There is a better way for super funds to fix the housing crisis

While state governments - particularly NSW and Victoria - have taken significant steps to address the issue, the federal government's initiatives have been more symbolic than real.

One of the Albanese government's plans has been to try and entice super funds to invest in housing.

Much of the focus has been on the need to get super funds to invest in social and affordable housing.

Unfortunately, this is both a poor use of members' funds - evidenced by the need for government to offer incentives to get the funds to invest - and unlikely to meaningfully impact housing affordability, as the scale of development is too low.

Of course, investing in social and affordable housing is much more palatable to the anti-capitalist left who think many of the problems in housing stem from greedy developers and landlords.

No doubt this also contributes to the continued insistence from parts of the left that the answer to housing affordability is to increase taxes; despite all the evidence to the contrary.

Notwithstanding this scepticism of development, even some on the left accept there is a case for super funds to invest in the broader residential property market. There is some merit to this idea.

Currently Australia's rental property market is dominated by small-scale landlords. The Grattan Institute reported that about 85 per cent of rental properties are owned by landlords with three or fewer properties.

This means most landlords are very exposed to risks on their properties, and tend to prefer the flexibility of shorter tenancies.

No doubt there would be benefits from large-scale holdings of rental properties, especially by super funds who are likely to prefer longer, more stable tenancies to short-term rentals.

There would also likely be economies of scale in property management.

Nevertheless, there are drawbacks. For example, state land tax regimes greatly advantage those who own one or two properties. Changing this will either require state governments to forgo revenue in the short term (to grandfather existing property owners) or risk creating temporary supply shortages in an already stretched market.

Another relevant point the opposition has raised is that many people are hostile to the whole idea.

They object that they can't buy a home because they are forced to contribute to super, and yet their super fund will take their money to buy the homes they might otherwise purchase directly.

However, super funds could invest in residential property in another way that would provide a similar social benefit to affordable housing, direct benefits to their members and a long-term investment horizon.

Super funds should be encouraged to provide reverse mortgages and equity release schemes; especially those that provide an annuity income rather than a lump sum.

The boost in living standards that would come from unlocking home equity for retirees could be enormous.

Last year the Actuaries Institute published a Dialogue Paper that investigated this option in more detail. They cited estimates that retirees hold approximately $1.3 trillion in housing equity.

By contrast, the entire reverse mortgage market in Australia is less than $4.2 billion in total loans; though this figure is now growing faster than before, despite a relative lack of interest from the big banks.

It should be noted that the Australian market is not only small by comparison to the size of home equity holdings, it is also well below the level in the United Kingdom, which is issuing almost $1.3 billion in new equity release loans every quarter.

Ten years ago, research by Matt Taylor and I estimated that changes to pension eligibility combined with equity release schemes could generate $14.5 billion in savings for taxpayers while boosting pensioner incomes by $14 billion each year.

Since then, the value of home equity held by retirees has almost doubled.

There are risks in equity release, but those risks are often significantly overstated. The traditional concern that the debt will quickly consume the entire value of the home is particularly exaggerated.

First, annuity-based equity release (which could be paid in the same way as the age pension) means that the debt starts very low.

Second, rising property prices mean equity continues to grow over time. Indeed, on a property worth $1 million, a compounding annual return of just 5 per cent would enable an equity release of $50,000 per year without any reduction in equity at all.

Over time, the interest owing would accumulate but so would the returns.

As long as the return on property remains above the interest rate on the loan, retirees may well continue to see their home equity increase.

Another important consideration is that super funds deal in investments, unlike banks which deal in loans.

Funds might find a more attractive model for retirees is to sell a defined percentage of the home upfront, in exchange for a staged annuity payment.

In those circumstances, retirees could access their capital without any risk of losing more of their home equity.

Indeed, an innovative fund might offer a combined annuity product drawing down on super and home equity to manage longevity risk and provide certainty of income for those in retirement.

This product could even be portable if retirees wanted to downsize.

Part of the problem is that the current regulatory settings, and the market itself, offer few incentives for innovation aimed at those in retirement.

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Nor have regulators paid nearly as much attention to boosting retirees living standards as they have to raising taxes or repurposing super balances for "national-building" investments.

In that respect it's not surprising that the government has focused on trying to entice super funds into symbolic investments into social housing, rather than creating a regulatory environment that encourages investment in the interests both of super fund members and society.

Even in highly regulated markets like superannuation and housing, opening up opportunities for market-based innovation will provide greater social benefits than throwing around fistfuls of taxpayers' dollars.