social housing reform plans. The programme signals a radical change in direction. It involves both state housing sales and a shift in terms of permitted providers.

In this article, we look at what the Government’s social housing reform programme means and what the planned changes could mean for investors.

What are the Government intentions when it comes to the provision of social housing?

Prime Minister John Key, who famously grew up in a state house, made his government’s social housing plans a centrepiece of his “state of the nation” speech.

Subsequently, the ministers overseeing the process – Bill English and Paula Bennett – elaborated. They say the objectives of the reforms are to:

➤ Ensure people who need housing support can access it and receive social services that meet their needs.

➤ Ensure that social housing is of the right size and configuration, and in the right areas, for those households which need it.

➤ Help social housing tenants achieve independence, as appropriate.

➤ Encourage and develop more diverse ownership of social housing, with more innovation and responsiveness regarding the needs of tenants and communities.

➤ Help increase the supply of affordable housing, especially in Auckland.

So what do the Government’s social housing plans actually involve?

According to English, the Government needs to be open to working with community groups, non-government agencies and the private sector. “The Government doesn’t have a monopoly on good ideas, advice and expertise. But we do have the resources to create better, fairer and more diverse responses to social needs, and that is what we are doing.”

Delving behind the political speak, this means the provision of social housing is being opened up to non-government social housing providers. The headline-grabbing part is the planned sales of some existing statehouses, albeit to community housing providers (CHPs).

Registered CHPs are already involved in providing government-funded social housing. In April 2014, the Government extended the income-related rent subsidy, from Housing New Zealand (HNZ) residents only, to people living in approved CHP properties.

The Government’s reform programme aims to enlarge the role of CHPs in the provision of social housing by encouraging the development of a larger pool of CHPprovided and run properties.

What’s the lowdown on the sale of the state houses?

The Government plans to sell between 1,000 to 2,000 Housing New Zealand properties over the coming year. But the properties sold have to remain as social housing unless the Government agrees otherwise. Also, existing tenants will stay in the properties concerned for the duration of their needs.

If the Government is satisfied with the process, further sales could go ahead. However, the government has committed to maintaining an HNZ portfolio of at least 60,000 properties.

At a briefing, ministers said Government has previously focused on the total number of statehouses rather than whether they are needed, NZPIF executive officer Andrew King says. “They believe they have too many three-bedroom properties, as opposed to one-bedroom properties, and too many properties in provincial areas.”

This government position will affect where the HNZ properties selected for sale are located. While properties in the regions are likely to feature prominently, it is thought some properties in “high demand” areas (ie, Auckland) will be sold too.

The government doesn’t have a monopoly on good ideas, advice and expertise. But we do have the resources to create better, fairer and more diverse responses to social needs, and that is what we are doing. - Bill English

Who can buy the state houses the Government sells?

The HNZ properties that go on sale will be sold only to approved CHPs to be used as social housing. As noted, the properties cannot be onsold. Redevelopment of the properties is allowed – as long as the number of social housing properties does not increase.

CHPs can buy the properties on their own. Alternatively, they can go into partnership with other organisations or groups which can lend them money, contribute equity or provide other services.

But the Government must be satisfied that sales are fair for taxpayers [in terms of the price achieved] and result in better outcomes for tenants and local communities.

What is a community housing provider (CHP)?

CHPs are social housing providers which have been approved by, and registered with, the Community Housing Regulatory Authority (CHRA).

Once registered, they enter into a tenancy services provision contract with the Ministry of Social Development (MSD) and can receive income-related rent subsidies. Providers are then responsible for matching applicants to appropriate properties based on their needs.

There are 38 registered CHPs. They include iwi groups, church groups, disability services providers and organisations like Habitat for Humanity. According to the MSD, CHPs own about 5,000 properties. Of these properties, only about 131 are receiving income-related rental subsidies, which are expected to increase.

For example, ministers have said an initial 300 income-related rent subsidies will be offered to community housing providers in Auckland.

Who can form a CHP? And what is the process involved?

Any social or affordable rental housing provider can apply for registration. In fact, King says English told an NZPIF meeting that anyone can apply to be a registered CHP. This means a private investor or group of investors could apply to be a CHP.
Under the Housing Restructuring and Tenancy Matters (Community Housing Provider) Regulations 2014, applications for registration must include:
➤ Information on the type and functions of the applicant’s organisation.
➤ Evidence that the organisation’s objects include social rental housing or affordable rental housing (eg, in the organisation’s constitution or trust deed).
➤Information on any relevant previously submitted declarations to the CHRA.
➤ Information on the organisation’s registered charity status (if any).
➤ A written declaration from the organisation’s governing body supporting the application.
➤ A written undertaking that the organisation will comply with all of the obligations of a registered community housing provider.
➤ Information on any potential conflict of interest that would affect the applicant’s suitability
➤ Evidence that the organisation has the capacity to meet the performance standards.
➤ An MSD evaluation panel assesses all applications for eligibility, suitability and risk.

What could the reform programme mean for investors?

King said the changes to social housing could have an impact on the entire housing market – although, at this point, it was difficult to see whether the impact would be positive or negative for private rental property owners.

But he says one impact could be the increased access to income-related rental subsidies could prompt CHPs to buy up properties, overdevelop them and then flood the rental market – a negative impact on private landlords.

Several commentators have raised the prospect of CHPs failing as providers. Most obviously, this would impact on the tenants. It could also carry a cost to government and cause supply problems. Further, if the properties are then sold, anyone – including speculators – could buy them, potentially removing them from the social housing pool.

Could directly investing in social housing be an option?

For private investors, direct involvement in social housing is a possibility. This would involve becoming a registered CHP or partnering with a CHP to develop and provide social housing.

Some commentators have noted, however, that the returns earned from such enterprises would have to outweigh the costs involved to make such investment worthwhile.

Further, real estate consultant Peter McDermott cautions that managing houses – let alone homes with potentially problematic tenants – successfully isn’t easy. CHPs need to meet certain criteria to qualify, but the ongoing management of social housing tenancies could prove challenging for some.

McDermott adds that sound financial control and reporting is needed to ensure ongoing solvency and prevent fraud. Multiple legal obligations (eg, Building Act, Residential Tenancies Act, Privacy Act) plus the organisation’s obligations to government will also have to be managed.

Has New Zealand done anything like this before?

State houses have previously been sold, particularly under the National government in the 1990s. But the transfer of some responsibility for social housing from the Government to non-governmental organisations has not been attempted on such a scale.

Previously, the 1990s was the most radical social housing policy when income-related rents were scrapped and the accommodation supplement was introduced. This was intended to make the rental market more equitable. It was not considered a success and Helen Clark’s first Labour-led government scrapped the policy.

They believe they have too many three-bedroom properties, as opposed to one-bedroom properties, and too many properties in provincial areas.- Andrew King

What sort of social housing models are used in other countries?

In the UK, the Government works with private sector landlords to provide social housing. Veteran UK property investor Kevin Green explains: “We cover the capital cost of the buildings and hold them, but the Government has a long lease with local councils, either directly through the council or through private, non-profit making housing associations.”

As social housing in Australia is provided by state governments, a range of different approaches and models have been utilised. However, in recent years, there has been increasing co-operation between state housing departments and non-governmental (not-for-profit) social housing providers.

What does the political opposition think about the government’s plans?

Labour’s housing spokesperson Phil Twyford says Treasury has advised the government that if a community housing provider were to run into financial problems this “could present risks to ongoing tenancies and fiscal risks to the Crown”.

Despite Government assurances that CHPs will not be able to on-sell the houses without permission, he is concerned former state houses could end up in the hands of speculators and private landlords.
“If these groups make poor financial decisions and end up in debt, or the Auckland housing bubble bursts leaving the groups in negative equity, the banks would foreclose, sell the houses and the Government would not have a leg to stand on.”

Some social housing lobbyists have also expressed concern that many potential CHPs would not have the expertise and resources to successfully manage significantly increased social housing responsibilities. King adds that a number of tenant representatives have raised concerns about the Government’s plans.

What happens in the event of a change of government?

Any change in government could see a change in governmental policy, which could result in changes to this government’s social housing programme. For example, a different government could remove control of social housing from non-government providers, which, in turn, could impact on the tenant pool and the rental market.
✱ This article is the first in an ongoing series on the issue of social housing that NZ Property Investor will run over the coming months.