Superannuation funds should take advantage of the long-term growth Australian residential market by investing in equity mortgages, according to a report by Mercer Investment Consulting.
“We find the case for institutional investment in equity mortgages compelling. Although we have recently experienced a national home price boom, the longer-term dynamics of the asset class remain sound due to the undersupply of homes relative to demand in Australia, ” Mercer Investment Consulting head Tony Cole said.
An equity mortgage offers home buyers a low or zero interest rate in exchange for an equity stake in the home. Equity mortgage providers then benefit from capital growth in the home when the property is either sold or refinanced.
The Mercer report also highlighted that as investors in equity mortgages, institutional investors could reduce the overall risks of their portfolio.
“Historically, residential real estate displayed a negative correlation with commercial property markets and a low correlation with the share market, therefore providing diversification benefits in a multi-asset class portfolio,” Cole said.
The institutional market, however, as yet has not been very active in the sector although equity mortgage products have been available to these investors.
Cole highlighted the collapse of the equity mortgage industry in the United Kingdom during the 1990s as a factor in hampering growth in the Australian market.
During that time in the UK, Bank of Scotland and Barclays both launched shared appreciation mortgages, but the products floundered thanks in part to prohibitive pricing.
