CHAPTER 5
SUPER FOR HOUSING
5.1 The Committee is required to report on the implications of the enormous
growth in superannuation fund assets in Australia for housing finance.
It has considered two aspects of this question: investment in rental housing
and public housing stock by super funds; and the drawdown of an individual's
super funds to assist with the purchase of a home.
Investment in housing infrastructure
5.2 Typically, super funds have not invested directly in residential
housing, probably because of its low unit cost and high administrative
requirements. If super funds could be encouraged to do so, then a flexibility
in the supply of public housing could be introduced. This is not necessarily
to suggest that more housing is required, but that the private rather
than the public sector build it, thus freeing up government money for
other uses. The Department of Social Security (DSS) has advised the Committee
of the Commonwealth's support for private investment in public rental
housing. [1]
5.3 Super funds will diversify their assets in order to reduce risk.
Housing can be part of this diversification if it can be packaged in such
a way as to provide the kind of returns that would attract super funds.
Investment in residential property may also help reduce volatility in
a portfolio.
5.4 A project in housing could appeal to a super fund if the return was
higher than the typically benchmarked return on government bonds, for
example. It may be that housing projects could be packaged as some recent
road projects have been, where securities have been listed on the stock
exchange. The Committee was told that they had been readily accepted by
investors and that there was a huge untapped market for such projects.
Of course, the usual difficulties with infrastructure projects, such as
the long gestation period, would have to be taken into account.
5.5 The bond market provides another avenue. If a project were to be
structured in such a way that there was a tradeable debt instrument rather
than bank debt, a super fund would be able to invest and still maintain
liquidity. [2]
5.6 Examples of private involvement in public housing in New South Wales
include the PEP (Public Equity Participation) Schemes I and II. Under
these schemes, AMP purchased dwellings in Sydney which were then leased
to the NSW Department of Housing. [3]
5.7 In the first scheme, AMP provided initial capital to fund the acquisition
of 1 000 dwellings which were let to public housing tenants. The homes
were leased to the NSW Department of Housing on a guaranteed inflation-linked
rental and guaranteed re-purchase after twenty-one years. The Department
of Housing assumed maintenance and management responsibility. The Department
and AMP share in any capital gain in the houses over and above the compounded
inflation rate. The overall cost to the NSW government was a one-off payment
used to subsidise the difference between the investor yield required and
net rental income.
5.8 The second project took the form of an extension of the first, involving
again a one-off payment by government.AMP has also invested $100 million
in a single placement of state government guaranteed Victorian housing
bonds, designed to provide housing for low income families. [4]
5.9 These examples indicate one way housing can be 'packaged' into something
that may appeal to super funds, provided returns are within the desirable
parameters. AMP, however, has submitted that its analysis of such investments
indicates that residential real estate is the least attractive of all
the property classes for institutional investors, with other, alternative
investments in infrastructure providing substantially higher returns.
AMP has said that expectations of the returns and terms acceptable to
attract institutional investors in social housing are 'extremely optimistic'.
[5]
5.10 The Committee notes differing views about what investment in social
housing infrastructure can offer the institutional investor. It is not
in a position to prefer one view over another. In so far as superannuation
funds are concerned, that is the task of trustees and their investment
managers.
5.11 Lack of certainty about the taxation treatment of investment in
housing has caused the private sector difficulty. Section 51AD and Division
16D of the Tax Act, designed to deal with leasing arrangements with tax
exempt entities, operate to deny normal business deductions to a private
sector owner of property who has entered into a lease arrangement with
a tax exempt entity such as a government, the Committee has been told.
[6]
5.12 Mr Campbell, Director, Infrastructure Finance, Fay Richwhite Australia
Ltd, said:
It is obvious to see how this could impact in the housing arena,
where a private sector owner seeks to lease residential housing to a
state government authority for leasing to public supported tenants.
The very fact that the government enters into a lease with the private
sector could operate to deny the private sector owner the tax deductions
which you or I as individuals would be able to access if we negatively
geared a property investment. [7]
5.13 The Committee considered whether some kind of investment allowance
or special tax arrangement would be useful as a means of encouraging super
funds to invest in housing. Mr Campbell noted 'an obscure section of the
tax act which allows an investment allowance for short term traveller
accommodation' and suggested that a similar type of proposal might work
in relation to housing. [8]
5.14 Mr Campbell made it clear that, in his view, his proposal for super
fund investment in public housing infrastructure was viable without so-called
tax concessions, as long as the law was clarified to establish that the
funds could be entitled to the same sorts of deductions that personal
investors would be entitled to if they were to invest in residential property.
[9] To the extent that the law is unclear
in this way, the development of worthwhile projects could be hindered.
5.15 The Committee recommended in chapter 3 that the government review
the intent and operation of the infrastructure borrowings concessions
and clarify the position. It believes this recommendation meets the concerns
that have been raised by Mr Campbell. It does not believe that investment
in housing infrastructure calls for any further special consideration.
Home purchase assistance
5.16 From time to time, calls are made for the use of individuals' superannuation
monies to assist with a home purchase. In the 1993 election campaign,
both of the major parties put forward proposals to allow the use of superannuation
funds to finance the purchase of housing by members. [10]
5.17 In October 1995, the Australian Democrats expressed support for
a limited drawdown of super funds for low to middle income earners to
assist with home purchase. [11]
5.18 More recently, the government in its pre 1996 election Housing Policy
Statement, said it was attracted to allowing first home buyers to withdraw
a portion of their superannuation contributions towards the cost of a
deposit on their first home. The Committee understands that steps are
currently underway to examine the implementation of this proposal. [12]
5.19 In its report Super for Housing [13]
the Committee proceeded cautiously, noting many of the pitfalls inherent
in such a proposal and advocating further investigation if such a scheme
were to be set up. It concluded that any such scheme would have to be
tightly targeted.In this inquiry, the Committee received a number of submissions
claiming there was little justification for the introduction of a scheme
whereby super funds could be drawn down and used for the purchase of a
home. These included submissions from the Life Investment and Superannuation
Association of Australia Inc (LISA) and the Association of Superannuation
Funds of Australia Limited (ASFA). [14]
5.20 A number of reasons are put forward in support of this position.
Arguably, Australia does not need greater investment in housing. It already
has one of the highest percentages of home ownership in the world, with
around 70% of Australians living in owner occupied dwellings. Lower interest
rates mean that home affordability [15]
has increased and home accessibility [16]
has also improved in recent years. In addition, home ownership receives
favourable tax treatment, for example in relation to capital gains tax.Allowing
access to superannuation for housing is more likely to increase the average
size or quality of dwellings (or allow people to increase current consumption,
with lower mortgage payments) than the rate of home ownership. Thus additional
investment in housing would be equivalent to consumption rather than adding
to the productive capacity of the economy. [17]
5.21 Superannuants are already able to access their super contributions
in situations of hardship. Hardship may include a case where a person
may lose his or her home if mortgage repayments cannot be met. In 1994-95,
the ISC received 39 680 hardship applications, 82% of which were accepted
in full and 9% of which were accepted in part. [18]
Many of these related to housing. [19]
5.22 Average balances per fund member tend to be small - the Committee
has been told in the past that it would be some time in the next century
before the average account member balance was as high as $10 000 [20]
- and proposals for the draw down of super monies for housing have always
only related to a portion of those monies. Yet it is usually a minimum
of 10% of the purchase price that is required as a deposit on a home purchase.
Based on home loan figures for 1994-95, the average deposit required would
be at least $7-9000. [21] It is likely
that those who would be most in need of assistance for the purchase of
a home would be those most unlikely to have sufficient super monies to
draw down to assist.
5.23 It is undeniable that home ownership contributes to security in
retirement and that pensioners owning their own homes require less taxpayer
support than renters. Home ownership may be seen as an alternative form
of saving, as a source of security in later life, and as an opportunity
to avoid the payment of rent. Home ownership is an important component
of retirement needs, then, but it is not a substitute for income support,
and comes at a cost to public saving:
... access to superannuation funds would direct savings from
an asset (superannuation) on which returns are taxed, even if concessionally,
to an asset (housing) were returns are not taxed. [22]
5.24 There would also be an adverse impact on a member's end benefit,
perhaps out of proportion to the relatively small withdrawal that might
have been made, because of the compound effect on the account of the interest
forgone. It is difficult to estimate the effect on the overall level of
superannuation funds if a 'super for housing' proposal were to be put
in place. While it might be small initially, when few people could be
expected to have sufficient super monies to draw down, the long term effects
could be considerable, with a consequent increase in uptake of publicly
funded pensions in addition to a reduced pool of national savings.
The ACTU/National Mutual scheme
5.25 The Committee notes the continuing success of the ACTU/National
Mutual Super Members' Home Loans (SMHL) scheme, set up in 1994, and of
other schemes that have adopted the practice of mortgage securitisation.
Securitised funding and lending operate on smaller overheads and therefore
assist more competitive housing finance. They do not require a base of
equity capital as do the traditional lending institutions like banks and
building societies, for example, and are not subject to prudential requirements
for capital backing for funds raised from mortgage-backed securities.
[23]
5.26 Through the SMHL scheme, home loans are available to members of
funds which invest in a trust managed by National Mutual Funds Management.
Eighty funds have invested in the scheme, allowing some 4 million people
access to loans. The first loan was settled in August 1994 and over 7
000 people have applied for more than $700 million in home loans since
the commencement of the scheme.
5.27 The SMHL rate is currently 8.3%, having decreased from 8.7% mid
September 1996. These rates are among the most competitive available.
Schemes such as SMHL have increased competition in the home loan market
generally, so that borrowers generally have benefited from lower rates,
at the same time preserving their superannuation benefits for retirement.
5.28 The Committee notes predictions that within 2-5 years, 25% of new
lending for housing will be funded from securitised mortgages. In the
United States, for example, mortgage companies represented 56.4% of the
market in the last quarter of 1995 compared with 23.5% for the commercial
banks and 15.7% for savings and loans institutions. Already mortgage managers,
as opposed to the traditional lenders, have shown strong penetration of
the home lending market in Australia. [24]
5.29 It appears there are generally no substantial regulatory impediments
to the operation and development of mortgage securitisation, although
there are suggestions that the introduction of the Uniform Consumer Credit
Code (UCCC) in November 1996 might influence lenders to act more conservatively.
DSS has advised that discussions between state authorities and industry
bodies have been progressing towards ironing out technical details. [25]
The Committee considers that the implementation of the UCCC should be
monitored so that any difficulties can be resolved at an early stage.
Conclusion
5.30 The Committee does not consider that the arguments in favour of
a 'super for housing' initiative outweigh the arguments against such a
proposal. Indeed, arguments in favour tend now to have been somewhat diminished
by the relatively recent introduction and proliferation of securitisation
schemes, compared with the appeal they have had in the past.It is the
Committee's firm view that super funds must continue to be principally
for the purpose of funding retirement income. They are not a source of
funds to cover the range of contingencies that might arise from time to
time in the course of a fund member's life. To the extent that genuine
hardship arises, the ISC is already empowered to deal with it, and does
so.Home loan schemes such as the ACTU/National Mutual scheme, however,
are an innovative and practical way of using super funds to help with
home purchase. They are able to facilitate home ownership without jeopardising
the fundamental role of super funds to provide retirement income. Given
the Australian situation of generally high levels of home ownership, affordability
and accessibility, it is the Committee's view that such schemes are the
preferred approach to assisting with home purchase, should a fund wish
to invest in that way.
[Return to Table of Contents]
Footnotes
[1] Submission SI-20, p27.
[2] Evidence (Mr Campbell), ppS61-2.
[3] Details of the projects are taken from submission
SI-20 (Department of Social Security), pp28-9.
[4] Submission SI-15, p17.
[5] Submission SI-15, p17.
[6] Evidence (Mr Campbell), ppS58-9. (These
provisions were examined in more detail in chapter 3.)
[7] Evidence, pS59.
[8] Evidence, pS59. The Committee has assumed
reference was being made to Division 10C of the Tax Act.
[9] Evidence, ppS60-1.
[10] See Twelfth Report of the Senate Select
Committee on Superannuation, Super for Housing, May 1994 (henceforth
Super for Housing), pp1-3.
[11] See submission SI-14, attachment 4.
[12] Submission SI-20, para 5.3.
[13] Twelfth Report, May 1994.
[14] Submissions SI-14 (see especially attachment
4) and SI-11.
[15] The relationship between median weekly
family income and average monthly home loan repayments on new loans, or
the ability to meet ongoing mortgage repayments.
[16] The ratio of deposit gap to annual income,
or the cost of becoming a home owner.
[17] Fitzgerald, VW, National Saving - A
Report to the Treasurer, June 1993, p61.
[18] Insurance and Superannuation Commission,
Annual Report 1994-95, p75.
[19] The Committee has previously been told
that the 'most common ground' on which the ISC releases super monies relates
to housing. See the Committee's Twelfth Report, Super for Housing,
para 4.30.
[20] Evidence to the Committee in Canberra
on 25 February 1994 by Mr P Roberts, then Chief Executive Officer of the
Real Estate Institute of Australia.
[21] Submission SI-14, attachment 4.
[22] Fitzgerald, VW, National Saving - A
Report to the Treasurer, June 1993, p61.
[23] Submission SI-20 (DSS), para 4.1.
[24] Submission SI-20 (DSS), para 4.2.
[25] Submission SI-20 (DSS), para 4.6.
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