A sensible way to use super to fund affordable housing

Institutional, not individual, superannuation investment key to funding affordable housing

23 March 2017

Whatever the respective merits of home ownership and superannuation as forms of ‘forced saving’, it is difficult to find compelling evidence that giving first home buyers access to their superannuation for a house deposit will be effective, particularly in a context of constrained housing supply. In such a context, logically, more dollars in the hands of those bidding for homes will only further inflate house prices.

However, there is a sensible way to use superannuation funds for the development of affordable housing, and that is through the implementation of a bond aggregator model.

Rather than individuals using their super as a form of deposit or joint equity ownership of their own private housing or investment property, the bond aggregator model enables superannuation funds to invest long-term in affordable housing that is owned and managed by not-for-profit community housing providers.

AHURI research developed the Affordable Housing Finance Corporation (AHFC) model bond aggregator. The AHFC is a financial intermediary designed to aggregate and source large amounts of capital from the bond market (including from large superannuation funds) so as to provide lower interest, long-term loans to not-for-profit community housing providers (CHPs) to develop housing for lower income households. The intention is that the AHFC would raise money efficiently with reduced financing costs rather than in expensive one-off transactions such as when borrowing from a bank.

...the bond aggregator model enables superannuation funds to invest long-term in affordable housing that is owned and managed by not-for-profit community housing providers.

For superannuation funds the benefits of buying bonds, such as through the AHFC, are as a hedge against inflation, to hold value and diversify their portfolios, balance risks posed by more volatile equity investments and provide for a more stable and predictable income source. Any investment in CHPs’ affordable housing would be similar to funds’ present investment in infrastructure such as rail, airports and harbours.

The benefit of the AHFC bundling together a number of loans for a number of CHPs is that the super funds level of investment risk is also reduced. If one CHP should have a problem repaying their loan (and there are ways the AHFC model reduces that possibility) there is still a good income stream from the loans made to the other CHPs. To further reduce risks and the interest rates on the bonds, the Australian Government would also offer a structured guarantee to attract long-term private investment.

To make the AHFC model work well in the long-term, government has an important role in providing policy stability, clarity and support as well as a transparent certification process for issuing guarantees; feasible social policy and supply targets, matched with tax incentives; and an agreement on government’s lending volume and guarantee obligations.

Financial markets work most efficiently when they are at their most simple and transparent and there is a free flow of information. As such, CHPs also have a responsibility to demonstrate their financial, operational and governance strengths in order to build the level of confidence necessary for the superannuation sector to commit to the affordable housing industry.