The Australian "Super" Dream

One of the urgent challenges for the Australian community is to enable young people to acquire home ownership and to maximise the number of retirees who own their own homes at retirement. Among the many strategies that have been discussed, a theme of superannuation funds moving focus beyond the contribution phase to the full life cycle of members has been given impetus by the retirement of a large cohort of baby boomers. The following thoughts relate to another strategy option that recognises the limitations of accessing super under current schemes when contributions are at their early stage instead of taking into account future flows.

Young people wishing to enter home ownership have after tax contributions for rent based on 5% to 8% gross yield on the whole property value to compare with mortgage payments at much lower rates and also have to make superannuation contributions . 

The capacity to save is much higher for owner occupiers with the deposit upfront being the challenge.

In addition, many young people have substantial HECs obligations at compound interest in the form of “indexation”. 

The opportunity costs for young aspiring homeowners are substantial.

Looking many years ahead to retirement we know that the objectives are for debt free home ownership and an adequate lifetime annuity at retirement. 

The super funds might consider investing in equity notes as coinvestors with the superannuant contributors in owner occupied homes of superannuant members as an asset class. The distribution and historical experience of home prices represents a low risk over many years. In fact, for the superannuant this creates a perfect hedge to achieve the objective compared with betting that investment in shares and other assets by the superfund would outperform the rise in home values plus the sunk costs of rent. 

We could move away from the notion of individuals drawing on their superannuation as is proposed for other strategies of using super fund contributions. The fund would be pooled and the superannuation contributor would have contribution requirements directed from their super fund related to the face value of the note that should pay it off on or before retirement including the return to equity based on the valuation of the pool. 

These thoughts seek to take into account tax, opportunity costs, risk management and timing.