Affordable Tenancies for Gungahlin
The Founders of Canberra wanted to stop land speculators from profiting from the development of the National Capital. They also wanted to make Canberra economically self-sufficient and not impose the development burden on the rest of Australia. Many were followers of Henry George, who in Progress and Poverty (1879) described the idea that wealth generated by people living and working together remained within the local community and was used to develop infrastructure.
The article Canberra Leasehold System (https://www.prosper.org.au/2008/01/canberra/) describes how the Founders wanted the rules of the Leasehold System to prevent land speculation by sharing unearned income fairly across the whole community. The article also outlines the implementation mistakes.
This article shows how we can return to the original vision starting with Affordable Tenancies for the Gungahlin Town Centre. It outlines lease conditions on undeveloped land changes to remove unearned income and stop speculative capital hurting the Gungahlin economy.
Affordable Housing and Commercial Tenancies
Everyone should have affordable housing regardless of their income. One definition is that a household should not pay more than 25% of its income for housing. They can spend more provided their extra payments build equity in their housing. The principle can also apply to commercial and community buildings. For example, the minimum percentage for commercial activities could be 25% of income, and for community organisations, it could be 5%.
The ACT government can ensure the development of affordable tenancies by putting affordability leasehold conditions when selling Town Centre leases. Affordability conditions already exist for some low-cost housing units but not for all units or commercial or community tenancies.
Most commercial developments with many occupants have a single owner because it removes the cost of transferring ownership when one occupier vacates a premise. A developer can reduce costs of occupancy of households with Build to Rent. The transfer of title and associated buying and selling costs are still high, but a single owner removes these costs. However, Build to Rent allows speculation and does not share the unearned income from land price increases with the occupants.
Build to Buy is an occupier-owned alternative to Build to Rent. It offers the same macroeconomic advantages as Build to Rent but allows occupants, with each rental payment, to build equity in the home they occupy. Part of each rental payment buys equity, and part is a return on investment to the current owner of the equity. Equity in Build to Buy is a prepayment for rent for any tenancy. Shareholders own prepayments as equity rather than ownership of shares. The purchasing entity owns the property. The organisation’s constitution gives the voting rights and governance rules of the shareholders. Prepayments save money as prepayments are a simple extension to the existing payments systems, while equity as ownership is expensive as it needs a separate trading system.
The initial shareholders are investors holding equity as prepayments. Over time the tenants of the buildings acquire equity through the payment of rent and the associated transfer of equity.
Prepayments attract a fixed discount set by the organisation. For example, the organisation could give the same indexed returns as allocated superannuation pensions but twice as long. The remaining profits go to the holders of prepayments. Prepayment discounts provide a return on investment as a lower cost of rent rather than more money. Investors who do not rent can sell their prepayments to tenants for the full price. Prepayments with discounts are an alternative form of equity or capital.
Using these rules, we can calculate the returns on investment by comparing superannuation annuities to prepayment returns. The following graph shows the difference. For any investment over five years, prepayments give a higher return. Unrealised investment returns accumulate but do not compound.
Reduced Prices to tenants
Some of the remaining profits lower tenant rents. The lower prices come by removing the interest on the capital paid if the tenant had purchased the property with a loan. If a buyer borrowed 100% of the money needed at 5%, they would buy a property of $600,000 for a total of $910,111 over 25 years, whereas, with prepayment capital, it would cost $600,000 no matter how many years it took.
The leasehold conditions set the rent at 25% of a tenant’s income. One way to compare the savings is to compare the cost of acquiring a home for a person with a given income and a given home value. As can be seen in the following graph, a person can have a lower income and acquire a higher value home with prepayments. Prepayments have further advantages over loans:
- Monthly rent can vary as income changes
- Buyers do not need an initial deposit.
- The tenancy can have additional capital works and not affect rent.
- There is no need for mortgage insurance.
Selling tenancies and prepayment capital
Selling the tenancies and getting investment with prepayment capital advantages investors and buyers over debt-based finance. With the government selling the leases and with the rules specified in the contracts, it means high demand from both investors and prospective tenants. Fixed prices and returns for all means the market does not resolve contention with price.
Instead of using price the government can specify the rules to settle contention. One set of rules could be:
Select tenants on need. When many with the same need, make a random selection. For example, if five people want a tenancy, they go into a lottery where the number of entries is the inverse of their income — the more income, the fewer chances. Investors are selected first from tenants or their superannuation funds.
Prepayments capital replaces shareholdings and loans. Prepayments capital gives the holder the right to participate in the governance of the holding organisation. The government can specify the governance arrangements in the leasehold conditions. For example, all holders of prepayments could have voting rights depending on the value of prepayments held.
With prepayment capital tenants decide the building design. With loan finance, landlords determine importance. Landlords tend to minimise capital costs at the expense of ongoing costs, whereas occupiers consider the long-term costs. It means loans tend to build for short-term monetary gains, while prepayments capital make long-lasting, sustainable tenancies with high utilisation.
The ACT government could ensure the development of the Gungahlin Town Centre meets the needs of the Gungahlin community through the lease conditions. Appropriate conditions will increase investor returns and reduce the cost of housing, commercial and community services. The cost of developing suitable leasehold conditions would be a fraction of the savings made in developing the Gungahlin Town Centre.