Innova backs using leverage in super for housing

Innova Asset Management has entered the super and housing debate, saying allowing the use of leverage in superannuation it could help younger Australians who are locked out of the property market build wealth.

Innova said millennials are firmly locked out of the property market with average dwelling prices in New South Wales now sitting above $1.2 million.

It said now is the time for younger Australians to consider other investment options, including devoting more to superannuation and allowing super funds to use leverage to boost their returns.

Innova co-chief investment officer Dan Miles said rising residential property prices have created unprecedented wealth for Baby Boomers thanks to the power of leverage, lucrative tax breaks, constrained supply, and strong population growth.

"Unfortunately, a generation of younger Australians have become the collateral damage to rising property prices. Many younger people who can't rely on parental wealth or an inheritance have been effectively locked out of the property market, without the funds to be able to afford a deposit for a home or maintain a mortgage," he said.

"This has deep implications across society. 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.  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."

Recent Australian Bureau of Statistics data revealed that nationwide, the average price of residential dwellings rose by $14,300 or 1.5% to $959,300, during the quarter.

According to Miles, several factors have driven up residential property prices but one that is rarely given its due is leverage, or the use of debt to buy residential property.

"Loan-to-valuation ratios regularly stretch beyond 80% while some governments have backed schemes allowing up to 98% of a property's value to be borrowed.  That amount of debt can turbocharge even nominal price gains given the median house in Sydney is now valued at almost $1.4 million," Miles said.

"It's no surprise then that the next generation is turning to more accessible investments such as shares and even cryptocurrencies."

Miles said allowing superannuation funds to take advantage of leverage would potentially offer more attractive returns for savers.

"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 average super fund has posted a 7.3% annual return (or a real return of 4.5%) over the 30 years ended 30 June 2023, according to ASFA.

"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."

Miles said while it may not be enough to solve the housing crisis on its own, it deserves further considering while younger Australians wait for political solutions.

"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," Miles said.