Why aren't we using superannuation to fund mortgages?
This article originally appeared on Mortgage Business on 9/7/18.
It seems like a logical idea. Superannuation funds need a fixed-income asset to invest in. Lenders need domestic funding. Super, meet mortgages. But Australia’s $2.6 trillion superannuation market is still unwilling to fund home loans.
This is not a new argument — people have been debating the potential for superannuation to fund mortgages for many years. It looks like the problem comes down to the asset manager and their preference for equities over fixed-income.
During the roundtable discussion that formed the Deloitte Australian Mortgage Report 2018, which was released last week, mortgage industry leaders were asked what were likely to be the biggest funding challenges this year.
Deloitte partner financial services James Hickey, who led the discussion, noted that 15 per cent of roundtable participants thought the lack of a deeper domestic fixed-income market would be a significant funding challenge.
“This always seems counterintuitive given the size of our superannuation market, with over $2.6 trillion of investment assets being managed for the long term on behalf of Australian households,” Mr Hickey said.
Liberty Financial chief financial officer Peter Riedel said that there is already a strong commitment by Australian asset managers to support domestic issuers of fixed-income securities.
“And we are very grateful for this support,” Mr Riedel said. “Unfortunately, there is a ceiling to this support given the strong preference of Australian asset managers and investors to allocate into equities.
“I understand [that] only around 10–15 per cent of the $2.6 trillion Australian superannuation market is allocated to the fixed-income asset class, whereas in other global markets, allocation to fixed-income assets is closer to 40 to 50 per cent. It seems to me that the only way to change this asset allocation imbalance is through legislation and/or regulation. Clearly, a greater allocation to fixed-income assets could benefit the funding program of all lenders in Australia.”
While Australia’s securitisation market has improved in recent years, it is nowhere near as strong as it was before the financial crisis in 2008. In fact, the spectre of the GFC still haunts fund managers and their appetite for RMBS, according to Australian Mortgage Marketplace (AMM) CEO and co-founder Graham Andersen.
Mr Andersen said: “While superannuation funds do invest in the Australian RMBS market, the structure of that market hasn’t changed much in 30 years. It’s a bit old tech.
“This goes back to the GFC. Ten years ago, people bought subprime mortgages that were rated, but the visibility of the data and the risk wasn’t there. It was too difficult. You may have been able to get some information, but it was basically too difficult.
“For superannuation funds, not a lot has changed. You can buy securities in residential mortgages, but getting data and understanding the risks is beyond the capabilities of most of the super funds. Some of the bigger ones have the resources. What they need is a trusted, reliable platform that can get the data for them. Then they will invest.”
Mr Andersen believes the impact of the GFC on the securitisation markets can’t be underestimated.
“Regulators were spooked, the investors were spooked, people putting money into the funds were spooked. In most cases, it was unnecessary, but what you don’t know you don’t know. That’s one of the things that must change.”
Mr Andersen and AMM are currently working on new and innovative solutions for mortgage funding in Australia. The company, which launched last year, has also outlined plans to offer tailor-made white label home loans to mortgage broking groups. The use and visibility of data will play a significant role for AMM.
“There is clearly a lot of potential investment money tied up in super that could go into mortgages,” Mr Andersen said. “It makes total sense.”
None of this is a criticism of the article but It also makes sense to consider other areas in the economy that could benefit from the superannuation pool. A good example might be infrastructure investment/development which as we know, has a multiplier effect within the economy. Or what about seed capital for industries that require a long lead time to turn a profit (super is a long term investment) or what about investing into some of the many wonderful inventions conceived in Australia but have to go overseas to find capital which then go on to be highly successful and lucrative?
Yes, there are many areas where super could be invested that make total sense.