Like most developed nations, New Zealand faces a shortage of affordable and social housing. The government has tried to reform the way that it provides social housing by attempting to create a competitive market. New Zealand is forging a new path for itself with this economic experiment – other governments should pay attention.

In this analysis from our social housing series, we look at New Zealand’s social housing market and what the UK can learn.

The ‘So What’ for the UK?

The UK and New Zealand have many of the same structural issues. Better aligning real customer demand and needs to the pipeline of future delivery is key. This is both in terms of the type of properties, tenures and location. Local authorities, Homes England and the ecosystem of providers need to use timely customer data to agree on long term strategic, spatial growth plans, and align the right financial and commissioning levers behind this.

New Zealand’s mismatched market

Social housing in New Zealand is targeted exclusively at the lowest income and most vulnerable households. As at August 2018, there were just over 67,000 nationally funded social housing places across the country, about 4-5% of the total housing stock (compared to around 17% in the UK)1. The state owns approximately 92% of those houses, while community housing providers (typically charitable organisations) owned the remaining 8%, working to central set market-share targets.

Some local council authorities own and manage social housing under their own separate system of assessment and funding. Wellington and Christchurch City Councils are the largest providers, each managing just over 2,000 units.

State-funded social housing places2

The national waitlist for social housing places is large and growing. Approximately 10,500 families are waiting on placement, of which 72% are considered “high risk”. The size of the waitlist has more than doubled over the last two years.

waiting list for housing in New Zealand

National social housing waitlist over time2

National social housing waitlist over time2

Wrong type, wrong place, poorly kept, and too few

There are some commonly accepted problems with social housing across New Zealand, particularly:

  • up to a third of Housing New Zealand’s stock is in the wrong place or is the wrong type to meet current demand, for example, 44% of the current waitlist is for one-bedroom units, whereas most of Housing New Zealand’s stock is 3-4 bedroom houses,
  • Housing New Zealand’s houses were generally in a poor state of repair, and
  • the demand for social housing was large and growing, outstripping supply in most urban areas of the country.

Dreaming of a competitive market

Through the Social Housing Reform Programme, the Government aimed to establish a market for the provision of social housing by making a rent subsidy routinely available to community housing providers. The Government also hoped that community providers would be able to integrate their charitable social services (e.g. mental health and addiction services) with their tenancies.

Initially, the government attempted to simply procure more social housing places just by making the standard rent subsidy (which is capped at “market rent”) available. It hoped that the rent subsidy would be enough for community housing providers to be able to supply more social housing places. To improve access to capital for social housing providers, the Government sought to sign long-term contracts to provide high-levels of certainty of continuous occupation.

After minimal take-up, the government also introduced an operating subsidy of up to 50% of market rent in addition to the rent subsidy, for new social housing places in Auckland (which is facing the most acute social housing shortage). This programme was run using an application-based approach and appears to be issued on an ad hoc basis.

Lastly, in an attempt to speed up the establishment of a competitive market, the government started a large-scale transfer of social housing ownership from the state, to registered community housing providers. In April 2017, the Government transferred 1,138 state-owned houses in Tauranga (a medium-sized but fast-growing city) to Accessible Properties, now one of the largest Community Housing Providers3. This transfer now makes up more than 20% of the total community housing provider stock.

Moving forward

Since starting the reforms, New Zealand has elected a new government. The new government has continued to pursue the essence of diversification of providers in the social housing market. It indicated in August 2018 that it will aim to have the Community Housing sector supply 30% of the social houses over time.

However, the new government has written off further bulk transfers of state-owned stock to the community sector, holding this position as a manifesto commitment. Instead, they continue to encourage community providers to increase their presence in the market, focusing particularly on the construction of new houses.

Learning from the New Zealand experience

The New Zealand Government has undertaken brave reform in its provision of social housing. It has moved the market from being almost solely dominated by state-run tenancies, towards a gradual diversification of providers who can provide specialised services. The reforms have not been without their faults though.

We have pulled out four lessons that we can learn from this:

  • making sure new providers have enough income,
  • ensuring that new providers build capacity quickly,
  • exploring alternative capital arrangements, and
  • leveraging the government’s position as a social provider to improve certainty.

Making it worth their while

Initially, it appeared that the government thought that by making the standard rent subsidy available to community housing providers, that they would be able to quickly purchase properties for social letting, thus increasing the overall supply. However, it’s not that simple.

Social tenants commonly have complex needs and, as a result, cost more to maintain their tenancies and properties, relative to the private rental market (which the market rent is based on). This is important when it comes time for community housing providers to raise capital to purchase or construct more housing and expand their social housing contribution.

Subsidies that Community Housing Providers receive need to make their tenancies financially sustainable, especially in relation to the cost of maintaining debt. The New Zealand Community Housing Providers are typically small organisations without access to huge capital bases, so they need to draw on private credit to increase their social housing functions.

It is likely that Community Housing Providers simply need a higher than market value rent on any given social house, to make the associated tenancy financially sustainable for the organisation. In response, the government has rolled out the additional operating subsidy, initially targeting Auckland only, then spreading throughout the country. This policy applies to new social housing stock only, and the government grants the subsidy on a case-by-case basis.

Plugging capacity gaps

Managing large-scale social tenancies is a fairly specialised skill. Many charities that signed up to become community housing providers had only very small social housing operations managed on simple platforms. Sophistication in Customer Relationship Management (CRM) systems, digital channels, and harnessing data on customer needs and expectations were lacking across the board.

As these providers increase their social housing operations, they need support to develop more organised processes and systems, alongside the associated staff training. This all requires government or sector investment in capacity building, co-developed between the two, possibly leveraging Housing New Zealand’s experience.

To neglect this capacity building exercise risks a learning-by-doing approach, which is perhaps undesirable when dealing with society’s most vulnerable people.

Splitting up the burden

The government missed a potential opportunity to give providers the opportunity to split the functions of managing large-scale social tenancies: asset management and tenancy management.

Charitable organisations are likely to want to focus their energy and attention on improving their tenants’ social outcomes, thus focusing on the tenancy management side. Conversely, few have any particularly strong experience in managing large asset portfolios.

There may be an opportunity to explore alternative asset management bodies, including possibly a government body, or commercial entities.

Certainty, certainty, certainty

Houses are expensive, and politics can make government funding an uncertain environment. It is likely that community providers initially approached the reforms with caution; weary of a changing government that may change the terms of their subsidies.

There are some mitigating strategies though. Long-term contracts, as the government has pursued, was a smart move by reducing the costs of uncertainty for providers without adding any material costs to the government. Demand for social housing is not likely to be going away any time soon, so the government will need access to those social houses for a long period of time, while the providers benefit from knowing that the houses will be occupied and paid for.

Recommendations for the UK

The New Zealand experience has a few key takeaways for the UK as it continues to evolve its social housing market model.

  • Governments should pursue opportunities to leverage their position to increase the certainty of funding models through long-term contractual arrangements. More certainty helps both the governments and the providers.
  • Small and new housing providers need support to build capacity, which the government should fund and steward through sector bodies. This will make housing providers more efficient and may mean they take opportunities to expand their portfolios.
  • It’s time to explore innovative financing models, including introducing asset management classes of social landlord as separate bodies from the tenancy managers.
  • If the Government wants social housing providers to increase their contribution, then it must ensure that the tenancies that those providers maintain are financially sustainable. With the changes to benefits coming through aligned to Universal Credit, this should be of particular note.

Gate One’s purpose is to deliver ‘Change that Counts’, not just for our clients but also for the people and the communities that they serve. We believe that a re-energised social housing sector that builds the right stock for our needs now and moving forward is critical and requires a change to how data and digital channels are used to better match supply with demand.

If you’re keen to talk through lessons from New Zealand and other markets, please contact our team.

JAMES SWAFFIELD | CLIENT DIRECTOR

James leads our Government and Public Services team at Gate One. He has experience across advisory and delivery – working across providers and commissioners – with a focus on strategy, policy and service development.