Impact of home ownership

Author:  Kent Davis, Fintech Director RCI Platform Australia Limited

There is little doubt in my mind that home ownership underwrites an easier and less stressful retirement because a retiree will always have the security of their home equity to fall back on. They may access it to purchase something or fund required services.

Conversely, non- home owner retirees spend their entire lives paying rent and the myriad of life associated costs that result for some, in a long term reliance on social welfare with little to offset their domestic capital outflows.

Notwithstanding, levels of home ownership in Australia are falling.

Federal Member of Parliament John Alexandra has a few ideas on how to curb the fall in homeownership. One suggestion was to have the Super Funds buy all or part of the residential dwelling so payments into super, which are tax deductible, would help provide the deposit and repay the loan. Over time, money could be invested in conventional super assets, where the income would then be offset against the home interest.

The problem with John Alexandra’s suggestion in the above article is that the Super Funds will simply not go for it. Yet the focus appears to be on conventional homeownership (actually owning bricks and mortar) which we all know comes at a significant cost notwithstanding the benefit of the accrued value of home equity over time.

But if you were to look at this through another lens, there may potentially be alternative ways of doing it? This principally would apply to renters who are actively employed. Under the compulsory superannuation scheme, those people who are employed have 9.5% of their salary deducted and allocated by their employer to the employees Super Fund (establishes tax free status). The Super Fund then manages this aggregated capital on behalf of the contributing Fund member over their working life. 

The Super Fund could invest a renter’s salary contributions into a number of asset classes. One such asset class could be a residential index fund (with minimal costs) that over time could provide direct access to the Australian residential property market in much the same way as homeowners but without the carried liability of debt funding (used to purchase the home) or the ongoing costs of interest payments, rates, maintenance, insurance etc.

The renter’s compulsory contributions could be automatically invested in the residential index fund which would be tax free for the entire term of their working life. Furthermore, the index fund would generate an underwritten growth yield over time from a portfolio of underlying residential assets that would be a function of the long term average growth of the Australian residential property market that since the 1950s, has tracked along steadily at 7.20% pa.

The compounded growth yield generated by the index fund would be downside risk protected, ensuring the renter would never be exposed or subject to economic shocks or market/price declines as has been the case from time to time in equity markets, effectively eroding accrued value over time. This however would not be the case for other popular asset classes such as equities.

To provide context, over the last 20 years there have been no less than three economic shocks – the dot com crash (2002), GFC (2008/9) and COVID pandemic (2020) all of which resulted in a significant decline of real value in super fund balances across the world.

Currently, there is not a settings configured residential index fund operating in Australia providing such benefits but if there was, perhaps that could potentially provide an alternative investment structure capable of capturing the underwritten, downside risk protected growth of the Australian residential property market.

Over a workers life time, a sizeable tax free nest egg could be accumulated for a non- homeowner retiree that would at a minimum, be commensurate with direct home ownership benefits once all the associated beneficial ownership costs were factored.

The argument relating to Home Ownership V Renting has been debated since time immemorial but from an investment perspective, the one underlying takeaway is that a life time renter will almost certainly miss out on an exposure to the compulsory saving potential provided by the Australian residential property market via home ownership.

Throw into the mix the inevitable uncertainty of rental tenure arising from landlords making decisions outside the control of the renter, the former without doubt is a major contributor in providing a financial and stress free safety net to retiree homeowners later in life.

If we could creatively address this and also underpin the long term security provisions in rental agreements, it would go a long way to changing the current retirement dynamics relating to long term renting.

Legislation could be contemplated to allow renters to bolster their super accounts by making additional contributions from income or savings which could be aggregated into the stream of compulsory salary deductions to their Super fund. This would have a very significant bottom line impact on the size and growth of the super nest egg at retiree age when it could be accessed tax free for purpose by the renter.

But it is difficult to see things that are not there?

However, in the near future, Melbourne based Fintech group RCI Platform Australia Limited intends to launch exactly what I am talking about here- a real and tangible alternative to home ownership in the form of an investible institutional residential asset class accessed via its cloud based digital platform that will be easy to loop or integrate into our existing superannuation system and that will provide any retail investor with access to a long term, downside risk protected residential mortgage backed growth opportunity.

Reader questions

Wouldn’t you need some new legislation to allow/govern such Residential Indexed Fund esp the Tax Free nature of access etc?

In fact no. Since the compulsory contributions of employees come under the Superannuation Guarantee legislation whereby Super Funds receive employee contributions and then invest that money into a range of investee opportunities, one of which could be a residential index fund. This would mean that the returns would be tax free under the legisaltion right up to the age of retirement with its main purpose to build a retirement nest egg. Unfortunately, compulsory super was introduced in 1991 meaning that many older retirees today have not had the full benefit of compulsory super during the bulk of their working lives. This of course does not apply to younger people beginning their working lives now and in the future.  

Does Vanguard have such a Fund?

I am uncertain but I am pretty sure no. The sort of Residential Index Fund that I am proposing here is the one that RCI Platform will create when it commercially launches its HIR Program. It is proprietary and will critically provide not only wholesale investors but also retail investors with exposure to residential mortage backed, downside risk protected minimum growth yields indefinitely into the future- a perfect model to invest compulsory super payments particularly because it will mirror the future equity returns that homeownership delivers (less economic shocks and the beneficial costs of homeownership), thereby providing a viable albeit indirect way of addressing not only the issue of affordability but the myriad of other issues I raised in the article.