May 5, 2023Liked by Cameron Murray

This housing bill nonsense does my head in. It’s so misconstrued and misrepresented. People see Housing Fund and they think It’s money the Government is using to build or buy houses. I’ve had these conversations to people about Queensland’s ‘Housing Investment Fund’. They think It’s money that’s being used to fund houses. So when Cameron Dick comes out and says ‘An extra $1Bln for the Housing Investment Fund’, people see ‘An extra $1Bln spent on housing’, when in reality it’s got nothing to do with it. And when Federal Labor comes out and says ’10Bln housing fund’, they connect that money to money being spent for houses. But they’re basically unrelated. The only thing that connects them is a name and political spin.

This whole exercise is just leveraged investing to increase both sides of the Government’s balance sheet and try and harvest risk premium on the investments above the cost of debt. You can see this in the way they talk about the $500 million. When they say It will create $500 million in funding, what that actually means is they just have a budget assumption of 5% investment return on the $10 billion that they will use to report an increase of $500 million in interest income on the operating statement (whether they actually take the $500 million out of the fund is irrelevant). This then gives them the ability to spend an extra $500 million without it changing the outcome of the net operating balance accounting profit/loss i.e; “the budget”.

Concerns that ‘if there’s a bad year, they won’t be able to take money out to spend’ are probably genuine but naïve. The Government probably won’t be taking money out of this fund. They’ll just take out an extra $500 million in debt each year to fund whatever housing policy they want to spend money on, but because Credit Ratings agency’s care more about “net debt” instead of “gross debt”, It won’t create any new “net debt”, because over the long term that fund will grow by more than $500 million per year.

Win / win. The Government gets to spend more money, net debt doesn’t change – and will actually going go down over time, on average, probably. Which if you think about for more than 3 seconds will lead you to the logical conclusion that because the Government is extremely large, has an infinite time horizon and the ability to instantly raise more revenue if it really needs, that it should be able to infinitely increase its financial position simply by borrowing money and investing in risky financial assets. Obviously this is a bad idea in reality. Peter Costello has discussed this previously. It was his position that the Future Funds should receive money from surpluses, not debt! And he’s still the Chair of the Future Fund!

But of course the political and commercial aspects of it all mean he’s going to keep his mouth shut about the poor policy decision of adding an extra $10 billion to the Future Fund via debt, because suddenly his pride and joy Future Fund gets an extra $10 billion to extract fees off. But now you start discussing the issues with purpose of government, and leveraged investing, and public sector balance sheets and suddenly you’re going over people’s heads and we’re not talking about housing anymore, and we’re in a housing crisis, so get back to talking about housing!!

What they actually spend the money on is what is relevant and I think there is a criminally underdiscussed fact that no one has a clue what they’re spending the money on. Is it grants to State governments Housing Departments? Is it offering capital/equity injections to private developers and charities to subsidise BTR and discounted rentals? Is it just being used to inflate interest income on the budget to offset loss of revenue caused by changes in tax policy that will result in developers/investors paying less taxes in a false hope that it will induce more supply? Is it God forbid annual subsidies in juicy commercial-in-confidence 30 year contracts with wealthy developers who under no circumstance should ever need a subsidy to do their job and are just using the low vacancy rate, high inflation and their large political clout to force the Government into forking over public money before they’ll do their job? No one has a clue.

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You are spot on here mate.

The only place I differ somewhat is that I don't take seriously any politician's claim to care about the budget balance or credit ratings agencies or anything else. They could, after all, buy houses with the fund off-balance-sheet in a property-owning fund where they can record the equity value of the fund (even trade a few shares in it to find a market price).

The Queensland government did this with its land titles office. Privatised it by buy it from itself using their investment fund! Now that fund has the equity in the titles office that used to be invisible in accounting terms.

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May 5, 2023Liked by Cameron Murray

Politicians might not seriously care about budget balance or credit rating agencies day-to-day, but Treasury does. There are entire teams dedicated to be manically obsessed with contorting the state’s finances to meet whatever random hurdle a Credit Rating Agency asks them to meet.

Why? Because if one of the big 3 in the Credit Rating oligopoly racket decided to downgrade the Credit Rating, the interest cost on debt would instantly go up, and THEN politicians would start caring about it, because they’ll be getting daily briefings and stern advice from bean counters and the media to slash and burn spending and improve the budget to make sure the Credit assessors kindly take back their downgrade lest the debt and interest bill start growing uncontrollably (this also undermines the whole borrow to invest thesis anyway, because cost of borrowing quickly outstrips the expected return on investments when the credit rating goes down).

Likewise that’s the issue with establishing a fund that buys houses. The Credit assessors would look at that and say “naughty, naughty. You’re just leveraging yourself to buy investments, and there’s no diversification in your portfolio. We’re not recognising those assets in our net debt calculations”.

On a separate but related issue the Audit Office would also likewise reject the purchase of housing using a fund unless the houses themselves were being rented out at commercial rental rates. If the State wanted to offer non-market rent / favourable lease conditions the Audit Office would refuse to recognise it unless the State coughed up on-budget subsidies/grants to cover the difference between offer and market (Department of Housing assets are not recognised in net debt calculations because public housing is treated as a non-financial asset). This is the whole issue with NSW’s Transport Asset Holding Entity that attempted to move on-budget rail subsidies and capex off-budget, because the TAHE wasn’t actually charging NSW Rail operators proper commercial rates for the usage of its rail assets, but Treasury tried to pretend it was.

And yes I’m well aware of the contorted creative accounting that Queensland did with their Titles Registry. Most of the ‘value’ in the Housing Investment Fund is in Titles Registry! And a significant part of the Debt Retirement Fund. Creating equity out of thin air that already existed but was invisible is a good way to put it. The whole reason they would have done that was because some genius told them the Credit Ratings agencies would recognise the equity as a financial asset to offset their net debt calculations. And I guess it worked, because even if the agencies took haircuts off the value of the Titles assets, even a single $1 counted against net debt is still better than what it was before, for absolutely no real difference.

You step back and ask yourself what even actually changed all they did was take the cash they used to get from Titles Registry income, that was part of a Department, and decided they were going to forgo all the revenue, and instead divert into the Debt Retirement Fund and various other public sector investment funds. But instead of just doing a simple dividend diversion, they securitised it all and transferred the equity, and now keep the income distributions within the funds themselves (Which they can take out again when they want). But they can’t sell the Titles assets to anyone else, so It’s not really privatised at all (Section 8 of the QFF Act 2020 ‘prescribed state assets must be held, directly or indirectly by the State in perpetuity). . So it’s all meaningless creative accounting and number shifting. The budget Accounting profit/loss probably didn’t even change that much because even though they lost Titles cash revenue, now the capitalised equity has a 6.5% interest income assumption on it that is increasing interest income on the budget (not that they ever actually take it as cash income, it’d be re-invested in the funds).

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All the research shows a direct subsidy is the most efficient way to deliver more social and affordable housing on the ground. The amount of public money that goes to consultants, lawyers and advisors under these types of schemes warrants investigation.

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Interesting commentary on the housing issue. As in most things, the causes and effects are multi-factual and housing is one of those wicked problems where there are many issues and associated factors that we can't realistically look at in its totality. It is almost like we need a super computer to chart out all the different factors and their linkages to start to contemplating the most effective course of action.

But I will agree that what the Federal Government is currently proposing is a joke. The starting point of any problem solving exercise is to define the problem. So in this instance I don't clearly see how the Federal Government has defined the problem, but its solution is Social Housing Fund that won't deliver any new housing stock for 3 years (depending on current negotiations).

Notwithstanding the above, we shouldn't forget that housing is primarily a State responsibility. So once again the different State Governments are abrogating their responsibilities in not only this field, but also in other fields (e.g. NDIS) and the Federal Government has to step into the breach.

I don't know what the solution is, but it seems to me that we have gone all in on a market based approach and done away almost completely with Public Housing. So how do you regulate a private market system or do we just increasingly help subsidies private housing (ownership and rental).

I was interested in the ACT approach to rental control pricing. But to my simple mind, I can't see what their legal head of power can be to justify such an intervention in a market economy. Historically it was done in times of war (i.e. economic emergency that was needed for a temporary period of time), but I would interested to understand on what lawful basis it can be defended against now. Maybe a lawyer can be provide me with a response. But what is to stop governments from applying the same measure any any number of goods sold in a market economy?

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Ripper effort guys. Look forward to the book on housing. This substack is worth checking https://californianism.substack.com/p/creating-a-home-building-machine

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