Superannuation funds should be allowed to leverage debt within a fund to generate higher levels of savings in the same way lending in the property market has driven up the value of housing, an investment management firm has suggested.
Innova Asset Management managing director and co-chief investment officer Dan Miles said with the increase in the average price of a residential dwelling in Australia rising to $959,300 during the March quarter, it was clear millennial buyers were locked out of the property market.
As such, these buyers should commit more money to superannuation, which should be leveraged, to generate more income for their future.
“Younger Australians are in desperate need of solutions, but there are no politically simple ways to tilt housing back towards being a human right rather than a speculative asset class,” Miles said.
“There will always be sound reasons to own a home that stretch far beyond the financial realm, but many younger investors will also need to consider new ways to accumulate wealth, including through superannuation.”
He noted a key factor in driving up residential property prices was leverage, or the use of debt, to buy a home and many loan-to-valuation ratios are above 80 per cent, with some state government-backed schemes allowing up to 98 per cent of a property’s value to be borrowed.
Those levels of debt have an outsized impact on nominal price gains in the residential property market and introducing leverage into the superannuation sector could boost returns for members, he said.
“While there are strict rules that prevent super funds from using leverage, perhaps it’s time to reconsider those rules given the superannuation system has been established for decades. Superannuation is a 40-plus-year investment where volatility, which can be amplified by moderate leverage, can be managed,” he said.
“Most superannuation funds have met their long-term return goals: leverage could power up that wealth creation.
“The scale of super funds means they could borrow at very low cost. Applying a moderate amount of leverage combined with a greater allocation to equities or a more aggressive investment profile should generate similar or greater return than a leveraged property investment.
“It may not be enough to solve the housing crisis on its own, but it deserves further consideration as a generation of young Australians face a long wait for political solutions to the current housing crisis.
“The common saying that ‘your home will be your largest investment’ may need a recalibration, with superannuation potentially being the biggest asset future generations will have.”
