A social housing fund is bad policy
Buy and build houses with the money. Don't buy financial assets.
A social housing fund is a policy idea gaining traction. The ALP has proposed a $10 billion one in their election platform. The Grattan Institute has proposed a $20 billion one.
The basic idea is to sell bonds to the market and use the cash from that sale to buy a range of higher-yielding assets. Because there will be a differential return between the low cost of borrowing and the higher return on assets, this creates a net return from the fund to pay for building new public housing.
It sounds so bland and innocuous that it is easy to miss how economically backwards the policy really is.
Opportunity cost
On the housing occupancy side of the ledger, if you are building homes and renting them below market, the opportunity cost to the homeowner is the market rent. The economic cost to the owner is therefore the gap between the market rent and the discounted rent. This is true for public landlords too.
Economically, this is always the exact situation. Just as a landlord with a mortgage who rents for $10,000 per year below the market misses out on that income, so too does the landlord without a mortgage. It really doesn’t matter what happens on the funding side.
On the funding side of the ledger, every billion dollars put in a fund for housing is a billion dollars that can’t be spent elsewhere. Every dollar of net return from the fund also has the same opportunity cost of being spent elsewhere.
A social housing fund doesn’t change the underlying economic trade-offs in any way.
A fund to fund the fund?
If we can’t find $20 billion to spend on new public housing, how are we finding $20 billion to spend buying a portfolio of shares and other assets?
Do we need a fund to fund the fund?
It sounds silly when you say it that way because it is silly.
If it is a good idea for governments to borrow by issuing low return assets like cash and bonds in order to buy higher return assets like shares, because of differential returns, then it is a good idea regardless of what the net return is spent on. If $20 billion in such a fund is a good idea, why not $200 billion?
Really ramp up those returns!
Further, if getting more housing is a policy concern, why not invest the fund in developing new homes and renting at market prices? This is another type of investment that gets higher returns than cash but has the advantage of directly expanding the housing stock.
The previous point applies here too—if this “cash for new housing” asset swap makes a decent net return then it is something government agencies should be doing regardless of where the returns are spent.
Public housing is a social housing fund
Just as new market-rate housing is an asset worth investing in, so too is new housing that is rented at a discounted price.
The New South Wales Land and Housing Corporation (LAHC) owns the public housing stock in that state. In 2012 its stock of dwellings was worth $32 billion. After selling many of its assets, by 2019 it owned $54 billion worth of public housing assets. That’s a 7.8% annualised return while at the same time providing cheap homes to tens of thousands of people. An accurate way to describe this organisation would be a high-return fund that provides social housing—a social housing fund.
So why not simply give money to the existing agencies that build new public housing?
In short, a social housing fund solves nothing about the housing situation. A simpler and much better alternative is to just spend on building new public housing assets rather than buy a portfolio of existing non-housing assets.
A fund to fund a fund - this reflects the financialised nature of our economic thinking i.e. that apparently you fix problems not by actually doing something but instead by some 'innovative' financial method such as printing more money, speculating on bond yeilds (as in this case), 'hedging', 'better risk management' (just hiding or buck-passing risk).
I've started following you to gain from all your expertise on this issue ... however I think your argument could be refined as I don't think this statement is unambiguously correct: 'On the funding side of the ledger, every billion dollars put in a fund for housing is a billion dollars that can’t be spent elsewhere.' The difference government makes is in initiating economic activity - by investing money government gets activity happening that acts as a money accelerator throughout the economy. This sentence reflects a closed-economy/crowding out theory view that is not correct. Governments can spend money, reap the returns and then spend more - this is the limitation of the 'opportunity cost' approach. The MMT or similar approaches have pointed out that what matters is how real resources are used, which is basically what you're saying.
Noting the above I obviously agree with the conclusion, don't try to find a 'magic' financial solution - just build more houses. That said, I think the 'more supply' option is a very capitalist-friendly and non-offensive option. We need to start penalising housing speculation (another magic financialisation solution like a get-rich-quick scheme for punters), which is the REAL cost of housing increases.
You seem to be saying we should think the logic through completely - "why not have a 20 billion fund" "why only spend on housing"
My view is we absolutely should have a very large fund at least as big as Aus GDP. For the purpose of socializing investment returns. The returns can be used - in conjunction with our existing tax system more or less - to provide all the services a modern society needs. We clearly need more funds for the NDIS aged care. Free meals for school children can be a good investment. There are lots of public goods that benefit everyone.
The policy suggested by the ALP is not very coherent. But the idea of socialized wealth funds is a great one. A lot of the pushback seems to have come from hedge fund managers whos position seems to be 'get of my turf'. They should be worried because the government can easily do just as good a job as them of managing investment capital.