Referral of the inquiry
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The National Housing Finance and Investment Corporation Amendment Bill 2019 (the bill) was introduced in the House of Representatives and read a first time on 12 September 2019.
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On Thursday 12 September 2019, the Senate referred the provisions of the bill to the Senate Economics Legislation Committee (the committee) for inquiry and report by 10 October 2019.
Purpose of the bill
1.3
The bill amends the National Housing Finance and Investment Corporation Act 2018 (the Act) to establish the framework for the First Home Loan Deposit Scheme (the scheme). It does so by expanding the existing functions of the National Housing Finance and Investment Corporation (NHFIC) to allow it to provide guarantees, and to undertake research into housing affordability. The bill also establishes a funding mechanism for the scheme by providing for a standing appropriation.
Background
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The bill legislates for the government's First Home Loan Deposit Scheme, announced on 12 May 2019, to be administered by the National Housing Finance and Investment Corporation.
National Housing Finance and Investment Corporation
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The National Housing Finance and Investment Corporation is a corporate Commonwealth entity established under the National Housing Finance and Investment Corporation Act 2018 (the Act) to improve the supply of affordable housing in Australia.
Establishment
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The corporation was announced in the 2017–18 Budget following a Council of Australia Governments-led process investigating innovative ways of addressing housing affordability. In January 2016, at the request of treasurers during the Council on Federal Financial Relations meeting in October 2015, the government announced the establishment of the Affordable Housing Working Group.
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The working group undertook public consultations and delivered its report, Innovative Financing Models to Improve the Supply of Affordable Housing, in November 2016. The report made a number of recommendations, including the establishment of a bond aggregator. It also stated the major barrier to the supply of affordable housing in Australia is the 'financing gap'—the difference between the rates of return available in affordable housing compared with market rates of return available in private developments.
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In his second reading speech for the legislation establishing NHFIC (National Housing Finance and Investment Corporation Bill 2018), the then Assistant Minister to the Treasurer, the Hon Michael Sukkar MP, explained that the objective of NHFIC was to 'improve housing outcomes for Australians, particularly vulnerable Australians who need social and affordable housing'.
Operation and activities
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Through the National Housing Finance and Investment Corporation Investment Mandate Direction (Investment Mandate), the responsible minister (the Treasurer) provides directions to the NHFIC Board, including on:
strategies and policies the Board must observe;
decision-making criteria;
limits on financial assistance; and
risk and return on investments.
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The National Housing Finance and Investment Corporation currently has two core activities: the affordable housing bond aggregator, and the national housing infrastructure facility.
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The bond aggregator provides low cost and longer-term loans for the establishment of social and affordable housing to community housing providers registered under state/territory schemes. Through this program, the NHFIC issues its own bonds into the wholesale capital market, and is able to use a Commonwealth line of credit. The funding may be used to:
acquire or construct new housing;
maintain existing housing;
assist with working capital requirements or general corporate requirements; and
refinance existing debts.
1.12
The housing infrastructure facility offers concessional loans, grants and equity finance for a range infrastructure projects to support affordable housing. These project may include new or upgraded infrastructure for services such as water, sewerage, electricity, telecommunications, stormwater or transportation, and site remediation works such as removal of hazardous waste. A number of entities are eligible to apply, but must establish that without funding, the project would be unlikely to proceed, or likely to proceed at a much later date or with lesser impact on new affordable housing.
First Home Loan Deposit Scheme
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The bill, as a framework bill, primarily makes minor amendments to the Act to allow the NHFIC to issue guarantees. The details of the scheme itself are to be contained in NHFIC's Investment Mandate (see items 7—11 below). The Explanatory Memorandum (EM), however, provides some detail of the scheme.
First home buyers and the Australian housing market
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The EM identifies a number of trends in the Australian housing market, including:
due to low interest rates, the mortgage debt-servicing ratio suggests housing affordability is around its long-run average;
national housing accessibility for first home buyers is around the long-run average, though Sydney and Melbourne have become significantly less affordable; and
first home buyers have become more constrained by the size and location of properties available for purchase.
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For the government, these trends indicate that despite the ability of a borrower to service a loan, the relatively high housing price-to-income ratio means first home buyers must save for a longer period to accumulate a deposit—approximately eight years to save a 20 per cent deposit on a median-priced home.
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The EM points out that while borrowers may access a loan with a deposit as low as 5 per cent of the property purchase price—a 95 per cent loan-to-value (LVR) ratio—lenders will require such borrowers to pay for lenders mortgage insurance, which is typically between one and two per cent of the property purchase price. This is because high LVR loans have a higher risk of default and have lower equity. Lenders mortgage insurance is generally not required when the borrower has a deposit of 20 per cent or greater.
Key features of the scheme
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The EM provides information on how the scheme will operate. The scheme will provide a limited guarantee to allow first home buyers to purchase a home with a minimum deposit of 5 per cent of the property purchase price without needing lenders mortgage insurance.
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It will do so by providing a first-loss guarantee on eligible loans for the difference between the deposit and 20 per cent of the property purchase price, subject to a minimum deposit of 5 per cent. In the event of a default and subsequent claim being made, the lender may claim for the amount owed after the sale of the property, up to the amount guaranteed.
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The EM states NHFIC will contract with a panel of lenders who will have access to the Commonwealth guarantee. The National Housing Finance and Investment Corporation itself will not have direct contact with borrowers. Participating lenders and mortgage brokers will themselves assess whether borrowers are eligible for the scheme.
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Other details of the scheme, as identified in the EM and the second reading speech of the Assistant Treasurer and Minister for Housing, the Hon Michael Sukkar, include:
a cap of 10,000 first home buyers per year;
borrowers will face lenders' usual loan serviceability tests;
it will be available to first home buyers with an income in the prior financial year of less than $125,000, or $200,000 combined income;
maximum dwelling prices will be set on a regional basis to ensure equitable access to the scheme across Australia;
the residential property or dwelling must be owner-occupied;
applicants must be Australian citizens purchasing property in Australia; and
there must be regular repayments of the principal.
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The government expects eligible first home borrowers will be able to purchase a property sooner and at lower overall cost because it will guarantee against the higher risks involved in lending to first home buyers with high LVR loans. However, it also acknowledges that with a relatively smaller equity buffer, more interest may be payable over the life of a loan.
Provisions of the bill
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The bill contains one schedule and 16 items to amend the National Housing Finance and Investment Corporation Act 2018. Each of the items are described below.
Schedule 1
Item 1: Object of the Act
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Item 1 adds an additional subsection to the object of the Act. The existing object of the Act is to establish NHFIC to improve housing outcomes for Australians. It is to do so by, amongst other things:
(a)
strengthening efforts to increase supply of housing;
(b)
encouraging investment in housing (particularly in the social or affordable housing sector);
(c)
providing finance, grants or investments that complement, leverage or support commonwealth, state or territory activities relating to housing; and
(d)
contributing to the scale, efficiency and effectiveness of the community housing sector.
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Under proposed subsection 3(e), NHFIC will also now assist 'earlier access to the housing market by first home buyers'.
Item 2: Simplified outline of the Act
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Item 2 amends the simplified outline of the Act by adding the 'issuing of guarantees' to the ways NHFIC improves housing outcomes.
Item 3: Definitions
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Item 5 adds a definition to the Act. It specifies 'guarantee liabilities' has the meaning given by subsection 48A(2), which is added in item 13.
Item 4: Functions of the NHFIC
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Item 4 adds new functions for NHFIC. The existing functions include: determining terms and conditions for and making loans, investments and grants; and providing business advisory services to registered community housing providers.
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The proposed paragraphs—8(1)(ca) and 8(1)(cb)—add the following functions: issuing guarantees; and undertaking research into housing affordability.
Item 5: Constitutional limits
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Section 10 relates to constitutional limits on NHFIC functions by expanding the provisions in the Constitution under which the NHFIC can perform its functions. Item 5 specifies NHFIC can perform its functions for purposes relating to banking, within the meaning of paragraph 51(xiii) of the Constitution.
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Section 51 of the Constitution specifies the legislative powers of the Parliament; and paragraph 51(xiii) encompasses banking, other than state banking (see also item 6).
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According to the EM, the effect of this amendment is NHFIC's functions and powers cannot exceed the Commonwealth's legislative power under the Constitution.
Item 6: Constitutional limits
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Item 6 further clarifies the constitutional limits on the performance of NHFIC's functions with regard to banking, specifying the Act does not apply with respect to state banking that does not extend beyond the limits of the state concerned.
Items 7, 8 and 9: Investment Mandate
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Items 7, 8 and 9 relate to matters covered by NHFIC's Investment Mandate. The Investment Mandate is a non-disallowable legislative instrument through which the relevant minister (the Treasurer) gives the board directions about the performance of NHFIC's functions.
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Item 7 (inserting subparagraph 13(b)(iia)), item 8 (repealing and substituting a new paragraph 13(c)), and item 9 (amending paragraph 13(d)), allow the minister to include directions about the decision-making criteria, limitations, and risk and return on NHFIC issuing guarantees.
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These proposed amendments provide for the full detail and operation of the scheme and the research function to be established in the Investment Mandate rather than the legislation itself.
Items 10 and 11: Limits on Investment Mandate
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Section 14 of the Act limits the directions a minister can give under the Investment Mandate.
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Item 10 (inserting subparagraph 14(a)(ii)) and item 11 (adding subparagraph 14(a)(v) will prevent the minister making a direction under the Investment Mandate that would require the board to issue or not issue a particular guarantee, or to take or not take a particular action relating to a particular guarantee.
Item 12: Adequate capital reserves
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Section 48 requires the board to ensure there are sufficient capital and reserves to meet NHFIC's liabilities, and to provide for defaults on repayments. Item 12 excludes from 'adequate capital reserves', any provisions for guarantee liabilities.
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The corporation is not required to maintain capital reserves to meet guarantee liabilities because the liabilities will be met by a standing appropriation (see item 13).
Item 13: Appropriation
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Item 13 inserts section 48A, which appropriates from the Consolidated Revenue Fund, money for the purposes of NHFIC meeting its guarantee liabilities.
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It also specifies the 'guarantee liabilities' are those NHFIC incurs under guarantees it has issued under paragraph 8(1)(ca) (see item 4).
Items 14 and 15: Matters to be included in annual reports
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Items 14 and 15 add the following requirements to items that must be included in NHFIC's annual reports:
financial support provided by way of guarantees (paragraph 56(b)); and
the particulars of NHFIC's research into housing affordability in Australia (paragraph 56(c)).
Item 16: Transitional arrangements
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Item 16 provides instruction on when NHFIC may make a decision to issue a guarantee. It allows for two options:
the minister, through legislative instrument, can determine a day, not earlier than 1 January 2020; and
if no such determination occurs, it must be the later of 1 January 2020 or the day occurring 3 months after the day the Act commences.
Consultation
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No formal consultations were undertaken on the bill itself. Neither were first home buyers consulted. However, the Treasury and NHFIC undertook a number of consultation activities to understand views on the scheme, which involved: small and large lenders; LMI providers; industry associations; financial intermediaries; mortgage brokers; housing developers; financial regulators; and consumer advocates. A reference group was convened in July 2019 to discuss key design elements of the scheme; and in August 2019 to discuss implementation details.
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The government has indicated it will conduct further consultation on the proposed amendments to the NHFIC Investment Mandate, which will contain the details of the scheme. It will also continue consulting with LMIs to manage the impact of the scheme on the sector.
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The EM states an independent review of the scheme will be undertaken within three years of its commencement to ensure the objectives of the scheme are being met.
Commencement
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Schedule 1 commences the day after the Act receives Royal Assent.
1.48
Sections 1 to 3 and any other provisions in the Act commence the day the Act receives Royal Assent.
Financial impact
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The bill's EM estimates administrative and research costs will be up to $25 million over the forward estimates, with the final allocation to be settled and included in the 2019–20 Additional Estimates bills.
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Estimated claim costs of $4 million over the forward estimates will be met from the standing appropriation contained in the bill.
1.51
Compliance costs for businesses (lenders and mortgage brokers) who participate in the scheme are estimated by the government to be $2.17 million per year (see 'Regulatory impact' below).
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More broadly, given the scheme will only guarantee 10,000 loans each year, the government expects there to be little, if any, impact on house prices. Neither does it see any significant impact on the lending market. The government is conscious of the scheme potentially impacting the private sector provision of LMI and has undertaken to monitor the situation.
Legislative scrutiny
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The Standing Committee on the Scrutiny of Bills expressed concern the decision-making criteria for issuing guarantees under the scheme is specified in the Investment Mandate—a non-disallowable legislative instrument not subject to parliamentary scrutiny.
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The Scrutiny of Bills Committee is of the view the justifications provided for specifying the detail in non-disallowable delegated legislation—that it provides flexibility to adjust the scheme as market conditions change, and it continues current arrangements—are not adequate justifications. The scrutiny report stated:
The committee's view is that significant matters, such as the core elements of the proposed First Home Loan Deposit Scheme, should be included in primary legislation unless a sound justification for the use of delegated legislation is provided. In this instance, the committee's scrutiny concerns are heightened by the fact the delegated legislation setting out the core elements of the proposed Scheme will not be subject to the usual parliamentary disallowance process.
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The Scrutiny of Bills Committee requested the Assistant Treasurer provide advice as to:
why it is necessary and appropriate to 'leave nearly all of the elements' of the scheme to non-disallowable delegated legislation; and
whether it would be appropriate to amend the bill to include the core elements of the scheme in the primary legislation; or
to provide that directions given to NHFIC relying on the new matters inserted by items 7 to 9 be subject to the usual parliamentary disallowance process.
1.56
In his response to the Scrutiny Committee's request, the Minister for Housing and Assistant Treasurer, the Hon Michael Sukkar MP, stated:
It is appropriate to prescribe the Government's expectations for the proposed Scheme in the Investment Mandate to ensure the Scheme is, and remains, responsive to market conditions, to facilitate additional consultation and to promote consistency with the existing legislative framework.
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In particular, the minister stated it would allow 'refinements to be made, within the scope permitted by the Bill, to reflect new information and changes in market conditions including changes to house prices, housing supply, wages and finance costs.' By way of example, the minister cited the need to periodically amend housing price caps in a timely manner to ensure they continue to reflect prevailing market conditions and the Government's overall objectives for the scheme.
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The minister argued the bill is consistent with the legislative framework already approved by the Parliament and in place under the Act. The Act authorises broad functions for NHFIC that support the current programs outlined in the Investment Mandate.
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Given the government announcement that the scheme will commence on 1 January 2020, the minister argued detailing the scheme in the Investment Mandate would facilitate additional consultation on the proposed operation of the scheme.
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With regard to disallowance, the minister stated the Investment Mandate should provide certainty to the NHFIC Board and the market about the way NHFIC will exercise its functions and powers. He further stated, 'certainty would be compromised, due to potential delays, and unpredictable market conditions and regulatory environment, if the Investment Mandate were disallowable'.
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The minister continued that the treatment of legislative instruments under the Act is consistent with the current treatment of all ministerial directions to corporate Commonwealth entities.
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The Scrutiny Committee responded to the minister that it is the Scrutiny Committee's consistent scrutiny position that the need for flexibility does not justify leaving significant concepts relating to a proposed scheme to non-disallowable delegated legislation, and it is not clear why key elements of the scheme cannot be included in primary legislation or delegated legislation subject to disallowance.
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It further stated the fact the executive has set a proposed start date for the scheme is not sufficient justification for leaving significant elements of the scheme to non-disallowable delegated legislation. The Scrutiny Committee considers:
…the Parliament should not be asked to approve the framework for the Scheme where there is ongoing consultation to finalise how the Scheme will operate in practice, or where operation of the Scheme may be subject to change by executive action without effective parliamentary oversight.
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The Scrutiny Committee considered the fact the NHFIC's existing programs have been established through the non-disallowable Investment Mandate without effective parliamentary oversight provided further justification for all programs to be subject to the usual parliamentary disallowance process.
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The Scrutiny Committee also disputed the minister's suggestion that providing for the usual parliamentary disallowance process would reduce certainty, countering the fact the Investment Mandate may be altered by the executive without effective parliamentary oversight may decrease certainty and noting the usual parliamentary disallowance period is limited to 15 sitting days.
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The Scrutiny Committee pointed out the Operating Mandate of the Regional Investment Corporation is subject to the usual parliamentary disallowance process, suggesting it is possible to establish ministerial directions to investment corporations in disallowable delegated legislation without necessarily compromising responsiveness or certainty.
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The Scrutiny Committee drew its scrutiny concerns to the attention of senators and leaves to the Senate as a whole the appropriateness of leaving the core elements of the scheme to be set out in non-disallowable delegated legislation.
Compatibility with human rights
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As required under the Human Rights (Parliamentary Scrutiny) Act 2011, the government has assessed the bill's compatibility with the human rights and freedoms recognised or declared in the international instruments listed in section 3 of that Act. The government considers the bill does not raise any human rights issue.
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The Parliamentary Joint Committee on Human Rights concurred, passing no comment on the bill.
Regulatory impact
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The government acknowledges there will be some regulatory costs on lenders participating in the scheme. These costs for participating lenders will include:
updating internal systems;
training front-line lending staff, including on how to apply the eligibility criteria; and
a per-loan regulatory costs to write a guaranteed loan as a consequence of determining scheme eligibility and communicating with NHFIC.
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Mortgage brokers who wish to offer the guaranteed loans to their clients will require training or self-education.
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The government states, however, the regulatory costs are discretionary as lenders will choose to participate if they feel the commercial benefits are sufficient to offset the administrative and regulatory costs. Although Treasury has not identified a regulatory offset, it will work with stakeholders to identify regulatory burden reductions where appropriate.
Conduct of the inquiry
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The committee advertised the inquiry on its website and wrote to relevant stakeholders and interested parties inviting written submissions by 24 September 2019.
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The committee received 14 submissions as well as answers to questions on notice and additional information, which are listed at Appendix 1.
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The committee held one public hearing for the inquiry in Sydney on 27 September 2019. The names of witnesses who appeared at the hearing can be found at Appendix 2.
Acknowledgements
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The committee thanks all individuals and organisations who assisted with the inquiry, especially those who made written submissions and participated in the public hearing.