Could Income-Restricted 2nd Units Work In Melbourne?

Image result for Australian secondary dwelling unit
An ADU somewhere in Australia. Sexy…  I’d live there.  Want privacy? Just put the garage door down.

In this post, I am going to test if an income-restricted affordable 2nd unit could pay for itself without government subsidy.

To do this we have to start with the household sizes and income levels that would be appropriate in this context.  Given the sizes of this kind of unit, I don’t think it would be fair to expect accessory/secondary dwelling units (ADUs, for short) to hold more than two occupants.

Here’s the rough annual rents paid by Very Low Income and Low Income households at those sizes:

Table 1: Max Annual Rents by HH Size and Income*
1 2
Very Low $9,724 $11,128
Low $15,548 $17,784

For background on how those income levels and rents are determined, see this post.

Under the “housing as infrastructure” concept, imagine a super fund putting $100,000,000 into a non-profit’s hands to build ADUs across Melbourne.  The fund would need a 7%/year return at current interest rates.  Making a few assumptions about annual maintenance costs (footnoted below*), I can calculate how much hard debt an ADU could carry over a fifteen year period based on the rent maximums posted above plus any residual revenue:

Table 2: 15 Year Serviceable Debt (and residual revenue)
1 2
Very Low $81,971 and ($15,818) $91,079 ($22,994)
Low $118,403 and ($47,353) $182,158 ($65,158)

ADUs are expected to range between $100,000 and $125,000 a unit in cost.  What Table 2 shows me is that ADUs with statutory limits to serve Low Income households could pay off construction debt with plenty of room to spare.  It also tells me that if the government kicked in just a small amount of equity, ADUs serving very low income households could be easily served through a program of this kind.

So, why on earth would any home-owner want to do this?  Here’s some ideas:

  1. So you can retire into something manageable and rent out your main home for income or pass on to your children.
  2. So you can rent out the ADU to a young working person who cannot afford sky high CBD rents, or a family friend who is recently divorced and cannot find an affordable place to live, etc.
  3. Have I mentioned it raises your property values?  A lot of buyers are attracted to owning a parcel with an income generator literally sitting in their backyard.

Now this dreamy vision I’m laying out could be complicated by a few issues, namely: the city or neighbours complaining about ADUs, trying to stop them, or demanding absurdly high impact fees or in-lieu parking payments.

So here’s an idea many people have said before that I’m asking you to consider again:

  1. By-right approval for ADUs serving low income households in transit-rich neighbourhoods,
  2. … Financed by a housing-as-infrastructure loan

The benefits of ADUs are not exclusive to affordability.  There’s also benefits around creating senior-friendly housing, encouraging (or helping to sustain) inter-generational mixing, promoting sustainability, and reducing social isolation.

Related image
Lovely backyard edition, don’t you think? / This looks like Ms. Honey’s house (From Matilda)

*Assumptions:

  • $500/year set aside for maintenance, $120 for insurance, $50 for other random stuff.
  • Loan assumptions: 15 year fixed interest rate of 7%.
  • Financing assumptions: rents and costs assumed to increase at 2% a year, value of money expected to decline 3% annually

Published by mattdpalm

Doctoral Student UC Davis USDOT Graduate Eisenhower Fellow 2014-2015

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

%d bloggers like this: