Vanguard’s UK Online Investment Platform Is Credit Negative for Incumbent Players

From Moody’s

Last Tuesday, low-cost fund provider Vanguard (unrated), announced its intention to enter the UK’s direct-to-consumer online investment market. Vanguard’s entry into the UK retail online investment market is credit negative for incumbent online platforms such as Hargreaves Lansdown (unrated) and FIL Ltd.’s (Baa1 stable) Fidelity FundsNetwork because it will likely trigger a price war that costs incumbents their profitability.

Vanguard’s online service, the Vanguardinvestor, lets UK retail investors directly access a wide range of Vanguard’s exchange-traded funds (ETFs) without using a broker or financial advisor. So far, most of Vanguard’s UK business has been sourced from brokerages and financial advisors, which typically require clients to have minimum account balances of at least £100,000. Using Vanguard’s online platform, retail investors will now be able to open an individual savings account with £500 or a monthly investment of £100. And, Vanguardinvestor will charge a flat administrative fee of 0.15% (capped at £375 per year), which is lower than the 0.45% fee that Hargreaves Lansdown, the UK’s largest online provider, charges (see Exhibit 1).

Vanguard will target investors from both the mass and mass-affluent markets – those with savings of £5,000-£50,000. These investors lost access to advice in 2013 with implementation of the UK’s Retail Distribution Review (RDR) and invest directly. In a November 2012 publication, Deloitte estimated that the RDR had created an advice gap population of as many as 5.5 million people.

Gross inflows into stock and share individual savings accounts in 2015-16 totalled £21.1 billion, and this segment has been growing (see Exhibit 2), driven by the tax-free individual savings account allowance increase to £20,000 from £15,240 in April 2017 and new products. In addition to individual savings accounts and defined-contribution pensions, general investment accounts without any tax wrapper are benefiting from investor inflows as people become increasingly aware of their investment options. Vanguard announced plans to launch a self-invested personal pension in the future.

Vanguard’s online service also targets younger investors such as millennials, who are comfortable with online services and are not yet a target for financial advisors or wealth managers. As they evolve in their careers and garner higher incomes, this demographic will be accustomed to low-cost services and investment funds. Vanguard’s online service in the UK is so far limited, but we can see it evolving toward robo-advice as it has in the US with The Vanguard’s Personal Advisor Services.

Incumbent platform providers will likely lower administrative fees and increase services to maintain market share, but this will compress their margins. Given the high and rising costs of running online services, smaller platforms with less price flexibility such as Interactive Investors (unrated) and Nutmeg (unrated) will be most challenged. Cheap online investment services will also accelerate the adoption of low-costs index trackers and ETFs among UK retail investors. Active managers such as Aberdeen, Henderson, Schroders, and FIL Ltd. Will face fee and margin pressure as a result.

In addition, the UK’s Financial Conduct Authority’s upcoming investment platform market study to improve competition between platforms and improve investor outcomes is likely to challenge most platform providers’ prices and Vanguard would be well positioned for any price war. As the best-selling fund manager in 2016 and second-largest asset manager globally, Vanguard has the scale, resources and brand necessary to disrupt the UK retail market, which was £872 billion as of year-end 2015. In the US, where Vanguard provides a similar online-value proposition, platform costs went down.

Super to become ‘hyper-personalised’: Bravura

From Investor Daily.

Superannuation funds are in the process of collecting “unprecedented” amounts of member data that will be used to create hyper-personalised services, says Bravura.

In a new report titled Super Megatrends, Bravura superannuation product manager Scott Kendall said big data and predictive analytics are becoming essential tools for super funds that are looking to retain members.

A better understanding of member data can also improve the risk management and compliance processes of the big superannuation funds, Mr Kendall said.

“Modern technology platforms are facilitating the collection of unprecedented amounts of member data, enabling detailed member profiling in an effort to deliver hyper-personalised service offerings,” he said.

Super funds are employing techniques such as behaviour modelling to identify members who are at risk of leaving the fund, Mr Kendall said – and scenario stress testing can help funds better manager investment risk.

“As their use of big data becomes more sophisticated, all kinds of businesses are drawing upon information from other external data sources, such as social media and data aggregators, to gain an even more intimate knowledge of their customers,” he said.

Mr Kendall pointed to Mercer’s Harmonise platform in the UK, which provides an aggregated view of members’ finances through their employer.

“Participating funds have access to far greater amounts of member information than ever before and the additional data captured via this loop can be applied to deliver more meaningful, hyper-personalised services to their members,” he said.

Super funds will also start investigating artificial intelligence services such as ‘cognitive computing’, Mr Kendall predicted.

“Various insurers are already employing the services of IBM Watson to process large amounts of data to achieve better underwriting, fraud detection and credit control,” he said.

“It’s only a matter of time before super funds follow suit.”

Benefit payments rise dramatically ahead of July 1 super changes

AMP says SMSF trustees looking to take advantage of the current rules around non-concessional caps have significantly increased benefit payments, according to the latest SuperConcepts SMSF Investment  Patterns Survey.

In the March 2017 quarter the average benefit payment increased significantly from $16,256 to $27,900.

Overall contribution levels also continued to rise in Q1, increasing from $8,548 to $9,138.  This continues the trend established in Q4 of last year which saw contributions increase by 181  per cent following the Government’s confirmation that the proposed Super changes will come into effect on July  1, 2017. The rise, however, is a reversal of the historical trend where Q1 has always been the lowest quarter each year.

SuperConcepts Executive  Manager Technical & Strategic Solutions Phil La  Greca said the findings clearly demonstrated that SMSF  trustees were looking to maximise current non-concessional contribution rules.

The current $180,000 after-tax contributions cap, and the three-year  $540,000 bring-forward rule remain until 30  June 2017.

Commenting  on the new trend to emerge around benefit payments,  which almost doubled  mainly through the  increase in lump sum withdrawals,  Mr  La Greca said:

“Trustees are implementing withdraw and re-contribution strategies to take advantage of the window of opportunity before July 1. Strategies include making non-concessional contributions  into an accumulation account, starting  a new 100 per cent  tax free pension and making contributions to a  spouse to try  and  equalise member balances and  maximise access to the $1.6 million pension transfer  balance cap for both persons.”

During prior quarters the split of lump sum withdrawals versus pension payments tended to be around 20 per cent versus 80 per cent. In the first quarter of 2017 the split shifted to 40 per cent versus 60 per cent.

Asset allocations largely remained unchanged as SMSF trustees and their advisers focus on dealing with the opportunities around the upcoming changes.

The quarterly SuperConcepts SMSF Investment Patterns  Survey covers approximately 2,750 funds, a sample of SMSFs administered by Multiport (part of the SuperConcepts group)  and the investments they held at 31 March 2016.  The assets of the funds surveyed represent approximately  $3.2 billion.


Super saver accounts fail to impress

From The New Daily.

The government’s plans to allow first home buyers to salary sacrifice up to $30,000 into superannuation accounts looks set to do little to make houses more affordable.

“Under this plan, most first home savers will be able to accelerate their savings by at least 30 per cent,” Treasurer Scott Morrison said in his budget speech.

From July 1, 2017, people can contribute up to $15,000 a year, taxed at 15 per cent, into their superannuation accounts for a home deposit.

Withdrawals will be allowed from July 1, 2018, and will be taxed at marginal tax rates minus 30 percentage points.

Dr Sam Tsiaplias, economist at Melbourne University, said the measure would not improve housing affordability “in any substantive way” because it favoured the well-off.

“Most of the people who might take this up will be able to afford a deposit anyway,” he told The New Daily.

“If the objective is to help a relatively small number of households save faster it probably can do that.”

Because the money will be deposited in Australians’ super funds, it has been suggested the funds would need to adjust their programs. But Dr Tsiaplias said the accounts would probably be so unpopular that they wouldn’t affect the super funds “in any way”.

Superfund Partners director Mark Beveridge said the government’s “30 per cent” sales pitch would simply leave super funds offside trying to accommodate the new funding arrangements.

The new schemes do not rely on Australians to open new bank accounts. Instead, the government will allow deposit savers to salary sacrifice into their superannuation accounts.

Bill Watson, CEO of First Super, said people who use the new scheme need to be wary of the risks that come with investments.

“There’s a risk that what you think is a saving is exposed to losses in the market. What a person would need to do is put it into a cash investment, but you get pretty much the same return as a bank deposit.”

Saving schemes like this have been tried in the past. The first Rudd government introduced First Home Saver Accounts in 2007. Savers were taxed at 15 per cent on the first $5000 they deposited each year, while interest was taxed at 15 per cent. The government also kicked in a 17 per cent contribution a year on the first $6000.

However, Labor’s scheme saw little uptake. Only 48,000 accounts were opened, compared to the projected 730,000. It was abolished in 2015 under the Abbott government.

Wayne Swan, treasurer during the first Rudd government, speaking on CNBC on Wednesday, said his scheme would have shown its impact if it had not been abolished.

“It was a far more generous proposal than the one they announced last night,” Mr Swan said.

“[This is] just window dressing because they’re ideologically opposed and won’t touch the negative gearing provision which is the key to solving this problem.”

First Home Buyers Australia co-founder Daniel Cohen said he supported the scheme, but wanted more to be done to address affordability.

“It doesn’t single handily solve the property crisis,” he said.

“We also wanted to see measures that decreased the amount of investor activity in the market, we were also disappointed that there weren’t more cuts to tax incentives given to investors.”

Negative gearing came in for only minor changes in the budget, with some tightening around travel expenses and depreciation deductions.

The government expects its home buyers grant to cost $250 million and its changes to negative gearing to save $540 million over the next four years.

Treasury consults on Superannuation integrity of limited recourse borrowing arrangements

The Government has released for public consultation draft legislation and associated explanatory materials for changes to improve the integrity of the superannuation system. These changes are being progressed as part of a package of amendments to address concerns that have been raised in the implementation of the superannuation reform tax package.

The draft legislation will include the use of limited recourse borrowing arrangements (LRBA) in a member’s total superannuation balance and transfer balance cap to the transfer balance cap and total superannuation balance. The amendments will address concerns about the ability of SMSF members to use LRBAs to circumvent contribution caps and effectively transfer accumulation growth to retirement phase that is not captured by the transfer balance cap.All interested parties are invited to make a submission by Wednesday 3 May 2017. More information on the Government’s superannuation changes is available on the Treasury website.

The two worked examples make things a little clearer, but in essence it attempts to stop SMSF property investment being used to circumvent the $1.6m tax free cap.

Example 1

Bob is 65 and is the only member of his SMSF. Bob’s superannuation interests are valued at $3 million and are based on cash that the SMSF holds.

Bob’s SMSF acquires a $2 million property. This property is purchased after 1 July 2017 using $500,000 of the SMSF’s cash and an additional $1.5 million that it borrows through an LRBA.

Bob then commences an account-based superannuation income stream. The superannuation interest that supports this superannuation income stream is backed by the property, the net value of which is $500,000 (being $2 million less the $1.5 million liability under the LRBA). Bob therefore receives a transfer balance credit of $500,000 under item 2 of the table in subsection 294-25(1).

In the first year, Bob’s SMSF makes monthly repayments of $10,000. Half of each repayment is made using the rental income generated from the property. The other half of each repayment is made using cash that supports Bob’s other accumulation interests.

At the time of each repayment, Bob receives a transfer balance credit of $5,000, representing the increase in value of the superannuation interest that supports his superannuation income stream.

The repayments that are sourced from the rental income that the SMSF receives do not give rise to a transfer balance credit because they do not result in a net increase in the value of the superannuation interest that support his superannuation income stream.

Example 2

Peter and Sue are the only members of their SMSF. The value of Peter’s superannuation interests in the fund is $1 million. The value of Sue’s superannuation interests is $2 million. All of the assets of the fund that support their interests are cash.

The SMSF acquires a $3.5 million property. The SMSF purchases the property using $1.5 million of its own cash and borrows an additional $2 million using an LRBA.

The SMSF now holds assets worth $5 million (being the sum of the $1.5 million in cash and the $3.5 million property). The fund also has a liability of $2 million under the LRBA.

Of its own cash that it used, 40 per cent ($600,000) was supporting Peter’s superannuation interests and the other 60 per cent ($900,000) was supporting Sue’s interests. These percentages also reflect the extent to which the asset supports Peter and Sue’s superannuation interests.

Peter’s total superannuation balance is $1.8 million. This is comprised of the $400,000 of cash that still supports his superannuation interest, the 40 per cent share of the net value of the property (being $600,000), and the 40 per cent share of the outstanding balance of the LRBA (being $800,000).

Sue’s total superannuation balance is $3.2 million. This is comprised of the $1.1 million of cash that still supports her superannuation interest, the 60 per cent share of the net value of the property (being $900,000), and the 60 per cent share of the outstanding balance of the LRBA (being $1.2 million).

Budget may encourage downsizing with superannuation breaks

From The Real Estate Conversation.

The government is considering offering exemptions to new superannuation limits for retirees who downsize from their family home, according to reports.

The upcoming Federal Budget could contain measures that allow elderly Australians who sell the family home to be exempt from new superannuation caps, according to media reports.

A report in The Australian Financial Review is claiming that proceeds from the sale of the family home could be quarantined from both the $1.6 million cap on super retirement funds, and the non-concessional amount that can be contributed to super annually.

It’s widely expected that proceeds from the sale of the family home will not be excluded from the age pension assets test.

The anticipated policy is designed to tackle housing affordability problems by freeing up more housing stock on the market, in particular housing for families.

The Federal Budget, which will be handed down on 9 May, is widely expected to contain several measures aimed at tackling housing affordability.

Read the The Australian Financial Review article here (subscription only).

Both sides of politics target the $24 billion super property lurk

From The New Daily.

The little-known superannuation tax lurk that has pushed $20 billion into the property market in just under five years is under attack, with Labor promising to ban private superannuation funds from borrowing and the Coalition foreshadowing new restrictions.

As The New Daily recently reported, self-managed superannuation fund borrowing arrangements have grown almost tenfold, from $2.5 billion in June 2012 to $24.3 billion last December. The lion’s share of that is going into commercial and, increasingly, residential property.

That has been a concern for regulators, with the Murray inquiry into the financial system in 2014 recommending SMSF borrowing be banned, warning “further growth in superannuation funds’ direct borrowing would, over time, increase risk in the financial system”. The Reserve Bank concurred.

Opposition Leader Bill Shorten on Friday announced he would ban SMSF borrowing if Labor comes to power as part of a bid to “cool an overheated housing market partly driven by wealthy self-managed super funds. Allowing this [SMSF borrowing] to continue would increase risk in the superannuation system and crowd out more first home owners”.

Stephen Anthony, chief economist at Industry Super Australia, said a ban would be “an obvious structural reform that would have benefits through the economy and to the budget”.

The Coalition has been silent on the issue in recent times, but Financial Services Minister Kelly O’Dwyer responded on Friday to questions from The New Daily foreshadowing moves to make the process less attractive.

The Government will be progressing a package of minor and technical amendments including a proposed limited recourse borrowing arrangement (LRBA) integrity measure to address a potential concern  that has been raised during the implementation of the superannuation taxation reform package.”

While the meaning of that is not altogether clear to the uninitiated, tax expert and principal with Arnold Bloch Leibler, Mark Leibler, told The New Daily it foreshadows action to prevent SMSF owners using borrowings to circumvent a $1.6 million cap on tax-free super retirement pensions due to start on July 1.

“It sounds to me like what they’re going to do is prevent people using borrowings to get around the $1.6 million cap,” Mr Leibler said.

Using an example of an SMSF owning a $2 million property with borrowings of $400,000, Mr Leibler said that if borrowings were not factored into the cap, owners would effectively get the benefit of a $2 million investment while staying within the $1.6 million cap.

Stephen Anthony described the Coalition move as “interesting. But if their intention is to reduce the incentive to borrow in SMSFs you’d have to ask why they don’t just rule it out entirely.”

While the foreshadowed move might reduce SMSF borrowing, it still leaves plenty of space for funds under the cap limit to borrow, Mr Anthony said.

Peter Strong, CEO of the Council of Small Business Australia, said Labor’s SMSF plans could negatively affect small businesspeople trying to buy their business premises.

“It’s good business for businesses to invest in their business. For most businesspeople their business is their super plan, so there could be unintended consequences in this. They need to be looked at,” Mr Strong said.

It also appears that Treasurer Scott Morrison has lost the cabinet battle to allow first homebuyers to dip into super to fund a housing deposit.

On Friday, Finance Minister Mathias Cormann, who is part of the government’s budget “razor gang”, told Sky News: “That’s not something we think would address the problem.”

Prime Minister Malcolm Turnbull has also come down against the move, saying, “The purpose for superannuation is to provide for retirement, that’s the objective.” The Treasurer had previously supported the idea.

Social impact investment can help retirees get the housing and care they need

From The Conversation.

A recent report raised concerns about the erosion of retirement income by ongoing rental or mortgage payments.

The report by the Australian Institute of Superannuation Trustees is timely, given the Australian aged pension system is predicated on an assumption of outright home-ownership. Yet increasing numbers of people are still paying mortgages after retirement, use superannuation to pay off mortgage debt, or do not own a home and must rent.

Any significant decline in home ownership or equity in a home also has impacts on higher care needs. This is because older people will not have an asset to sell to fund the bonds required to enter aged care accommodation.

Author provided

These developments – and the increasing housing insecurity for older people – potentially undermine the sustainability of Australia’s retirement system and, in turn, public finances.

Addressing the problem

Social impact investment strategies could fund more affordable housing and aged care for seniors.

Social impact investments are:

… investments made into organisations, projects or funds with the intention of generating measurable social and environmental outcomes, alongside a financial return.

Impact investment in Australia may take a variety of different forms. It can be organised through direct equity investment, acquisition of units in a mutual fund, debt, venture capital, social impact bonds or other fixed income mechanisms, which might combine blended social impact and financial return.

The sources of investment are equally diverse. These may include philanthropists, funds, businesses, government, private investors, or a combination of two or more.

In Australia, social impact investing is a relatively recent phenomenon although it is developing rapidly in a variety of areas. Impact investing in Australia will be worth $A33 billion by 2022 and extends to a diverse range of investments.

In relation to housing support, examples include the Aspire Social Impact Bond, which targets people experiencing long-term homelessness, and Homeground, a not-for-profit real estate service.

In relation to housing developments, projects such as the innovative CapitalAsset partnerships instigated by ShelterSA. The project aims to collaborate with developers, landowners and investors to build affordable housing developments through a property unit trust.

Housing is likely to be a focus area of social impact investment partnerships between Social Ventures Australia and organisations such as HESTA and Macquarie.

Financing is the key to increasing stocks of affordable housing. It seems the federal government is likely to institute a bond aggregator model involving institutional investors and affordable housing providers.

Retirement housing issues have not been a focus for social impact investing in Australia or elsewhere. However, it is suggested this form of investing could tackle the problems outlined in the Australian Institute of Superannuation Trustees report in three ways.

(Almost) home owners

For those who must maintain a mortgage into retirement, or who want to avoid using most of their superannuation funds to pay off the mortgage, thought could be given to offering lower-cost loans or products akin to reverse mortgages at lower than commercial rates.

Alternatively, under a shared equity arrangement – where reduced payments are made until the sale of the property or the death of the owner/s – the property could be sold and the sale price shared by the older person to put towards care or the estate and the lender.

Social impact investment lenders could finance this in the same way as banks do but at reduced rates. There would still be a healthy return, and older people could live better in retirement with reduced payments but secure in the knowledge they do not have to leave or lose their home.

Regarding the older people who rent, again social impact investing could focus on ensuring that any housing projects developed have a certain percentage of the accommodation available for older people.

Models proposed for social impact investing in affordable housing could be applied to ensure this accommodation is suitable for older people.

Wrap-around services

In both cases, the financing models could be supported by social impact investing provided for support services.

For example, wrap-around services, such as those provided in the Newquay project in Britain, aim to keep older people in their homes and out of hospitals and aged care.

If housing costs are a problem for people in retirement, that’s also going to hamper their ability to pay for care. shutterstock

Ripe for repair

Social impact investing could mobilise private capital to work with not-for-profits to attract investment funds. Grace Mutual has mooted such a project in Australia.

Furthermore, social impact investments could work in areas, such as rural and regional Australia, that are traditionally left to government because of low population and problems with profitability and economies of scale.

Sabina Lim recently suggested the services gap in health and aged care is ripe for social impact investing in Australia.

It’s time to bridge the gaps

Governments alone cannot bridge the gaps and support affordable housing for seniors.

Although government will certainly continue to play a significant role, impact investment should be encouraged as a way to resolve financing and development issues in meeting seniors’ needs for accommodation and care.

Such involvement can be fostered through partnerships between government, NGOs and private investors, together with taxation and other financial incentives. Legal, policy and planning impediments to financing and investment in seniors housing also need to be removed.

Importantly, we need other players in the market who are prepared to invest in affordable housing and aged care for Australians in retirement.

Authors: Eileen Webb, Associate Professor, Curtin Law School, Curtin University; Gill North, Professorial Research Fellow, Deakin University; Richard Heaney, Professor of Finance, University of Western Australia.

Here’s how superannuation is already financing homes

From The Conversation.

The federal government is split on whether first home buyers in Australia should be allowed to use part of their superannuation for home deposits. But what the more strident critics miss is that Australia’s superannuation system already channels a significant proportion of retirement savings into housing.

It does this not via the traditional route of people buying a house outright, but rather through an indirect channel, by transforming the household’s compulsorily acquired superannuation equity into mortgages from commercial banks and other financial intermediaries.

Statistics from the ABS (December 2016) show that for every A$1 of assets managed by the superannuation sector, approximately 27 cents is directly financing Australia’s banking sector. This is via superannuation holdings of bank deposits (14c in the dollar), bank equity (7c in the dollar), and other bank liabilities (6c in the dollar).

What do banks do with this 27c? The ABS reports that 38% of bank financial assets are long-term loans to households. We have cross-inspected this data with figures from the Australian Prudential and Regulation Authority (APRA) and found that nearly all of these loans are mortgages.

This suggests that at least 10c of every A$1 of superannuation assets is indirectly financing house purchases via commercial bank debt.

But this also excludes other indirect financing of banks by superannuation. For example, the portfolios of non-money market mutual funds and other private non-financial corporations are also heavily weighted towards funding banks (24% and 36% of their assets, respectively), and superannuation funds allocate 6% and 24% of their funds to these agents respectively. This potentially adds a further 4c in every A$1 of superannuation assets that ultimately results in debt financing of housing.

Why using super for housing might be good idea

One of the merits of allowing households to use their superannuation to supplement their housing deposits would be to reduce unnecessary and expensive financial middlemen. Under the present system, the money from superannuation that finds its way into housing finance does so by passing through chains of two or more intermediaries. This means that it incurs management expenses at each step.

The first link in the chain is the superannuation sector (with an average expense ratio of 0.7%). Next is one or more financial intermediaries, like banks. A plausible estimate of the banking sector’s expense ratio, by our calculations, is 1% to 2.3% of bank assets.

Total expenses through the intermediation chain could therefore be as high as 1.7% to 3%. These expenses might be lower under a housing equity super access scheme.

Another potential benefit relates to the accumulation of debt and its consequences for financial stability.

Most of the money people put away into superannuation, because its compulsory, would have otherwise been used for other types of saving. If you look at the assets in a household’s balance sheet, it is clear that housing equity (representing 65% of non-superannuation assets) is the household’s preferred savings vehicle.

It is possible that growth in compulsory superannuation has contributed to growth in household debt in two ways. First, by frustrating people’s ability to finance home ownership through their deposit. Second, by increasing the supply of mortgage finance, as superannuation savings are recycled through the financial system, and converted to mortgages by the banks.

The risks with the plan

One concern about letting people divert money into buying a house is that their income in retirement could suffer as a result. To mitigate the risk of this happening, any policy on this would need to record and track the values of super funds’ home equity stakes (just as super funds presently track values for the traditional assets they hold).

But retirement income is determined by total net assets, not superannuation assets alone. In this context, home ownership provides retirees an important stream of stable tax-free, inflation-protected, income. This is recognised by the Association of Superannuation Funds of Australia benchmarks for “modest” and “comfortable” retirement income.

These assume that retirees own their home outright. So the decline in home ownership is a significant threat to the adequacy of Australia’s retirement income system.

A second risk is that the policy could further raise house prices, reducing affordability and exposing retirement savings to a house price collapse. In the present house price environment, this is a real risk, which would need to be monitored. But the policy’s two main merits (reducing intermediation costs and improving financial stability by reducing gross debt) are long-run benefits that will continue to hold beyond our current point in the house price cycle.

APRA also already monitors risks associated with housing credit growth, and has the tools, and the willingness to use them, should the policy promote undesired house price growth.

There are reasons to expect that a policy allowing first home buyers access to super will not lead to net growth in housing finance. Superannuation funds are already required by APRA to understand their underlying asset exposure risks. So super funds might try to maintain their total exposure to property risk under this policy, for example by reducing their exposure to the banks.

Authors: James Giesecke, Professor, Centre of Policy Studies and the Impact Project, Victoria University;
Jason Nassios, Research Fellow, Centre of Policy Studies, Victoria University

A less than super response to housing

From The New Daily.

Prime Minister Malcolm Turnbull has reportedly intervened to scotch reports the May budget will include a measure to allow first home buyers to access funds from their superannuation.

He may believe that’s the end of the story, but in reality it’s the continuation of a too familiar narrative. This is a government of fragile convictions, bereft of ideas and lacking a cohesive policy framework.

This is not the first time the Turnbull government has floated a ‘big thinking’ idea – such as the short-lived income tax sharing arrangement with the states – only to hastily retreat at the first sign of opposition.

The irony will not be lost on anyone that a government which has boasted that it alone has a plan for Australia is manifestly rudderless on a range of policy fronts. On tax reform, energy, health and education the government has proven more adept at setting expectations than delivering on them.

Treasurer Scott Morrison’s second budget will seek to restore confidence in the government’s agenda, such as it is, but the early signs are less than promising. The flailing Mr Morrison, whose budget will also be aimed at securing his hold on the Treasurer’s job, has set very high expectations in an area he can realistically do very little about: housing affordability.

The grand plan floated for putting housing within the reach of first-time home buyers was a proposal to allow young Australians early access to their superannuation to raise funds for a house deposit. The same proposal that was deemed “thoroughly bad” by Mr Turnbull when it was raised two years ago. The fact that the idea resurfaced raises questions not just about the government’s policy acumen but its political smarts as well.

Under the model that reportedly had the favour of the Treasurer, potential home buyers would be able to put their compulsory superannuation contributions into a special-purpose fund for up to three years.

Despite public support by some members of the government’s restive backbench, including resident thorn-in-the-side Tony Abbott, the proposal has been widely condemned by economists and the superannuation industry. Mr Morrison would have been familiar with criticisms that the early release of super would lead to higher home prices.

And that’s in addition to the criticism that allowing young Australians to access their super early would be to the detriment of providing an adequate retirement income. As it is, with a current superannuation guarantee rate of just 9.5 per cent, retirees will be struggling to fund their retirement.

negative gearing morrisonTreasurer Scott Morrison has come under fire for the plan.

It would have been negligence of the highest order were Mr Morrison to enact bad policy for the sake of being seen to be doing something about housing affordability.

It is one thing for backbenchers to float populist measures in the lead-up to the budget, but Mr Morrison’s conduct on this issue has been reckless. Whether for supporting the flawed proposal or permitting speculation to gain such currency, he stands condemned.

In making housing affordability a cornerstone of his budget, Mr Morrison has again set expectations that the Turnbull government will not be able to meet. While there are assistance measures around the edges that can provide home buyers with some relief, housing affordability is a function of the market. Nationals leader Barnaby Joyce is wrong to assert that there is no housing affordability crisis, but Mr Morrison is no less wrong for pretending that a resolution to housing affordability is in his gift.

As economist Chris Richardson of Deloitte Access Economics told the National Press Club, governments cannot solve housing affordability.

“We now have state and federal politicians talking about housing affordability and their policies, and if we leave families with the impression that governments can solve this, then they’re going to be pretty disappointed,” he said.

“The levers that state and federal governments pull on housing affordability are pretty small levers on a massive thing.”

Mr Morrison would do the nation a favour if he employed similar candour to set the context in which his budget will seek to provide some relief for young home buyers. He would especially do the nation a great service if instead of undermining Australia’s superannuation system he preserved, defended and enhanced its one and only role of providing Australians with a retirement income.