Federal Treasurer Scott Morrison recently challenged state governments to do something to make housing more affordable in Australia’s largest cities, and in Sydney in particular.

The Treasurer cited complex state planning systems slowing down housing supply. One part of the affordability equation is to increase supply so that there are more new homes than people looking for homes. Currently in Sydney, we are only completing 30,000 new homes a year in boom times. Over 20 years, an average of 37,000 a year is needed, so in boom times we should have at least 40,000. So an extra 10,000 a year would help.

Many academics and community housing agencies call for inclusionary zoning as a way to provide more affordable homes. The theory here is that developers are making too much money, so they should provide 30 per cent of new housing projects to community housing providers who will rent them out to people on low incomes.

The problem with this is that developers are already hit with a raft of costs, including infrastructure contributions, that are adding hundreds of thousands of dollars to the cost of a new home. If the developer gives away 30 per cent of homes on top of the other costs, they will need to recoup this from the 70 per cent of units that can be sold to the market.

Clearly this will inflate the cost of the 70 per cent of new homes significantly. There must be a better way to get affordable housing that incentivises developers rather than taxing them. Is there a ‘carrot’ approach rather than a ’stick’ approach?

Some research into the data on the website of the NSW Department of Planning and Environment shows there is a policy that acts as an incentive to the development industry to provide affordable housing. The policy is the Affordable Rental Housing State Environmental Planning Policy (SEPP). The current SEPP encourages developments to include 20 per cent floor space for affordable housing, with the incentive of an increased uplift in floor space ratio for the development as a whole. However, the formula for increased floor space is written in a way that means that the amount of uplift provided is well below the 20 per cent of floor space allocated for affordable housing, meaning there is little bonus or incentive for developers to provide the affordable housing.

The end product is that not much affordable housing has been built under the SEPP that aims to promote the provision of this desperately needed housing. All that is needed is for the NSW Minister for Planning to change the formula to allow an uplift of 20 per cent on floor space and height over the current planning controls provided the uplift is for affordable rental housing.

This sounds incredibly simple, and it is. It turns a clause that becomes a financial burden to one that is an incentive. Our proposal says the developer can add 20 per cent of floor space to their project provided the units built there are affordable. The Urban Taskforce estimates that in Sydney this could add 4,000 new affordable apartments a year, adding up to 40,000 over 10 years. These homes would be on top of the current annual Sydney home production of 30,000.

The Sydney community would need to support this slight increase in height and floor space. A five-storey building under the council plan would become six storeys, and a 10-storey block would become 12 storeys. It is important that the new affordable housing is for a rental stream that charges 20 per cent less than the market rent in that local government area.

The Urban Taskforce proposes the adoption of the affordable housing definition used by the Federal Government’s National Rental Assistance Scheme (NRAS) as 20 per cent less than the market rental in the local government area along with the NRAS thresholds for income levels. As with NRAS, the rental would be for 10 years, after which the developer could put the apartments on the market. There would, however, be a continual supply of affordable apartments being built and the renewal of stock, ensuring that this affordable housing stock does not become run down or substandard.

The affordable rental homes could be managed over the 10 years by community housing providers, or other managers of these properties could emerge. These organisations would measure income thresholds and manage the rental process. As with the NRAS scheme and the NSW Affordable Rental Housing SEPP, the 10-year period would be registered on the title of the property.

The aim of the 10-year period is to keep a well-maintained, continuous supply of affordable housing rather than allocating the property to a tenant for life. This encourages tenants to move up the housing ladder over time. With the tens of thousands of affordable homes that could flow from this policy, a new asset class can emerge that would attract institutional investors like superannuation funds, and this would lock in an ongoing program of affordable homes for decades.

The scale of the affordability crisis in Australian cities, particularly in Sydney, is such that big picture ideas are needed to mobilise thousands of affordable homes. We need a systemic approach to solving housing affordability that attracts funds, is supported by developers and is understood by the community. Slight increases in height and density are a small trade-off for the provision of cheaper homes for the next generation.