With Anthony Albanese’s signature housing policy delayed for months in the Senate, investment consultant Harry Chemay examines what’s wrong with this approach — and what’s right with another Labor policy
The Albanese government is right in wishing to ease the nation’s chronic housing crisis, but how it wants to go about it leaves too much to ‘the demon of chance’, irrespective of the best endeavours of the Future Fund.
With the Housing Australia Future Fund (HAFF) bill now in limbo until October, thanks to its defeat in the Senate this week, the government has to decide whether to push ahead with its signature housing policy or opt for a different course of action.
Here’s the case against the HAFF – and a pointer, from the government itself, to a simpler solution.
Capital markets to the rescue?
The proposed $10 billion Housing Australia Future Fund (HAFF) is intended to help fund the creation of an additional 30,000 social and affordable dwellings within its first five years of operation, from the 2024-2025 financial year onward.
These would include 20,000 dwellings to provide social housing and a further 10,000 affordable homes for frontline workers, providing an ability for them to live closer to their places of work.
So far so good.
In its year or so in power, Labor has moved at commendable speed to wrestle with the beast that is housing availability. The Minister for Housing, Julie Collins, has introduced a number of measures to alleviate pressure in the housing market, now so acute that the national vacancy rate, as measured by property data firm CoreLogic, hit an all-time low of 1.1% in April this year.
The issue of contention is the modus operandi the government has chosen for the HAFF.
Rather than spend from consolidated revenues, and potentially add to a budget deficit, the government aims to credit the Future Fund the HAFF funds to invest, with disbursements from this investment pool of “up to $500 million” per year used to meet the target of 30,000 social and affordable dwellings over the first five years of operation.
That ‘up to’ was doing a lot of heavy lifting in the government’s original announcement and so, under pressure from the Greens, the government recently relented, committing to a minimum funding of $500 million from HAFF for at least the 2024-2025 budget year, were the legislation to pass.
All up, the proposed HAFF is a neat accounting device, as the government essentially never loses control of these funds. It neither adds to or detracts from the budget bottom line, and the Future Fund has been around since 2006 investing for a range of government priorities, so what’s not to like?
The math behind the HAFF
The HAFF proposal is as follows. It credits $10 billion to the Future Fund, Australia’s sovereign wealth fund created by former Treasurer Peter Costello in 2006, and now chaired by him as one of (currently) six eminent individuals who make up the Future Fund’s ‘Board of Guardians’.
The Future Fund receives a distinct HAFF investment directive from the relevant Minister (a ‘mandate’ in investment parlance), with its own return objective and risk parameters, then creates and manages a portfolio of investments it believes provides the highest probability of delivering the desired returns.
If the HAFF needs to deliver $500 million in 2024-25, that’s clearly a net 5% return off the starting $10 billion. Whether it delivers 5% or something quite different is the issue here. Such is the nature of investment markets; the future is unknown to all, even the brightest of investment gurus with the most sophisticated of market forecasting algorithms.
That’s precisely why share market investors expect to receive a return higher than cash over the longer-term, for taking on the higher uncertainty of actual returns (the so-called ‘equity risk premium’). Whether it pans out as expected in the timeframe desired, well that’s really in the lap of the gods.
A cursory glance at the Future Fund’s most recent annual report shows how risk indeed does impact its performance. The FF’s main mandate (the original 2006 investment directive to help meet public service unfunded superannuation liabilities) has returned 7.8% per year since it started. But in 2021-22 it lost 1.2%. But then again in the prior year it delivered 22.2%.
You see where I’m headed with this; there is no such thing as a sure bet in capital markets. You allocate capital, hopefully intelligently through appropriate diversification and risk management, then you get what you get and you don’t get upset.
Using the Future Fund’s own numbers, its main portfolio (now worth somewhere around $200 billion) has roughly a 95% chance of experiencing a one year return anywhere from -1.2% to 16.8%, if past performance (and volatility) are any guide.
As noted investment columnist for The Wall Street Journal Jason Zweig muses: “One thing we can forecast clearly is that, if the past is any guide, the future won’t resemble it.”
So to expect the HAFF to deliver 5% per year straight out the gate is a big ask, without it experiencing not inconsequential year-to-year return variability. Which would be at odds with its remit to operate in effect as an endowment fund, the kind of investment pool that many American universities use to help meet annual running costs.
In short, without the government first developing a HAFF investment mandate, allowing it to be openly debated, and having interested stakeholders undertake scenario modelling to stress test it, we simply can’t have any confidence the HAFF might deliver at least $500 million of funding for social and affordable housing year in and year out with some consistency.
Or conversely whether, given agreed-upon risk/return tradeoffs, an amount much bigger than $10 billion might be needed, if a capital market solution is to be used. But does it need to be used?
Sometimes the simple solution is best
In last weekend’s announcement of a $2 billion Social Housing Accelerator (SHA) programme, the government might inadvertently have found itself a way out of the HAFF impasse.
The announcement (details are scant at present) suggests an immediate allocation of these funds to state and territory governments to deliver “thousands of social homes across Australia”, according to the Minister for Housing, Julie Collins. And these funds, from consolidated revenues, will be out the door before 30 June. That’s quite impressive.
Further, the ability of states and territories to decide how to use this funding, whether for new builds, expanding affordability programs, renovating existing social housing stock or refurbishing existing but uninhabitable stock, is to be welcomed.
Get the money out the door fast with maximum flexibility, to have people housed sooner. And with no need to be at the mercy of the market gods to start putting mortar on bricks.
Given that the Centre for Urban Research at RMIT University indicated that housing needs were not being met for up to 640,000 households (one in 15 households) in its submission to the Senate HAFF committee, the need for speed should trump the convoluted complexity and excessive financialisation of the Housing Australia Future Fund proposal.
The Social Housing Accelerator provides us a glimpse of how the government might just get to grips with our seemingly intractable housing dilemma. As Prime Minister Albanese proudly tweeted in announcing the SHA, “Real dollars, driving real change, building more homes”.
Harry Chemay has more than two decades of experience across both wealth management and institutional asset consulting. An active participant within the wealth and superannuation space, Harry is a regular contributor to investment websites in Australia and overseas, writing on investing and financial planning.