Future funding housing

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From the Age this morning.

The Future Fund has gone into partnership with a land developer to buy and develop greenfield sites on the outskirts of the major cities.

West Australian-based property developer Peet Limited yesterday announced a partnership to buy land in areas of projected population growth and develop master-planned communities.

The arrangement is expected to be worth more than $300 million over 10 years.

The Future Fund was ..

… established by the Future Fund Act 2006. The object of the fund is to strengthen the Australian Government’s long term financial position by making provision for unfunded Commonwealth superannuation liabilities. These liabilities will become payable at a time when an ageing population is likely to place significant pressure on the Australian Government’s finances. The Future Fund has received contributions from a combination of budget surpluses, proceeds from the sale of the government’s holding of Telstra and the transfer of remaining Telstra shares. The Future Fund Board of Guardians is responsible for deciding how to invest the assets of the Fund.

So basically this is a superannuation fund run by the government for itself to fund its own superannuation liabilities. The fund’s mandate sets some fairly tough targets.

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The Future Fund Investment Mandate sets a target return of between 4.5% and 5.5% above the Consumer Price Index (CPI) measure of inflation over the long term. The Board has interpreted this as an objective to provide a return of at least 5% above CPI over rolling 10 year periods. The mandate also requires the Board to take an acceptable, but not excessive, level of risk.

$300 million over 10 years certainly isn’t a large investment, but for some reason I find myself feeling conflicted about this particular article.

On the positive side I am happy that the government has had the foresight to realise its superannuation liability and to create a facility to deal with that issue. However on the negative side I feel that more direct intervention into the Australian housing market by the government (or pseudo-government body) is unwarranted.

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This also creates an interesting chain of government financial dependency on itself. The Future fund which is setup to manage a financial liability of the government is investing in housing, which it is implicitly supported by that same government via bank funding guarantees. No matter how remote you consider a housing crash to be, that double-dipping on risk is certainly an issue. It isn’t as if the taxpayer isn’t already on the hook for enough government initiated housing risk via those particular guarantees and AOFM operations ( past and future ).

Obviously the other question is whether it is an investment that is able to return 5% above CPI over the next 10 years given the continuation of falling housing market

House prices continued their downward slide in May losing more value in the first five months of this year than they did in similar period during the 2008 global financial crisis.

National city home values fell 0.3 per cent over the month, seasonally adjusted, but posted a decline of 2.7 per cent over the year from January, the latest figures from RP Data-Rismark show.

By comparison, in the five months up to July 2008 during the peak of the GFC, house values dropped 2.4 per cent, RP Data researcher Tim Lawless said.

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Obviously this is a long term investment, but the trend in credit issuance for housing certainly looks to be baked in and you only need 1 or 2 years of losses to make it very hard to catch up.