Since the emergence of “Modern Portfolio Theory” and the “Capital Asset Pricing Model” in the late 1960s, institutional investors have taken a quantitatively driven approach to portfolio construction, looking to create portfolio diversification and obtain better risk-adjusted returns by balancing their asset-class exposures. This journey has seen several important advancements in thinking about how to optimally achieve desired results.
Funds that want to take the total portfolio approach first need to get the total portfolio view. To do that they not only need data – and lots of it – but a rock-solid understanding of exactly how they’re going to use it.
No silver bullet for ‘Home First Super Second’
No amount of hard data or compelling evidence is going to stop people who want to use their super to buy a home. And super funds might have to help out after all.
The idea of using superannuation for housing has a simple allure that has seen it revived several times in the thirty-odd years since the inception of the compulsory system under the Keating Government. Super is, after all, our money – and the persuasive evidence presented by the recent retirement income review, and independent thinktanks like the Grattan Institute, shows how problematic not owning a home in retirement can be.
But new data from self-described “progressive thinktank” the McKell Institute might just harpoon the idea for good – at least, in the realm where people care about that data.
The McKell report, “Mortgaging our Future”, found that Australians would have to withdraw a significant amount of their superannuation – in the order of $40,000 for cities with lower housing prices, and as high as $80,000 in Sydney – to get a foot in the door, and that doing so would significantly inflate prices by as much as 4.6 per cent in Sydney, 10.4 per cent in Melbourne, and 14.8 per cent in Brisbane.
Withdrawing a smaller amount between $10,000 to $30,000 would have “no material impact on the number of people transitioning to home ownership”. And it’s groups who have less super to withdraw – particularly younger Australians – who are perhaps most likely to consider the idea. That would represent a particularly dark outcome for them; withdrawing their super to build a house deposit, but missing out on both a house and the nestegg that would have resulted from 30-40 more years of compounding returns.
“Real returns on super funds exceeded real house price appreciation over the reference period (2001-2020). Assuming these historic trends are repeated in the future, this means that cash invested in home ownership will compound at a lower rate than cash invested in super,” the report says. “We have assumed that returns are tax free in both the housing market and in super, i.e. the returns are real, net returns.”
The idea’s more recent champions include senator Andrew Bragg and MP Tim Wilson whose “Home First Super Second” campaign echoed the franking credits battle he (and Geoff Wilson, a distant relative) fought to devastating effect against Bill Shorten’s Labor government in the 2018 election.
“If we actually believed in the wealth creation of every Australian, we’d actually talk about why home ownership is the biggest financial decision Australians can make and superannuation is the second,” Wilson said in August.
“But because we have an obsession between the collusion of the Labor party and their mates in the industry super fund sector, they constantly put superannuation ahead of home ownership, so much so, they’ll literally run interference to keep super funds buying homes at the expense of young Australians.”
Home First Super Second never quite got off the ground – superannuation minister Jane Hume poured cold water on the idea – though it did force this publication and many others to write about Tim Wilson, which was probably its intended effect. Still, the campaign speaks to the never ending resuscitation of the idea, which became more prominent after the Morrison Government allowed early release of super as a form of stimulus during the early days of Covid-19. Keating himself actually floated the idea of allowing Australians to draw down up to $10,000 for a house deposit in 1993, before facing stiff opposition for all the same reasons.
McKell’s data will do little to rebuke the powerful populist appeal of Home First, Super Second. Though not as statistically airtight, anecdotal evidence suggests that early release was used by many young Australians to build a house deposit; it was seen as the only way to get a foot in the door. It is perhaps a lack of transparency from super funds – and the resulting member disengagement – that creates such a situation in the first place. And the arguments that self-interest is at the heart of super’s refusal to engage with housing debate may well contain a kernel of truth.
More than likely, super funds will have to find a way to help their members accomplish what Tim Wilson wants them to do: leverage their retirement savings to get a foot on the housing ladder. It’s a view that has been espoused by David Hartley, chair of Catholic Super’s investment committee, who has previously suggested that superannuation could be invested in an account that provides mortgage interest offset, in recognition that home ownership is a genuine retirement objective.
“Those who own their residence at the point of retirement are much better off than those who need to rent,” Hartley said in early 2020. “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.”
Ian Fryer, general manager of Chant West, voiced a similar sentiment in July, warning that the reluctance of funds and trustees to engage with the debate could wind up hurting retirement outcomes.
“Rather than just saying “No, it’s a bad idea, because it’ll hurt super”, we need to think about the big picture, about what members are trying to achieve – which is where Bragg and Wilson are reportedly coming from,” Fryer said. “Let’s work out ways we can help to achieve some of those goals but in a way that is not detrimental to overall outcomes.”
“Sometimes super is not the answer. Sometimes super is only part of the answer. How can we incorporate other things in our guidance services and advice services that show we’re not just here to build your superannuation – we’re here to help you get to a good place in terms of retirement outcomes… there will be limits in terms of how we can help you with those other things, but we can at least provide some sort of guidance.”
