In our world, capital drives outcomes. Throw money at a problem, and something will happen—whether good or bad is another question. Australia throws a lot of money at housing, but not necessarily in the right way or by the right people.

Capital markets exist to connect those with money to those who need it.

Australia's capital markets are shallow. Financing here is pretty vanilla, with fewer creative options. In contrast, the U.S. has deep capital markets—if you can dream it, they can securitise it. Smart people (definitely smarter than me) engineer financial structures for almost anything. The upside? Good ideas get funded.

I was reminded of this when Larry Fink (BlackRock, not Blackstone) discussed 30-year fixed-rate mortgages in the Australian Financial Review (Larry Fink says 30-year fixed rate mortgages could change Australia). In the U.S., these mortgages help families secure homeownership without worrying about interest rate fluctuations. If rates rise, they're locked in. If they fall, they refinance. This makes monetary policy less effective—rate hikes don't scare homeowners—but as an onramp to the middle class and beyond, it's fantastic.

Backing these loans are mortgage giants Freddie Mac and Fannie Mae, quasi-government institutions ensuring the middle class can access stable financing. The result? Housing is less speculative (outside of NYC and LA). A teacher and firefighter in Iowa can secure a reasonable home loan for 30 years. Prices rise, but it's nowhere near the rollercoaster we have in Australia.

So what does a middle-class couple in Iowa have to do with Specialist Disability Accommodation (SDA) in regional NSW? Australia's shallow markets don't just hinder first-home buyers; they also limit creative financing for affordable and disability housing. Here, developers can't access cheap capital, so they charge higher rents. Instead of structuring innovative funding models, the government simply inflates rental incomes to entice investment (as evidenced in the SDA sector).

In the U.S., deep capital markets offer alternative solutions:

Low-Income Housing Tax Credits (LIHTC): Developers receive tax credits for building affordable housing. These credits can be sold to investors, who then get a dollar-for-dollar tax reduction over 10 years. This system channels private investment into affordable housing without relying on direct government spending.

Municipal Bonds: Local governments issue bonds, investors buy them, and the funds finance affordable housing at low interest rates. Developers get cheap loans, allowing them to offer lower rents.

Laymen Speak

A building costs the same to operate (i.e. staff, repairs, maintenance, council rates etc.) whether you are renting units for $1,000 per day or $1,000 per year. For an investor to earn a reasonable return, they can either charge a high rent or lower their cost of development. In the USA, they lower the costs of development; in Australia, we increase the rent.

Both mechanisms make affordable housing feasible without massive subsidies. Australia, lacking these tools, compensates by making SDA rental amounts 5-6 times market rates—great for investors, but a Band-Aid solution.

Since diving into SDA, I've been struck by the stark contrast between Australian and U.S. capital markets. Then Larry Fink connected the dots: Australia's $4 trillion superannuation sector could unlock deep capital markets. If super funds mobilised their capital into secondary markets, structured finance solutions like LIHTC and municipal bonds could thrive.

But there's a catch. For this to work, Australia must stop treating residential property as a speculative asset. A 30-year mortgage system would curb the wild price appreciation homeowners expect. That's the trade-off: preserving the social compact (work hard, buy a home, build a future) means existing homeowners might not see endless price gains.

This is beyond my (APS) pay grade, but if we're serious about housing reform, deepening capital markets is the way forward. It's a market-driven solution that could revolutionise Australia's housing sector—if we're willing to take a leap into the deep capital markets pool.

Worked Examples from Deep Capital Markets World

LIHTC Project Example

Project Setup: A nonprofit wants to build a 50-unit affordable housing complex costing $10M. To qualify for LIHTC, 40% of units must be rented to low-income households.

Tax Credit Allocation: The state awards the project $1M in tax credits annually for 10 years ($10M total).

Investor Involvement: Since the nonprofit can't use tax credits directly, it sells them to a bank for upfront capital—typically at $0.85-$0.95 per $1 of credit. If sold at $0.90, the developer gets $9M.

Remaining Financing: The last $1M comes from a small mortgage and a government grant.

Outcome: With reduced debt, the project sustains affordable rents while staying financially viable.

Municipal Bonds in Action

A city wants to build 500 affordable units for $100M.

  • It issues $100M in municipal bonds at 3% interest (tax-free for investors).
  • Banks and pension funds buy the bonds, raising capital.
  • The city loans funds to a nonprofit developer at 2% interest.
  • The developer builds the housing, charges below-market rents, and repays the city over 30 years.
  • The city repays bondholders with interest, making it a sustainable financing model.