A $1 billion “world-leading” and “Australian first” pre-sale finance guarantee policy is hoped to streamline more housing in New South Wales, but how exactly does it work?

Treasurer Daniel Mookhey unveiled the scheme in his third budget this week, targeting the private sector to deliver more housing. 

The state will guarantee the pre-sale of up to 5000 apartments or units over five years for residential developments that require a certain number of dwellings to be sold before construction can begin.

The state claims this will unlock a total of 15,000 new homes.

Mookhey said this cuts the red tape around one of the biggest financing bottlenecks for developers – securing enough pre-sales to qualify for funding from banks and lenders.

He added that this was contributing to the housing crisis by causing months to years-long delays to housing projects. 

“These are the projects that will add more low-to-medium density housing in neighbourhoods people love to live in,” he said.

Here is a breakdown of how exactly the plan will work.

The state government has approved a $1 billion revolving fund, which will be used to provide each low-to-medium density housing project with pre-sale guarantees of between $5 million and $50 million.

Developers with planning approval and at least 50 per cent pre-sales can apply.

Typically, banks require 80 per cent pre-sales.

After assessments and approval, they have to begin construction within six months.

If the homes are sold, the guarantee is extinguished and poured back into the $1 billion fund to be used again for other projects.

If the homes remain unsold, the developer can call on the guarantee, which means the state will buy the homes at a discounted price.

The government can then sell these homes to buy or rent, or keep them as affordable or social housing.

According to Tenants Union of NSW chief executive Leo Patterson Ross, the guarantee partly addressed the financial issues that prevent housing from being built.

“The guarantee acknowledges that the private market is not well suited to delivering the community’s housing needs as opposed to investment returns,” he said.

“The financial arrangements needed either prevent housing being built at all, or passes on risks and their financial and non-financial costs to the consumer.”

But, Ross said, the scheme failed to directly influence the size or type of dwelling, including encouraging affordability. 

“The government suggests the guarantee may fast-track 5000 dwellings, though not necessarily through direct expenditure,” he said. 

“We were disappointed that the government did not continue to directly fund the delivery of genuinely affordable, publicly funded housing of which we need many hundreds of thousands, so every billion counts.”

Mookhey admitted the plan was not a “silver bullet” but denied that it was a “drop in the ocean”.

“It is a canny use of our state’s balancing sheet that is carefully calibrated to bring on 15,000 new dwellings,” he said at a press conference this week.

“What this means is that industry can spend less time and resources having to convince their banks that there are buyers of these apartments and more time building them.”

Meanwhile, other industry groups hailed the scheme as a “real breakthrough”.

“Projects that tick all the boxes, planning approval, market demand, sound delivery partners, are unable to proceed because developers can’t meet unworkable pre-sale thresholds,” Property Council NSW executive director Katie Stevenson said.

“The pre-sale finance guarantee responds directly to that issue.”