Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 186

Bond markets to help affordable housing crisis

Affordable housing plays an important role in the welfare of lower income households. Yet spiralling house prices in recent years and the limited supply of quality affordable housing is placing significant pressure on these households.

The affordable housing problem needs urgent attention. In 2013-14, approximately 31% (2.7 million) of Australian households were in the rental market. Around 47% (1.3 million) of these were classified as lower income households (ABS). According to the Productivity Commission, in June 2015 there were about 190,000 households on the waiting list for social housing, of which about 66,000 were deemed to be of ‘greatest need’. Social housing costs state and federal budgets more than $10 billion per year.

A major step forward in addressing affordable housing supply recently occurred when the federal and state treasurers agreed to the recommendations of the Affordable Housing Working Group (AHWG) at the Council on Federal Financial Relations (CFFR).

Alternative financing models

The AHWG was charged with investigating innovative financing models aimed at improving the supply of affordable housing, with a particular focus on models that attract private and institutional investment at scale into affordable housing. The AHWG canvassed four possible innovative finance models:

  • a housing bond aggregator (see below)
  • a housing trust
  • housing co-operatives
  • social impact investing bonds.

The AHWG took 78 submissions from interested parties including community housing providers, banks and welfare agencies, the majority of which advocated a housing bond aggregator as a priority.

It’s not surprising then that their key recommendation was the establishment of a financial intermediary to aggregate the borrowing requirements of affordable housing providers and issue bonds on their behalf (the bond aggregator model). The AHWG argues that the bond aggregator model “offers the best chance of facilitating institutional investment into affordable housing at scale, subject to the provision of additional government funding.”

By providing cheaper and longer-term finance for community and affordable housing providers, the AHWG believes this model has several benefits:

  • it enables affordable housing providers to refinance their existing borrowings and finance new developments at lower cost and longer tenor
  • it creates a market for private affordable housing investment that both normalises and expands capital flows to the industry
  • it best addresses the barriers of return and liquidity by providing an instrument that is understood by sophisticated investors as a fixed income investment
  • due to its financial profile, it can be easily traded in a secondary market and would be seen as an attractive low-risk financial product.

The UK offers a template

The bond aggregator model has been successfully implemented in the United Kingdom. The Housing Finance Corporation (THFC) has, for more than 30 years, been on-lending predominately long-term debt, obtained from bond issues (public issuance and private placements) and bank loans including funding from the European Investment Bank to over 150 individual housing associations throughout the UK.

THFC has an ‘A’ credit rating from Standard and Poor’s and a total loan book of more than £4.2 billion.

How would a housing bond aggregator operate?

A housing bond aggregator model requires the establishment of a specialist financing intermediary, whose function would be to liaise with affordable housing providers to determine the amount of debt they are seeking to raise. The intermediary, or entity acting on its behalf, would then source these funds in aggregate from wholesale markets by issuing bonds to investors. The funds generated would then be loaned to the relevant housing providers in return for ongoing interest payments (Figure 1).

Figure 1: A Housing Bond Aggregator Model

Source: Affordable Housing Working Group

The design of any bond issued to finance affordable housing will be critical. The AHWG identifies four key items that would need to be decided upon:

  • the type of bond and its coupon payment (fixed or indexed to inflation)
  • the term of the bond (between 25 and 40 years would best match the lifespan of housing investments, however Australia has traditionally had a much shorter tenor bond market)
  • the loan to valuation or interest coverage ratios used for lending purposes
  • whether any government guarantee is provided, as well as which level of government issues the guarantee, the size of the guarantee and whether it is transitional or ongoing.

Can house bonds have an impact?

The simple answer is yes. How much depends on the demand for credit by affordable housing providers and the appetite of institutional investors. The AHWG estimates that if the bond aggregator simply allows the refinancing of the existing debt of community housing providers (estimated at over $1 billion) at cheaper rates it could result in an increase in their borrowing capacity by over 65% or an additional $765 million. If this amount was to be reinvested into new affordable housing it could fund the construction of up to 2,200 new dwellings, assuming an average dwelling cost of $350,000 and no increased equity requirements.

The AHWG also acknowledges that the bond aggregator can’t solve the affordability problem entirely. It notes the importance of a variety of complementary reforms, including nationally consistent regulation of community housing providers, planning and zoning regulations, and taxation and concessions.

While there is some way to go, the signs are encouraging. The treasurers at CCFR agreed to the establishment of a taskforce to design the exact mechanism and report back to the heads of treasuries by mid-2017.

 

Adrian Harrington is Head of Funds Management at Folkestone and one of the Federal Government’s representatives on the Australian Housing and Urban Research Institute (AHURI).

 

  •   15 December 2016
  •      
  •   

 

Leave a Comment:

RELATED ARTICLES

Institutional investment in affordable housing one step closer

banner

Most viewed in recent weeks

It’s time for LICs to die

A high-profile dividend cut and a prominent fund manager’s apology have reignited a long-running debate. If investors can access similar exposures more cheaply and efficiently elsewhere, what exactly is keeping LICs alive?

Testamentary trusts survived the trust tax. The drafting battle has just begun.

The fight over testamentary trusts looked settled. Then the draft legislation arrived. Hidden in a technical detail is a question that could force many families to rethink wills they thought were already future-proof.

Is it time to bail on Australian stocks?

For generations, Australian investors have backed banks, miners and dividends. But has that loyalty come at a cost? A look at the numbers raises an uncomfortable question about where future returns will come from.

The new capital gains tax trap for your portfolio

Investors have long accepted one portfolio rule without much question. A major tax shift could change that calculation entirely, forcing difficult trade-offs between risk, discipline and an overlooked cost lurking beneath.

How the typical Australian Family could save $844,350 in taxes

The value of a testamentary trust is not determined by wealth alone. Depending on circumstances, it can reduce the tax burden on inherited income, create efficiencies and help build intergenerational wealth.

The housing slide could become a crash

House prices are sliding across Australia, yet the most dangerous ingredient for a housing crash is still missing. If job losses surge amid growing economic risks, today's correction could become a historic property downturn.

Latest Updates

Retirement

The retirement scorecard: how many of these questions can you answer?

From the maths of retirement, estimating spending and picking the right asset allocation to survive a poor decade, here are the questions every retiree – current or future – should be able to answer for themselves.

2026 is not 1999

The US market looks eerily similar to the dot-com era with soaring AI spending and tech giants dominating returns. But one difference separates today’s boom from the dot-com bubble and it could determine what happens next.

Planning

Taxing time for trusts

Trusts are facing a shake-up, but an overhaul may not be necessary. Families can explore restructuring strategies that preserve succession and the asset protection benefits that have made these structures valuable.

Economy

Why the US economy is stronger than you might think

War, inflation and higher rates were expected to derail America. But has the market got it wrong? Three forces are driving the economy beyond expectations, revealing implications for stock prices and portfolio positioning.

Gold

How much trust is in your portfolio?

Everyone talks about diversifying assets. Far fewer think about diversifying trust. As inflation, debt and market assumptions collide, the question is whether portfolios need greater protection from unexpected outcomes.

Retirement

Retirement in reality - 7 months in

Seven months into retirement, I'm still uncovering surprises. This month was spent reflecting on the slow pace of health change, the myth of neatly scheduled part-time work and the unexpected persistence of retirement guilt.

The new geography of technology leadership

The next chapter of technology may not belong to the companies or business models many expect. As the landscape shifts, some opportunities are emerging in places that remain surprisingly overlooked by global markets.

Sponsors

Alliances

  • ASA-Logo-RGB-ActiveGreen-web.png

© 2026 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. To the extent any content is general advice, it has been prepared for clients of Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), without reference to your financial objectives, situation or needs. For more information refer to our Financial Services Guide. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.