Unaffordable housing: costing Australia $677 million each year

For some Australians, unaffordable housing means making difficult choices between the number of daily meals they eat, thermal comfort, medical treatment, or even being housed at all. While the impact of these choices directly affects individuals’ health and wellbeing, having a large percentage of the population in housing stress also has broader negative impacts at a societal level on the national economy and public finances. These societal impacts are the unseen consequences of an unaffordable housing system. Improving housing affordability can therefore also improve broader societal outcomes.

There is a powerful economic rationale for scaling up public investment support for low-income housing construction and solutions. The economic scale of the societal impact, along with the additional asset value that additional housing generates, could be used to overcome the upfront equity gap that is a significant barrier to increasing the supply of low-income housing.

A lack of affordable housing options for low-income households

Low-income housing models can include both social housing (rents charged as a percentage of income), and affordable housing (rents charged as a percentage of market rents).

The impact of housing costs typically depend on a household’s income. In this research, the focus was on low-income Australian households with a weekly gross income below $481 (lowest income quintile) [1]. For low-income households in housing stress there is a shortage in Australia of nearly 440,000 dwellings. This shortage is expected to increase by 66% to 730,000 dwellings by 2036 [2].

Our research shows that the broader negative impacts on the national economy and public finances from the affordable housing shortage amounts to at least $677 million per annum in 2020, and exceeding $1 billion per annum by 2036. These negative impacts are evident in additional health expenditure by all levels of government, in additional justice system costs, reduced household consumption, mental health impacts, overcrowding, reduced educational outcomes, and reduced wellbeing for low-income households [3].

To calculate the negative impacts on the national economy and public finances the research draws from existing evidence on:

• The monetary cost, benefit or wellbeing impacts per individual associated with homelessness, health and justice system expenditure, net societal consumption, mental health impacts, educational achievement and wellbeing [4].
• Estimates of how many people would actually experience an improvement as a result of accessing affordable housing (referred to as the 'incidence of beneficiaries') [4]. Not everyone who obtains access to affordable housing will necessarily experience improved health conditions, education outcomes or financial stresses, therefore estimates of the number of likely beneficiaries is central to calculating national and public finance impacts.
• A profile of people who would live in the affordable housing based on recent priority allocations of social and affordable housing [3]. The social and economic impacts of accessing affordable and appropriate housing is generated through impacts on people.

Notably, additional benefits, such as the asset value represented by new housing, is not included in these estimates. Moreover, the evidence base on foregone economic benefits remains under-developed in relation to transition to employment, design and construction standards, and access to green infrastructure.

The cost of unaffordable housing is a national as well as local problem. The economic impact is greatest in the most populous areas, often larger cities. However, it is also evident across the Northern Territory, which has high rates of overcrowding and risk of homelessness [5], and much of the Australian east coast.

What this demonstrates is that tackling the widespread and systemic shortage of affordable housing will require concerted, coordinated and ongoing investment support across federal, state and local governments.

Affordable housing as social infrastructure

Social and affordable housing can be classified as critical social infrastructure: ‘facilities, spaces and networks that support the quality of life and wellbeing of our communities[…] helps us to be happy, safe and healthy, to learn, and to enjoy life’ [6].

Housing is unaffordable for a number of reasons, but at discounted (affordable) rents the construction finance of new dwellings typically suffers from an upfront equity gap, 30% for affordable housing and 60% for social housing [6][7]. The equity gap is the difference between the financial resources that affordable housing providers have access to, including borrowing based on the revenue that affordable housing generates, and the total equity cost of constructing new affordable housing. Addressing this equity gap, rather than the full equity cost, provides a means of promoting a variety of affordable housing business models, including community housing, to scale up affordable housing solutions.

Positioning affordable housing as social infrastructure generates four key insights for why scaling-up equity-gap investment support and innovation for social and affordable housing is warranted.

Insight 1: Investment in social and affordable housing reduces other expenditures, which benefits all Australians

There is persuasive evidence that housing people experiencing homelessness results in reduced health and emergency services use. On average, health-related cost savings per annum per homeless person housed range from $2,000 (where the individual receives basic homelessness support services) to $14,500 (where the individual also receives customised specialist support).

In a similar way, access to affordable and appropriate housing generates societal level benefits for other groups of individuals – those fleeing domestic violence, those experiencing financial stress, those experiencing tenure insecurity, and those with mental health challenges. For each of these, research again finds compelling evidence that accessing affordable and appropriate housing reduces cost to society as a whole [4].

Figure 1 compares the annual societal costs of the affordable housing shortage to the annual capital expenditure on existing social housing in each Australian state [11]. For each of the two most populous states, the societal costs amounts to some 50 per cent of current capital expenditure on social housing, substantially more in WA.

Housing construction is not inexpensive. However, combined with the additional asset value created by new affordable housing stock, the avoidance of negative impacts on the national economy and public finances creates a powerful argument for developing equity-gap investment support mechanisms to expand the construction of affordable housing to low-income households. By targeting the equity-gap, rather than the full equity cost, affordable housing models can become financially viable as going concerns.

Insight 2: Investment in social and affordable housing can empower residents to support themselves

Access to affordable, appropriate and secure housing is shown to positively affect mental health and wellbeing of households [8][9]. For some households, these effects translate into reduced personal medical expenditures. Moreover, rents set as a discount to market levels (e.g. affordable rental properties), or social rent (set as a proportion of income), has a measurable impact on an individual’s ability to pay for other necessities – large proportions of low-income households forego other forms of consumption (groceries, medical and family/leisure activities) to pay for rents [10]. Overall, improved household finances empowers residents to support themselves

Insight 3: Investment in social and affordable housing can enhance wellbeing

Wellbeing Values are used in the UK and other OECD countries for measuring social impact. These are estimates that calculate the monetary equivalent of peoples’ wellbeing or happiness due to, in the case of housing, safety, security and stability. In Australia the Australian Social Values Bank (ASVB) uses this methodology and some of these values are included in our estimates with the generous permission of the ASVB.

Insight 4: Investment in social and affordable housing can serve to unlock targeted and additional support

The estimates in Map 1 and Figure 1 focus on the societal costs that the ongoing affordable housing shortage creates in Australia. The societal cost is estimated as the direct effect of unaffordable housing. However, many social and affordable housing providers also provide a series of additional services and support to their tenants that deliver further educational, jobs-readiness, parenting, health and wellbeing outcomes. These are not captured in the above benefits estimates, since they are a function of what the housing provider does as opposed to the impact of affordable and appropriate housing per se. Nevertheless, they illustrate the significant potential that social and affordable housing provision has for delivering societal benefits beyond the accommodation-related benefit.

In combination with the asset value that new affordable housing construction delivers, the ongoing economic and societal drain – $677 million per annum – provides a powerful rationale for concerted and coordinated public policy measures, at all levels of government, for equity-gap investment support and innovation in financing new affordable rental housing construction. Building housing is of course not cheap and after years of COVID spending, public finances in Australia are stretched. However, like all good infrastructure investment, affordable and appropriate housing investment generates returns that benefit all Australians. Investing in social and affordable housing is thus an investment in the infrastructure that Australia requires for a productive and resilient 21st century.