Various experts have emerged to slam the Coalition’s proposal to allow first home buyers (FHBs) to access their superannuation to purchase a home. From The Canberra Times:
Paul Keating has dramatically added his voice to those of industry and finance experts warning the Turnbull government against allowing superannuation savings to be used for house purchases, branding the idea scandalous, ideological and designed to “pull the backside out” of super.
Mr Keating has told Fairfax Media it is a triple threat because it would drive up prices, would permanently gut retirement nest eggs for the under 40s and would compromise the optimal investment profiles of the super funds themselves…
Financial systems inquiry head David Murray has also expressed concerns over the suggestion, even as it appears to be gaining supporters on the crossbench…
“There are many issues in the tax and superannuation systems, but to allow savings to be withdrawn to be used for other investments really defeats the purpose,” he said.
He agreed that the proposal would likely add to demand and therefore to higher prices, and would present problems because funds would need to maintain greater levels of liquidity to facilitate withdrawals, thus earning them lower returns…
Financial Services Council chief executive Sally Loane urged the government to think again.
“Allowing young Australians to use super for housing would undermine efforts of the RBA and APRA [the Australian Prudential Regulation Authority] to cool the housing market,” she said on Sunday.
Meanwhile, Rice Warner Consultants have produced modelling showing that extracting money from superannuation to facilitate a property purchase will cost the individual later life as well as put a greater burden on the Aged Pension and the Budget in the future:
The Financial System Inquiry (2014)… recommended the government adopt the objective of superannuation as providing income in retirement to substitute or supplement the Age Pension. Last November, the Financial Services Minister Kelly O’ Dwyer accepted the FSI recommendation without modification and it will become law as soon as a Senate committee has finished discussing the finer details of how this simple phrase should be worded.
Despite this clear objective, the Assistant Treasurer Michael Sukkar has ignored his own policy and this week suggested that he is reviewing whether young people could use their superannuation benefit as a deposit to buy a home. Perhaps he will regret this when he realises what such an asinine policy would cost future governments in increased Age Pension costs.
This policy would create higher activity and would push up the price of housing as more people compete for the same amount of housing stock. It would benefit real estate agents and mortgage brokers who would get higher commission without needing to do any extra work – one of the consequences of distorting capital markets. State governments would also benefit from the higher stamp duties on inflated house prices. Again, rewarding an inefficient tax…
We have modelled the impact on a member aged 35 on average earnings taking $100,000 out of their super account to use as a housing deposit. Our young member now loses the power of compound interest and, assuming they only receive SG contributions and don’t top up their super later in life, they will draw an extra $92,000 (present value) in Age Pension payments in their retirement years.
So, the Federal Government allows someone to draw $100,000 and then pays them an extra welfare benefit of $92,000 later in life!
Some have suggested the super fund would simply lend the money to the member and it would be repaid. This would reduce the pain, though the member would still lose out on years of fund earnings – and investment returns make up a much larger component of a retirement benefit than contributions made throughout a career. The fund administrators would also need to keep records of this new activity which will increase fees for all members.
Clearly, there are far cheaper ways of getting people into home ownership, by looking at addressing the supply and demand for housing in our capital cities. Using super as a piecemeal solution is not the way to fix the housing problem.
Rice Warner’s modelling follows previous PwC anaysis, which estimated that allowing FHBs to access their superannuation for housing could blow a $31 billion hole in the Federal Budget by 2049-50.
It’s also worth remembering that Canada’s Garth Turner, who oversaw the introduction of a housing-super system in Canada in the 1990s, has admitted that it was a massive mistake – placing further upward pressure on Canadian house prices and putting at risk retirement savings – and has explicitly cautioned Australian policy makers against such a move.
Australia needs genuine policies to tackle Australia’s affordability woes that seek to reduce demand via tax reforms, cutting immigration and restricting foreign buyers, as well as freeing-up land supply and planning.
What we definitely don’t need is more demand-side stimulus that would make the affordability situation even worse, cost the Budget a fortune, and place Australia’s retirement system at risk.