Dr Martin Fahy CEO of ASFA discusses housing affordability and superannuation for young people
Housing Affordability and Superannuation
Ross: We’ve been talking about the issue about Housing Finance. The way in which you get more younger people into the housing market because as we heard previously from Saul Eslake, the number of first home buyers in proportion to the total number of home buyers has collapsed to less than 10%. In the case of Sydney, less than 5%. Now the fact is that the number of housing investors has grown. You got the haves and have-not’s. It’s hard to get started. Some people as we’ve taken your calls have said what about superannuation?
Problem is you’re robbing Peter to pay Paul because you are saving for your retirement? Where you want to actually have it. Then how do you retire if you don’t have a house? Now the government’s also saying, “Well if you have a big house when you retire, you downgrade maybe you can put that money into super”. There’s all sorts of ideas. Let’s go to the Association of Superannuation Funds in Australia. This represents all of the big superannuation funds in this country. The chief executive is Dr. Martin Fahy, he’s on the line right now. Many thanks for your time Martin.
Martin: Hi Ross, how are you?
Ross: Good, thank you. You’ve heard the treasurer today. You’ve seen what he’s said. Is he on the mark here or is it simply a case that involves all of a sudden we start pulling money out of superannuation from young people, to go and buy houses which are more expensive now. It’s A you’re going to push up the price, and B it’s not necessarily going to solve the problem long term.
Martin: It’s no doubt Ross that we are at a very specific point in the property cycle, I’m not a property expert. But if you look at the income multiples are currently household. I think posing debt is 120% of GDP according to Moody’s today. We are at a very unique point in the property cycle. What we were encouraged by was the treasurer talked about an institutional solution to this problem of housing affordability in the medium-term. This is the idea that superannuation funds at an institutional level, might start to invest more in residential property as an asset class.
Ross: In other words what you’re saying is a big superannuation funds, suddenly go out and start to develop. Isn’t that what the likes of the CBUS and others of this world already do? If you’ve got superannuation funds they invest in companies such as Stockland or Mervac who are doing big property developments anyway. Doesn’t it alternately come from the superannuation funds money anyway? From the ordinary person is putting in their 99.5% per year of their pay?
Assets Super Funds invest in
Martin: Yes, superannuation funds are invested right across the ASX. Not just in housing and construction companies, property companies but in infrastructure, airline, telco et cetera. What we’re looking at here though is looking at bringing more supply of housing into the private rental market and particularly into the affordable markets through social impact bonds and other mechanisms. The challenge is at the moment people invest in the bulk of the property that’s owned as an investment is held by mom and dad. In other countries you have much more involvement from pension funds and institutions.
Here the other feature you have is the bulk of the return comes through capital appreciation. Not through the yield. What we have is this particular asset class that needs to go up and up in price all the time. What an institutional investor would be looking for in real estate is to transform it into a fixed income return that they would hold over a 40-year period. That would allow me to give you a 10-year lease so that you could rent to buy. It would allow me to give you a 30-year lease as a retiree to downsize. It would help first-time buyers. We’d have to make some changes to how we can transform real estate into a fixed income investment for super funds.
Ross: It was no doubt because if I look right now at the Corelogic monthly numbers and it tells me that if I’m renting an apartment or a house in Melbourne or Sydney, I’m getting less than 3% yield. The fact is that’s not as good as Bank interest right now. Therefore why would you invest in a property investment of fair yield basis, given the fact that most people who are there right now speculating the prices will keep on going up.
Martin: This is something that leaves us out of line with patterns that we see in other geographies. Where there’s a greater emphasis A, on longer term tendencies for rentals that gives people security of 10 years so that their kids can keep going to school over a five, 10, 15 year period. But it does mean that we’ve got this focus on capital gain. As an institutional investor what a superannuation fund.
What we’re saying is let’s find property that’s close to mass transport. Maybe it’s Crown land and land adjacent to it. We’ve designated for affordable housing first-time buyers, rent to buy people who are retiring and we build livable precincts, high quality property. Where a qualifying investing Institution can securitize the rent book and it can hold this and it’s a 40 year investment. Not for the capital appreciation. That just adds to the property increase., but holds it as an income.
Ross: Okay, the problem is largely younger people. Now you’re also polling younger people largely because you wonder whether they actually understand the benefits of superannuation. Of course a lot of them say, “Look my priorities is not for when I am 65 years old or 70 years old, my priority is right now. I want to get that house”. When they see their money locked up in super, they’re wondering how they can unlock it. To try and afford their first home.
Martin: What we know is that young people generally aren’t as engaged with superannuation as they should be. They trust it as an institution and an institutional level. For many of them the idea of a deferred gratification, we’re asking young people, “Would you prefer to have a thousand dollars in your superannuation or $300 in cash?” It’s interesting to see that most young people know that a thousand dollars in their superannuation will compound openly will grow and they’ll get a return. It’s the right answer.
That short-term Drive for cash and the need to get into a house is very, very strong. We know that over 50%, just over 50% of 30 to 39 year old’s have still not achieved home ownership. That’s a really big change in the cultural pattern. We’re also finding more and more people at the other end going into retirement with a mortgage. If we look at the 60 to 64 year-old category, about 15% of those people have a mortgage in excess of $100,000. That’s a big change historically.
Ross: Well, especially if you’re on the age of pension there is no doubt. Now that question that Martin Faye actually put out there. If you had to choose between instant and delayed gratification, $300 cash now a thousand dollars for your active superannuation account that could equal $4,000 when you retire, what would you choose and why? It is a question for ASFA youth week 2017 competition for people who are under the age of 25. They can apply and give a written or video-entry, Youth Week at superannuation.ASN.au Dr. Martin Fay, chief executive of the Association of super funds of Australia. I appreciate your time in the program.
Martin: Thank you Ross.