WA government underwrites new apartment builds to combat ‘market failure’

Western Australia’s government is taking the extraordinary step of underwriting new apartment builds to address “market failure” in high-density housing in the state.

In what was dubbed an “elegant” solution to housing pressures by Premier Roger Cook, the state will set aside $250 million from its upcoming budget to guarantee the purchase of up to 50 per cent of off-the-plan apartments or townhouses at yet-to-be-built projects.

It is expected to help fund the delivery of up to 1200 apartments in the state.

Cook credit Treasurer Rita Saffioti and Housing Minister John Carey for the initiative, which he said was “elegant”, “clever”, and would unlock more private investment.

The idea is that by guaranteeing apartment purchases, developers will be able to easily meet strict bank requirements that more than 50 per cent of dwellings must be presold before the bank approves finance to begin construction.

The guarantee, provided by WA’s own lender, Keystart, will see the government purchase up to 50 per cent of unsold apartments or townhouses once the project is complete, at 10 per cent below the market rate.

Keystart will use those purchased dwellings in its shared equity program.

If the developer sells those apartments privately during construction, the government is released from its guarantee.

“It’s giving the developers the ability to convert the approval into construction in the affordable apartment space,” Saffioti said.

“Financial institutions are now requiring between 50 per cent to 80 per cent of pre-sales to support the financing of these developments.”

Saffioti said there would be risk to the government if the builders collapsed, but it was worth the reward.

“Our risk is similar to any home buyer in relation to the pre-sales guarantees, but we believe we need to be part of this,” she said.

“If we don’t partner to get these apartments built, then we won’t get them built. It is as simple as that.”

The Keystart initiative is modelled after the NSW government’s $1 billion pre-sale finance guarantee, which was launched in October and has received 45 expressions of interest from developers.

Cook also announced an increase in the Keystart home price threshold from $800,000 to $860,000.

Carey said the scheme was an unprecedented measure for unprecedented times.

“We need apartments. It is part of Perth’s future. We want to keep growing greenfield estates, but for those West Australians who want choice, we need to ensure that we do have apartments coming into the market,” he said.

Property Council of WA executive director Nicola Brischetto had been advocating for the scheme and was pleased it had been adopted.

“It’s not unusual for the government to step in when there’s market failure,” she said.

“Underwriting pre-sales helps [developers] by allowing them to start that development faster, and gives a little bit more flexibility to respond to changes in construction costs.”

Strategic Property Group managing director Trent Fleskens said, as a positive, it would help get apartment developments off the ground quicker.

However, from a developer’s perspective, if the guarantee is called in, it means they will be selling unsold stock at a 10 per cent discount.

“It’s a backstop that would have protected a few apartment developers in the last crash from going bust,” he said.

“The most likely outcome in this market is that it will allow developments to go straight to build stage, which derisks the project and then most of them won’t call the guarantee because they won’t have to and because they won’t want to sell for 10 per cent discount.

“Overall it’s a very strong policy and fixes a major development risk for the apartment segment.”

Fleskens said areas the policy didn’t fix were the fact that most high density projects did not stack up at the moment, nor the lack of builders.