29 September 2024
Committee Secretary
Standing Committee of Economics
Via email: economics.sen@aph.gov.au
Dear Chair
Financial Regulatory Framework and Home Ownership
The Proptech Association of Australia (Proptech Australia) is the nationally and globally recognised peak member organisation for the property technology sector in Australia.
We represent the fast-growing property technology sector which is estimated at approximately 480 locally active businesses that are delivering efficiency and innovation to how Australians plan, build, buy, sell, rent, maintain and upgrade property.
Proptech Association members are committed to supporting innovation to generate better property outcomes for all Australians. We engage deeply with our members to better understand the challenges they face in order to recommend policy, regulatory changes, establish better standards and deliver trusted and transparent processes and governance systems.
Proptech is different to fintech, which specialises in technology that innovates across Australia’s payment, banking and lending systems. However, we often overlap when it comes to new solutions for purchasing, lending or solving financial problems that exist in the property ownership space, especially in light of the fact that housing is Australia’s favourite asset class for building wealth.
Executive Summary:
Our recommendations to the committee fall under three key areas
- The need for harmonisation of the regulatory environment across the property ecosystem to provide greater transparency, consistency, analysis and accountability.
- Supporting a framework for better data exchange across property sector silos to allow better planning, forecasting and to drive efficiency and support new policy analysis to address structural inequities.
- A review of the outmoded and no longer fit for purpose risk modelling that underpins the Australian home lending system examining how new big datasets can more effectively reduce risk while also delivering greater equality and transparency for home buyers.
- Traditional silos and data invisibility within the property ecosystem
Residential property is an $11 trillion asset class in Australia . It is the country’s favourite asset for building wealth and deeply connected to our national psyche. While housing is a basic human right, access to housing is increasingly out of reach for too many people and creating a generational divide.
The problems outlined in the committee’s terms of reference are structural, interconnected and deeply embedded within Australia’s housing and property ownership system at every level.
While we are delighted to share specific solutions and areas where our members are having an impact, we highlight that these are usually just a handful of individual businesses chipping away heroically at small corners of the problems.
It is our desire to provide a submission that assists the committee to see the bigger picture and provide insights into the need for broader structural reform.
Figure one shows the property ecosystem and reach of proptech across that ecosystem to provide context for our recommendations.
Figure 1: The Property Ecosystem & Reach of Proptech
Each of the seven pillars above operate within regulatory environments that are deeply fractionalised across eight state governments and 512 local councils.
In addition, each of the seven pillars above function as effective data silos of information.
Therefore, while each of the pillars above should provide essential insights into the quantity, quality, cost, location, ownership and usage of property, the invisible data locked inside each of these silos prevents government, industry or policymakers from a clear and adequate view and retards quality decision making.
Recommendation: National framework for Harmonising Local and State Regulation
Just as aged care and disability services delivery started out at local levels but are now governed by a national policy, vision and standards, there is an urgent need for harmonisation of initiatives across planning, regulation, supply and construction across local council, state and federal levels to remove bureaucracy and complexity that significantly impacts time and cost to bring property to market.
There is precedence for this – the REEDI Framework to develop the Home Energy Ratings Disclosure Framework is delivering a well researched and evidence based model to upgrade the energy efficiency of Australia’s existing homes.
- The adequacy of metrics available to policymakers for monitoring the ratio of new housing supply relative to population growth
The siloed nature of the property ecosystem ensures that it is difficult to create metrics for policymakers – or anyone in industry – to see the big picture of new housing supply planned, or coming to market.
This information lives predominantly in local government planning documentation that sits in PDF documents or scrolled plans in council basements and/or subjectively shared knowledge from developers and agencies operating in individual markets.
Mum and Dad developers represent 40% of the property development stock and are only visible through local government. However local government planning decisions are “by definition, haphazard and unquantifiable”.
This opacity of data and decision making comes at a huge cost. In 2018, the RBA identified that zoning restrictions raised the average price of detached houses by 73 per cent in Sydney, 69 per cent in Melbourne and 29 per cent in Brisbane. For apartments, the figures were 85 per cent in Sydney, 30 per cent in Melbourne and 26 per cent in Brisbane.
Nevertheless there are a number of early stage proptechs that are working hard to capture and bring this data to life, speed up decision making and support the creation of new housing indices. These include: Archistar, Propcode, Urban Prospects, Planning Vision/Developr, Propte/LandNow, OpenLot, UDrew and CanIBuild.
Capturing the data needed to create metrics in this space is manual, slow and costly and requires millions of dollars in investment for every business that currently attempts it. It also creates a privately owned ‘data race’.
But it does not need to be so.
Recommendations:
Some common guidelines and rules around how planning submissions are supplied would revolutionise data capture in this area allowing powerful new datasets to be created to deliver accurate and timely metrics giving full visibility of housing supply. We recommend:
- Harmonised legislation that obliges local councils to adopt standardised formats for the submission of development plans by PDF that ensures they are machine readable so that the valuable data within them can be easily extracted.
- Support for a Property Technology CRC to create harmonised guardrails to achieve interoperability for Australia’s digital property infrastructure and data sets.
- Consideration of a national core property dataset. This could naturally rest with the Land Services registries in each state.
- The nature and type of debt and equity arrangements being used to underpin housing development
In addition to data, the second underlying issue that runs across many of the inquiry’s terms of reference is the issue of current risk modelling and its suitability for purpose in 2024.
Current risk assessment modelling for both debt and equity arrangements that underpin housing development at both an individual and commercial level are outdated, limited in their effectiveness and stymie the very development they seek to support adding to the cost and timeliness of new homes coming to market.
Ironically, the outdated nature of the models actually introduces additional risk to the equation, supporting applications that ‘tick the boxes’ on the risk hypothesis rather than demonstrating with realtime data the actual capacity of the individual/s or organisation to pay.
Big data across both the lending and property ecosystem provides real time and specific insights that should now be used to establish the risk modelling of debt and equity arrangements.
Examples of proptechs in this space include Downsizer, which supports asset-rich homeowners to make the decision to move to a new off-the-plan apartment without the need for costly bridging finance, while at the same time using the guarantee of the sale to support more affordable developer finance.
A second example is CrowdProperty, which crowd sources funding for smaller off-the-plan projects delivering new funding options for small developers and new property investment options.
Recommendations:
Government instruct APRA to review current risk modelling frameworks used by the finance and lending industry, to assess their suitability for purpose in the current environment and understand the opportunities presented to industry through the secure incorporation of new and integrated data.
The adoption of our recommendations in section 1 and 2 would further enhance the risk modelling through ever improving data.
- Examples of effective priority treatment for aspiring Australian homeowners that do not compromise financial stability
The issue of outdated risk modelling is cruellest in how it plays out for ordinary young Australians now trying to buy a home. Current risk modelling is based on the following assumptions:
- You must save 20% for a deposit to be an ‘acceptable’ risk to the finance sector or pay punitive insurances to reduce that risk – not for yourself – but to protect the lending institution.
- You are required to save for a deposit while paying the highest rents ever recorded in Australia.
- First home buyers today are paying 7.5 times income for their home. This compares to previous generations who paid 3.5 times their salary.
- As a potential home owner, other debt should be minimal at the time of applying for your mortgage – ignoring that 45% of Australians aged between 25 and 34 have a university degree and therefore HECs debt.
- Your loan should be paid off by the time you retire at 60.
- You should purchase a property with a spouse or live in partner ignoring the fact that 37.9% of Australians have never been married or been in a civil partnership and the rate of marriage has fallen from 58.4% in 1991 to 46.9% in 2021.
Flipping the hypothesis of the committee on its head reveals that any young Australian who can save even a 5% deposit on a median priced property in any of the capital cities while paying a market rent and paying down a student loan arguably has the cash flow and is a better candidate for a mortgage than his or her parents were 25 years ago. Yet most in such a scenario are deemed to ‘compromise the financial stability’ of the current system and be unworthy of a loan.
Proptechs are solving these challenges in the following ways.
Helping home buyers plan, save & understand what they can afford: Property Dollar, ScaleApp. These apps, while excellent, identify and quantify the size of the challenge faced by buyers. While they make goal setting easier, they do not solve any of the inherent issues inherent in the current system.
Providing new ways to save or pay for deposits: Nel.fund, Deposit Power, Downsizer, FrontYa, Coposit, OwnHome, DepositBond. While all innovative, these solutions are designed to help buyers navigate around the current structural inequity in the system of requiring a 20% deposit, they do not solve it. In many cases, making it possible for first time buyers to lend more only deepens the issues.
Allowing fractionalised ownership of property: Bricklet, Getblocks, Domacom, BrickX, CoVESTA. These are best suited as property investment options and are designed for those who wish to buy property assets but cannot afford an entire building/title. They become complicated should one party wishes to live in the fractionalised property and many are not suited for this purpose.
Shared property ownership: Cooperty digitises the ‘tenants in common’ ownership model to allow shared ownership and mortgages. Cooperty is an innovative way for adult children to co-buy with parents, putting structure around the ‘bank of mum and dad’ that protects the asset ownership rights of all parties and provides transparency around the transaction. However, most banks will not lend on properties purchased by tenants in common with disparate age gaps because – wait for it – an elderly, asset rich parent does not fit their prescribed risk profile for a joint 25 year mortgage. (!!)
Recommendation:
We reiterate our recommendation in section 4 that Government instruct APRA to review current risk modelling frameworks used by the finance and lending industry, to assess their suitability for purpose in the current environment and urge for the current deposit requirement to be rigorously modelled against historical affordability benchmarks.
The Proptech Association Australia welcomes the opportunity to further assist the Committee with its inquiry. If you have any queries, please don’t hesitate to contact me on 0401 673 329.
Kylie Davis
President
Proptech Association Australia.
