The New South Wales government’s $1 billion plan to sell the Waterloo Estate public housing land in central Sydney will deliver fewer than 100 additional “social” homes over the next five years, ultimately doing nothing to relieve pressure on a waiting list that is currently more than 50,000 households long.

A confidential briefing paper to the Perrottet government’s powerful expenditure review committee, obtained by The Saturday Paper, reveals the proposal – which only went on public exhibition on Thursday – has settled on the sale of the high-value inner-city land to developers in return for 3050 new homes, 28 per cent of which will be social. This is less than half of what was initially deemed possible for the project. A further 64 per cent will be ordinary private homes and 8 per cent will be “affordable”.

The submission recommends the government approve the three-stage procurement process for the project, which is expected to start in May.

“The process is consistent with other Communities Plus projects,” the note says, “targeting tier 1 developers with the capability and capacity to deliver the project, foster collaboration and enhance value for money.”

Under the $22 billion “Communities Plus” program, which has been largely scrubbed from government websites but is still referenced internally, the state’s Land and Housing Corporation (LAHC) “redevelops sites throughout metropolitan Sydney and regional NSW into sustainable mixed communities”.

The asset recycling strategy is explicitly designed to cost the NSW government nothing and the nominal ratio of social to market homes built in the wake of land sales – 30 per cent and 70 per cent – is configured bluntly to achieve a budget-neutral renewal of old public housing stock.

Last month, the LAHC announced public consultation on a plan to rezone and rebuild the Argyll Estate in Coffs Harbour on the NSW mid-north coast, replacing many single-storey homes with small apartments, duplexes and terraces of between two and four storeys.

Minister for Planning and Homes Anthony Roberts said the fast-tracked rezoning in concert with Coffs Harbour City Council would deliver “new social and private housing that better suits the needs of the community”.

Similar plans to “repurpose government land” are afoot in Cooma and across regional areas in the state. In Wollongong, construction is about to begin on a new residential high-rise in the CBD, which will deliver 65 new mixed-use apartments, 18 of which will be for social housing tenants, nine as affordable housing stock and the rest available as private homes.

Across Greater Sydney, the Communities Plus model is moving at pace in 36 different suburbs. Development applications have been lodged to replace 142 social housing dwellings in Arncliffe with 744 new residential units, 180 of which will be social. There are two major projects to “revitalise” public housing commission accommodation in Glebe.

Shelter NSW says the current approach to selling off land is “cannibalising” the housing stock.

“We will continue to call on the state and Commonwealth governments to make an urgent and widespread investment in social housing acquisition and construction. NSW needs 5000 additional dwellings per year for a decade just to catch up,” its chief executive John Engeler said. “But at the same time, we implore the NSW government to completely reimagine the business model that is currently tying the hands of its lead agencies in delivering that housing.”

While the Communities Plus strategy has been in place for many years, it faces its biggest test with the sale of the Waterloo Estate, the largest social housing community in NSW.

In March last year, the City of Sydney was removed as the planning lead on the Waterloo South redevelopment. It was a significant power shift on the project.

A state government ministerial brief at the time, seen by The Saturday Paper, noted that the council’s “alternate masterplan” for the redevelopment “featured a greater volume of social and affordable housing (70 per cent) comparatively to private housing (30 per cent) and would require a financial contribution from government”.

“Following eighteen meetings between the City of Sydney and LAHC the two plans are not aligned in relation to street widening, the proportion of social and private housing, the retention of existing towers in Waterloo North and the number of dwellings,” the brief says. “The submission seeks the Cabinet Committee on Delivery and Performance to approve the City of Sydney be advised that their proposed modifications make the project unviable and request that the LAHC plan proceed to a council meeting.”

Even after the local council revised its proposal to include a 50:50 split between social and affordable housing versus private homes, it was relegated to the background. The state government relied on analysis of the proposals by an Independent Advisory Group (IAG) and now leads the project, citing the advisory group’s findings.

The independent group – led by former director-general of planning in NSW and professor of urban policy at UNSW Sydney Sue Holliday – does not believe council’s proposal was “feasible”. However, the advice made clear that the Waterloo South project could “support 10 per cent affordable housing in addition to the 30 per cent social housing”.

Instead, the state is pushing ahead with plans for just 8 per cent affordable housing and 28 per cent social.

“The IAG believe that in the Waterloo precinct, there should ideally be more affordable housing than the 10 per cent proposed due to the demography, the clear need and the income circumstances of the population in this area,” the report says.

“However, the feasibility analysis shows that this is not possible within LAHC’s feasibility constraints. To achieve additional affordable housing units beyond that, the state and/or federal government must subsidise additional affordable units to meet the future needs of this area.”

Critics of the Communities Plus model, which is the sole source of such “feasibility constraints”, have argued that budget neutrality is an artificial constraint.

In a report commissioned by Shelter NSW, and not yet released, economist Dr Cameron Murray and Professor Peter Phibbs examined the fundamental assumptions about LAHC’s strategy to gradually dispose of its $54 billion asset portfolio in a bid to fund new social and affordable housing.

As Murray writes, the portfolio “grew from $32 billion over the prior seven years, reflecting a 7.8 per cent annual growth rate. For comparison, this property portfolio is five times larger than the market capitalisation of the largest listed developer, Stockland, and nine times larger than major developer Lendlease”.

In short, the authors argue, the self-funding strategy of LAHC is flawed, “self-limiting” and contributing to the erosion of a valuable asset base.

“Unlike most other government spending, public housing generates an economic return to the government in addition to the direct housing policy outcomes,” the report says. “LAHC also makes around $800 million per year in rental income from its property portfolio. LAHC’s balance sheet is larger than any of Australia’s largest private housing developers.

“This enables it to carry financial risk at low cost. However, unlike other development companies, it does not borrow extensively in the capital markets to leverage this return on its property portfolio, nor to fund new housing or redevelopment projects.”

Using a combination of build-to-rent, social housing and private dwellings, Murray showed a way to almost double the number of public homes on the Waterloo South site, to 1550, while holding onto some of the risk of the asset and therefore the long-term returns.

“When there is a focus more on the long-term asset returns available, rather than only on the short-term costs during the redevelopment period, public housing outcomes can be greatly enhanced even under the self-fund constraint,” he said.

“Exceeding the self-fund constraint and using cash subsidies in addition to real estate value subsidies could further accelerate the expansion of publicly owned housing.”

Community advocates such as Shelter NSW argue that 5000 additional units of social housing are required each year for the next decade, just to address current backlogs in the waiting list and help meet future demand.

Late last year, UNSW Sydney professor of housing research and policy Hal Pawson did the sums on national demand and supply and found the situation in NSW to be one of almost no growth.

“For example, also factoring in the numbers of existing public housing properties that governments plan to demolish or sell over just the next three years,” he wrote, “we estimate the prospective net gain in social housing dwellings over this period will be only 400 in NSW, compared with 8300 in Victoria and 4400 in Queensland.”

Those numbers were prepared before an announcement this week that fundamentally changes Victoria’s public housing policy. On Tuesday, the state’s treasurer, Tim Pallas, announced his government had ditched its proposed 1.75 per cent levy on the value of new housing developments with three or more dwellings in Melbourne, Geelong, Bendigo and Ballarat.

The tax, which became the subject of a vicious rearguard action from councils and the property industry, would have raised $800 million and been used to build an average of 1700 social units each year.

The reforms, Pallas said, are now “done, they are dusted and they are finished”.

On Thursday, two days after his department received questions from The Saturday Paper about the timing of the Waterloo Estate (South) redevelopment, NSW Minister for Planning and Homes Anthony Roberts put out a media release announcing the plans for the project had finally been released for public consultation.

“This is one of NSW’s most significant urban regeneration projects and it’s imperative we get it moving,” he said.

“If approved, the Waterloo South redevelopment will provide a vital refresh for tired social housing as well as thousands of new inner-city homes, plus more than 2 hectares of public open space to support recreational activities like field sports, cycling and walking.”

Curiously, the media release has revised down the proportion of affordable housing in the development from 8 per cent to 7 per cent, much less than the minimum 10 per cent argued by the government’s independent advisers.

The public exhibition of the planning proposal ends on April 29, just two days before bureaucrats have already planned to launch an expression of interest from developers for the site.

Over the next 20 to 30 years, the rest of the Waterloo Estate (Central and North) will follow, with preferential involvement from the developers of Waterloo South. In total, the government hopes to create 6000 new homes of all types on the site it has owned for half a century.

At this rate, the disposal of the billion-dollar site will create just 10 new social units each year over the next three decades.

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