Australia has $3.3 trillion of superannuation savings – the fourth-largest retirement savings pool in the world – but practically none of it is invested in Australian housing. Treasurer Jim Chalmers wants to change that. At last week’s job summit, he committed to working with super funds to invest in housing. Some $575 million has also been committed to encourage private capital, including super funds, to invest specifically in social and affordable housing.
The first of these ideas has promise. The second should be met with scepticism.
Getting super funds to invest in housing that’s rented out on the open market is a good idea. It could lead to a more secure rental experience for tenants, a much-needed boost to housing supply and therefore lower rents, and it could all be done without super funds compromising returns or relying on government subsidies.
Australia’s rental stock is dominated by “mum-and-dad” landlords. About 85 per cent of rental properties are owned by landlords who have three or fewer properties. With such small portfolios, landlords prefer shorter leases and relaxed tenancy laws in case the relationship with the tenant turns sour, or they want to sell the property (which often results in the tenant having to leave against their wishes). And as anyone who has rented will attest, trying to get a landlord to complete simple repairs via a property manager can be painful.
In contrast, institutional investors, with a much larger and diversified portfolio, would have a stronger tolerance for these risks, meaning renters could get more secure tenure. And while mum-and-dad landlords are essentially anonymous, prominent institutional landlords would have a brand to protect. For example, AustralianSuper or Cbus could use the economies of scale across thousands of properties to offer a higher-quality service directly – think professional tradies on call 24 hours a day – rather than sit behind traditional property managers.
But to get super funds investing in housing, we need to reform state land taxes.
Currently, states levy land tax rates on the combined value of all properties owned by a landlord, charged at progressive rates often with generous tax-free thresholds. These state taxes were introduced by the colonies in the late 19th century to force large rural landholders to subdivide their land and sell it to settlers. Nowadays, these land taxes simply make it uneconomic for large investors to own residential property.
Take the example of 100 investors each owning one house in Sydney worth the median price of $1.24 million. Assuming the land accounts for half the house value, they’d pay no land tax because of the generous tax-free threshold. But a super fund owning the same 100 houses would pay $12,118 in land tax on each home, taking almost a third of the rent.
In Melbourne, where the median price is $930,000, assuming the land accounts for half the house value, they’d each pay $705 in land tax, or 2 per cent of the likely rent payable. But a super fund owning the same 100 houses would pay $11,372 in land tax on each home, taking more than a third of the rent.
It’s no wonder Australian super funds invest in housing in the United States, but not here.
The simplest way to remedy this would be to flatten land tax rates and abolish tax-free thresholds, or to apply progressive rates based on the value of individual properties rather than the combined value of holdings. But doing so would create both winners and losers if state governments were to collect the same revenue as before. If the federal government wants super funds to invest in housing, it should help states to make the switch.
While getting super funds to invest more in market-rent housing could produce big benefits, the same can’t be said for super funds investing in social and affordable housing.
There’s no doubt we need more social housing: Australia’s stock of social housing has barely grown over the past 20 years.
Superannuation funds’ core objective is simple: maximising returns for their members. Our retirements depend on it.
By contrast, social housing protects vulnerable tenants by offering discounted rent set at no more than 25 per cent of tenants’ incomes, with a government subsidy plugging the gap between what the tenants pay and what the same home could return on the open market.
Super funds could get involved by financing the construction of new homes via loans to community housing organisations, or by owning them outright. But for yield-hungry investors such as super funds to finance social housing while maximising returns, governments would still have to stump up a subsidy to artificially transform social housing into a commercially attractive investment.
In the end, the government wouldn’t save any money. Federal and state governments can borrow much more cheaply than the terms that would be offered by super funds. Involving super funds in financing social housing risks making social housing more expensive to deliver, not less.
Rather than try to commercialise social housing, the federal government should double the size of the Housing Australia Future Fund – from $10 billion to $20 billion – if it’s serious about getting more social housing built.
Getting super funds invested in Australian housing is a good idea. But there’s a right and a wrong way to go about it.
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