What is a bond aggregator and how does it help build affordable housing?

AHURI research informs Treasurers’ affordable housing plan

In recent news, Treasurer Scott Morrison has visited London to confer with British officials on the UK experience implementing a bond aggregator model to fund affordable housing.

AHURI research into a bond aggregator model for affordable housing was central to the Affordable Housing Working Group (AHWG) report to Australian Federal, State and Territory Treasurers meeting during the Council on Federal Financial Relations. As a result, the Council recommended establishing an expert taskforce to design a bond aggregator model.

What is a bond aggregator?

The model is based on AHURI research into the creation of an Affordable Housing Finance Corporation (AHFC). The AHFC is designed to aggregate and source large amounts of capital from the bond market so as to provide lower interest, long-term loans to not-for-profit community housing providers (CHPs) developing housing for lower income households. The intention is that money would be raised efficiently with reduced financing costs rather than in expensive one-off transactions such as when borrowing from a bank.

What are the benefits of a bond aggregator?

The benefits of a bond aggregator such as the AHFC are that it is relatively simple and transparent; minimises the impact of debt on government budgets; draws on the successful experience and expertise of other countries; provides lower cost finance to community housing providers and therefore is likely to maximise the sustainable expansion of affordable housing stock.

How will a bond aggregator work in Australia?

The AHFC would be an expert independent not-for-profit entity adapted to Australian financial market conditions from established Swiss and UK schemes. New affordable housing projects built by finance sourced through the AHFC would be administered by CHPs, and the properties rented in the private rental market (with rents charged at 80 per cent or less of those charged in the local area) or sold under some form of shared equity model. In either case, the dwellings would be targeted at people working in lower paid jobs or those who otherwise can generate an adequate income (such as self-funded retirees). As a consequence, the properties are unlikely to be available for households who have no income apart from government welfare payments.

Through its management team, the AHFC would:

  • assess the risks and benefits of applications from individual CHPs for borrowing money
  • combine the approved borrowing applications from many different CHPs
  • raise large volumes of money ($50–200 million and upwards) from long-term low-yield bonds issued by specific banks to institutional investors
  • distribute the money to the applying CHPs
  • monitor that the CHPs were using the money properly and effectively
  • collect the repayments (of both interest and principal) from the CHPs
  • repay the banks who would return money to investors.

AHFC bonds would come with a carefully structured guarantee such that interest and loan payments due to investors would be paid by the Australian Government should a CHP borrower be unable to make a repayment. This lowers the perceived riskiness of the bond, resulting in a lower interest rate paid to the investor. The Swiss Bond Issuing Cooperative guarantee scheme that the AHFC is based on has recorded no repayment defaults during its many years of operation.

Standard and Poor’s noted that, compared to Australian Government balance sheets, the size of potential risks to be guaranteed by the AHFC was minute, and therefore was unlikely to impact the Government's credit ratings.

The research into the AHFC model is detailed in AHURI Final Report no. 220.