Should you rent a house from a super fund?

One of the notable decisions from the recent jobs summit was to encourage superannuation funds to invest in private rental properties, as well as social and affordable housing.

It is a noble idea given the lack of affordable housing and the $3.3 trillion of money sitting in superannuation.

Surely, you can put these two things together and get a good result?

Well, yes and no, given that the main aim of superannuation is to earn the highest returns possible for a given risk to afford people the best possible retirement income.

While the main aim of private rental and social and affordable housing is to provide a roof over the head of those who would otherwise struggle to achieve that.

No investment at the moment

At the moment, Australia’s massive pool of super has virtually nothing invested in domestic housing, although it has billions invested in shopping malls, office towers and warehouses.

Treasurer Jim Chalmers is trying to change that by committing $575 million to encourage private capital, including super funds, to invest specifically in social and affordable housing.

The problem with this approach is that the entire structure of the Australian rental housing sector is built around individual investors rather than large ones.

It is one of the reasons the whole rental experience in Australia is so different to many other countries that use housing co-operatives or other big players to provide large amounts of professionally run housing on long term leases.

The Australian “mum and dad investor” approach leads to short term rentals and endless disputes over maintenance, repairs, cleaning and bonds, with expensive real estate agents acting as intermediaries.

It also leaves the rental sector vulnerable to big withdrawals of supply – for example, if a lot of landlords decide it will be more profitable to swing to short term holiday leasing through Airbnb or other programs.

Land tax could be a killer for super funds

One of the other effects of the Australian “individual investor” approach is that taxation is very different.

With state governments in charge of land tax, they levy that so that the combined value of properties owned by a single owner are charged at a progressive rate.

This means that small investors can mitigate their land tax bills to some extent through tax-free thresholds that make the overall package of being an individual landlord attractive.

However, that system becomes prohibitively expensive for bigger investors, as the combined value of property rises sharply until the tax-free threshold is totally overwhelmed.

Most estimates show that land tax would swallow up to a third of the annual rent, which is a massive amount to try to recoup by raising rents.

Of course, the entire system of land tax could be changed but the history of co-operation between different levels of government within Australia to achieve a desirable outcome is not a promising one.

It is much more common to see different levels of government trying to push costs on to each other rather than agreeing to slice and dice their tax revenue.

Queensland in controversial bid to tax interstate landlords more

Currently Queensland has adopted a very controversial change to its land tax regime that would act to further disincentivise large owners from operating social or affordable housing.

Under this proposal, owners are required to declare their interstate property ownership, and this is then used to scale-up their land tax payable in Queensland – thereby getting around the fact that the state can’t levy tax on an interstate property.

The new system is being sold as “closing a loophole” that allowed owners to use multiple tax-free thresholds across different states, but could more accurately be seen as a way to further discourage super funds and other large owners – or even the current small owners – from entering this space.

You can be sure as well that all other state governments will be watching the Queensland experiment very closely and if it works, they could prop up their rickety budgets with some hefty increases in land tax using a similar model.

Queensland also pioneering involving super funds

Interestingly, at the same time as the controversial Queensland land tax reform is being pursued, a big Queensland super fund Australian Retirement Trust or ART (produced from the merger of Sunsuper and QSuper) has formed a partnership with Queensland Investment Corporation (QIC) and Brisbane Housing Company (BHC) to invest up to $150 million in new social and affordable housing in Queensland.

The Queensland Government will subsidise the revenue stream, ART will finance the housing, QIC will be the investment manager and BHC, a social housing partnership between the state government and Brisbane City Council, will manage operations.

The plan is to build up to 1,200 new social and affordable housing units by 2025.

Arguably, given that federal and state governments can borrow more cheaply than super funds, it would be better for the state to just finance the housing itself.

The remaining argument for this scheme, though, is that by underwriting the revenue stream, the Queensland Government could afford to provide many more houses than if it had to finance them entirely by itself.

Arguably, nationwide land tax reform would be much more effective but with Queensland facing a deluge of new arrivals from overseas and interstate, it will be an interesting test bed for involving super funds in housing – and in controversial land tax changes as well.