David Hartley’s big idea for more affordable housing

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by Greg Bright

David Hartley seems to be on several missions at the same time. The chair of the investment committee and a director of the $9.5 billion Australian Catholic Superannuation fund has come up with a workable concept to ease Australia’s housing affordability crisis. Along the way, he has also developed thoughts on other ideas to improve the effectiveness of the super system.

Hartley, a former fund manager, asset consultant and, in his last full-time role until November 2015, the CIO of the $70 billion Sunsuper industry fund for 10 years, is nothing if not an ideas person. He is a prolific writer to various formal inquiries, such as the most recent Productivity Commission’s look at the super industry, and industry platforms. For the Productivity Commission he finally put pen to paper about thoughts which have gestated – or in some cases fermented – over many years. More recently, he provided his take on APRA’s ‘Heatmap’ for the industry website i3 (Investment Innovation Institute).

Like Michael Block, his CIO at Australian Catholic Super, he has views on almost everything to do with the super industry and beyond. The missing link in the pairing, though, is that Hartley can take or leave watching sports, at least since his kids have become adults and no longer do the children’s weekend sports thing. Block, on the other hand, is a sports fanatic with an encyclopaedic memory for a range of games. Hartley, though, it should be pointed out, was in his earlier years an A-grade tennis player, having first picked up a racquet at age four.

In the super industry, perhaps Hartley’s biggest, boldest and most recent idea has been several years in the making and it has become increasingly topical as big city residential property prices look set to regather their upward momentum this year, according to property pundits. He has devised a scheme to increase affordability without increasing prices through a combination of providing leasehold land for developers, allowing earnings on super accounts to help members make mortgage interest payments, and several other possibilities to favour owner-occupiers and renters.

The scheme was developed against the backdrop of several concerning macro-economic factors in Australia and some other countries since the global financial crisis. These include: rising household debt; declining disposable income, which has recently been outstripped by consumption; a declining savings ratio; and, increasing income inequality. And then there are residential property prices which may have had only a brief hiatus in 2018 and 2019.

In Australia, household debt as a percentage of GDP has risen from about 96 per cent in 2008 to 104 per cent in 2018, while it has declined in the US, from 99 per cent to 77 per cent, in the same period. The Australian savings ratio improved between 2002 and 2010, peaking at a little over 10 per cent, but subsequently dropped to about 2.5 per cent by 2019. Labour’s share of GDP compensation, which Hartley describes as the “root of voter dissatisfaction”, has fallen from 72 per cent in the mid-1970s in Australia to 59 per cent in 2017. In the US, the decline has not been as pronounced, down from about 65 per cent to 60 per cent over the same period. Despite some gyrations, the figure has been overall relatively flat in the low 60 per cent range in the UK.

To a certain extent, Hartley says, the debt-to-GDP ratio is offset in aggregate by assets held in Australia’s large superannuation system. In addition, the decline in labour’s share of GDP has been mitigated by workers trading wages for superannuation, starting with the “Wages Accord” in 1986 and being expanded by the Superannuation Guarantee from 1994, making the decline arguably more sustainable. He says there may be some demographic forces in play too, such as the ageing population and a rise in part-time and contract workers. The voter dissatisfaction is obvious, though, and property prices, especially in Sydney and Melbourne, are making the situation worse.

Australia and New Zealand have less income inequality and better income mobility than the US and the UK, according to the Bank Credit Analyst (BCA), but we don’t fare as well as Canada and nowhere near as well as the Scandanavian countries of Finland, Norway and Denmark, on either score.

“Without some form of fiscal transfer, the natural state for the economy is that the rich will get richer, as they do not need to spend 100 per cent of their income. In contrast the poor need to rely on the social security system to boost any money they can earn and, due to means testing, can face effective marginal tax rates that are enormous,” Hartley says.

BCA has also identified a correlation between violence and inequality, with more political violence being seen in those times when there is a larger gap between the elites and the masses, in the US (for which there are the best statistics) at least, he says. “At an extreme, the expression ‘let them eat brioche’ did not work out so well for Marie Antionette and Louis XVI. In modern times, Brexit, the treatment of tall poppies in Australia and the ‘deplorables’ in the US may be milder manifestations of similar undercurrents,” he says.

Attacking the issue of housing affordability, for both renters and owner occupiers, he says that any improvement implies some combination of lower prices, higher incomes and/or a change in the mix of demand and supply. “This may be obvious, but it is often not clearly acknowledged.”

Lower house prices

  • Increasing supply: zoning and high land prices are impediments and without changes to the rules a simple increase in supply won’t necessarily help owner-occupiers or renters
  • Reducing demand: some mechanisms such as cutting incentives, restricting some types of investors and increasing interest rates
  • But lower house prices introduce a new systemic risk to the banking system and the economy.

Higher effective income

  • Wage increases: but this brings other challenges
  • Tax deductions for interest on the purchase of a personal principal residence, which could be capped or restricted to first-home buyers
  • Allow a member’s superannuation account to be invested in an account that provides mortgage interest offset: this recognises that home ownership is a genuine retirement objective, and
  • Deductibility of childcare expenses, which are more necessary for earning a salary than interest on an investment property.

Hartley says: “Those who own their residence at the point of retirement are much better off than those who need to rent. Many superannuation fund members, implicitly or explicitly, have an intention to direct their superannuation account balance at retirement to repay debt. Home ownership needs to be acknowledged as a valid objective for retirement savings. And it is worth supporting this as a social aim.

Grants of money for people to buy houses sounds good in theory but can be counterproductive. People typically borrow 80 per cent of the house price, so an extra $20,000 deposit simply means an extra $100,000 for the vendor and more debt for the borrower.”

The better, big idea here is to allow super accounts to be invested into accounts to offset mortgage interest. This is not permitted under current super rules but, if allowed, will increase effective disposable income and make the servicing of debt more affordable. It has a different impact than the much-debated idea to release some super money for a deposit on a house.

The money would still be in the super system. It would not be able to be used as a deposit and therefore would not simply lead to an increase in overall prices, Hartley says. Using super accounts for mortgage offset doesn’t help people get into the market but, once they are there, it makes the servicing of the home loan more affordable. On the surface this might seem to be favourable for banks which can link mortgage accounts with super accounts. However, there are restrictions on ‘third-party forcing’. In addition, for the banks there would be a negative as they would still need to hold capital against the full value of the loan but would be only able to charge interest on the net balance.

In terms of tax revenue, there would be no 15 per cent tax payable by the super fund on the mortgage offset account. However, the bank would also not be able to claim a 30 per cent tax deduction for the interest it would otherwise pay on that money that is borrowed.

And there are other ways in which effective income can be increased to improve affordability. “It is beyond me why someone unable to take their child to the office (or mine site etc.) with them is unable to claim childcare as a deduction against wages income earned but a property investor can claim interest costs as a deduction against wages income earned,” Hartley says.

Change the supply/demand mix

  • Alter the mix of tax incentives away from investors and towards owner occupiers: prices could stay at similar levels but become more affordable for owner-occupiers, but this could have a negative initial impact on renters, while buying would be more viable
  • A role for institutions: institutional investors play a big role in the provision of ‘multi-family’ housing (apartments and estates) in the US, providing a natural source of rental properties with greater security of tenure for renters, but in Australia they are not competitive against personal investors partly because of tax breaks
  • Decentralisation: a relocation of government departments to regional areas could be a useful start.

Hartley says: “Those who say that negative gearing is not a factor leading to higher real estate prices must also be effectively saying that the removal of negative gearing would not lead to a decline in house prices. I don’t accept this. If incentives for some type of investor are removed then, in isolation, this will lead to lower prices.”

For rental accommodation, to provide a US-style opportunity for big investors alongside better security of tenure and stability in rents as well as a continued role for developers, Hartley says that state governments’ regular land releases, often at city fringes, could be made available on long leases – say 50 years – rather than for outright sale. Multi-family housing could be financed and held by superannuation funds in a similar way to other infrastructure assets, with a regulated rate of return. This would require less capital and more certainty for developers, who won’t have to earn a return on the purchase price of the land.

Also the chair of the independent advisory committee for the NSW Public Trustee and Guardian and a senior investment counsel to NSW’s State Super, Hartley says that he would like to see defined contribution funds, which make up about 90 per cent of all super funds in Australia, provide “defined benefit-type outcomes”.

Hartley has had several very senior roles in the superannuation industry after starting his investment career in fixed interest at GIO Investments (bought by AMP), fixed interest, currency and industrial shares at Schroders, then as a portfolio manager at the former EquitiLink (now a part of Aberdeen) followed by SBC (now UBS Global Asset Management). He moved into asset consulting at Mercer in 1991 where he established the Sydney investment consulting team. He then became Mercer’s first CIO in 2000 before moving to Russell Investments as director of investment consulting in 2003. He joined Sunsuper as its CIO in 2005.

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