KiwiSaver funds should look at housing

To understand how to fix a problem, you first need to understand it. It’s devilishly hard with housing, because the problem is so complex.

But it’s important we do, because housing is a human right. Insecure and poor quality housing is a key cause of childhood poverty, mental stress, physical ailments and dislocation from community.

The problem is large. Nationally, 14,000 homes are demolished each year, so we need to replace that number just to stand still. And we need to build another 10,000 a year to satisfy growth in Auckland alone. Economists say the national shortfall is between 40,000 and 60,000 homes, and rising.

So how can we get more families into quality, long-term housing?

In the social housing area, Government is the only real answer. Community organisations and charities play a small and important role, but it’s the Government that will supply the bulk of what’s required.

And it’s right that the Government focuses on social housing. It’s where the need is greatest. It’s also the area of maximum political risk if there isn’t delivery. But the Government can’t be expected to supply affordable housing as well. Resource Management Act reform and provision of Crown land can help, but taxpayer money is needed more for social housing, schools and hospitals, rather than homes that people could otherwise afford.

So how do we fix the shortfall of affordable housing? The solution is well understood overseas, and is now possible here.

It starts with Economics 101. The price of any commodity, including houses, is determined by the balance between demand and supply. If demand isn’t going down (and for houses it’s not), we need more supply. Issues like low interest rates and loan to value ratios are a distraction from the real issue, there simply aren’t enough houses.

So how do we increase supply? The critical factor often missed is the need for well-funded, long-term investors. These investors now exist in New Zealand, in the form of NZ Super, ACC, iwi and KiwiSaver funds. Collectively they have $150 billion to invest, and growing. KiwiSaver managers alone should have $200 billion by 2030.

Europe is a good example of how money could be wisely invested. Pension funds there typically have 10 per cent to 20 per cent of their investments in rental hosting, providing large amounts of longterm supply. That means houses for sale need to compete with those available for long term rental.

For New Zealand, the numbers really add up. If we had 10 per cent of superannuation fund investments in affordable housing, there would already be 25,000 to 30,000 homes available for long-term rent. This would dampen rising house prices.

House prices in Auckland have risen 96 per cent since 2010. But in France the rise has been 27 per cent, Germany 62 per cent, Belgium 32 per cent, Ireland 30 per cent and Switzerland 15 per cent. And in Singapore prices have risen 14 per cent, London 34 per cent and New York 57 per cent. Prices in all have risen less than Auckland, all have large stocks of rental housing owned by pension funds.

Overseas pension funds, and other large investors, own rental housing where tenants rights are strong, and building standards high. A quality long-term rental, at a fair price, attracts the best tenants, and the best investors.

The recent Government focus on stronger tenants rights and better building standards are steps in the right direction.

Another reason we have so little institutional ownership of rental properties is our national obsession with homeownership, with its taxfree capital gains. It means that most houses are rented by those who can’t afford to buy. Everyone acts short-term, which is not what large investors want.

But this is changing. A growing number of Kiwis don’t want to own houses, or think they could never afford them. And older people seek stability in housing, not necessarily ownership and capital gains. That’s one reason why retirement villages have done so well. And while our tax laws favour homeownership, if house prices rise slowly, the allure of capital gains from housing will fade.

Plenty of overseas evidence shows that well-built housing, with long-term tenancy agreements, encourages high-quality tenants to consider renting as a viable alternative to owning. And that attracts investors like pension funds. They bring large supply into the market, and cool rising house prices.

Building quality housing in scale is affordable for the NZ Super Fund, ACC, KiwiSaver funds and iwi. If they had 5 per cent of their funds in rental housing, we could already have 15,000 extra warm, dry homes for rent. And build-to-rent housing should be attractive to our largest investors when the alternative, bank deposits, are offering less than 1 per cent. And they could choose right now to grant more favourable tenancy terms and build higherquality homes, creating a reliable investment that is fair to all.

I suspect that the reasons that our biggest domestic investors haven’t stepped up is a combination of short-term thinking, reluctance to do anything different, and fear that the Government would flood the market with cheap housing. None are valid any more.

Rental housing in scale is a sound investment for our biggest domestic investors, including KiwiSaver funds. They can play an important role in addressing a national need, while also making money for their members. Nothing about this is new, just new to New Zealand.

Sam Stubbs is the founder of KiwiSaver scheme Simplicity.

Nationally, 14,000 homes are demolished each year, so we need to replace that number just to stand still. Sam Stubbs

If we had 10 per cent of superannuation fund investments in affordable housing, there would already be 25,000 to 30,000 homes available for long-term rent.