Joe Hockey recently announced that the Government is considering providing first home buyers access to their superannuation to assist them in the purchase of their first home.
When considering whether it would be advantageous to provide these buyers with access to their superannuation, along with what the government is attempting to achieve, you need to take into account several considerations.
The first of these is the current market conditions. The market conditions that we are currently experiencing in Sydney (and in parts of Melbourne) are not indicative of what the property market is like in other parts of New South Wales or other capital cities for that fact.
You need to consider what percentage of the population will be assisted by this policy if implemented? When it comes to first home buyers it is still not known what actual percentage of home purchasers in recent times have been first home buyers. I have read figures that state as low as 14% of purchasers in the market are first home buyers I wrote about this issue in First Home Buyer Figures Understated.
Then there is the superannuation, it is estimated that an average person at 30 years of age has about $15,000 in their superannuation.
Interest rates also need to be mentioned as well. While the low interest rates are good for those first home buyers that are coming into the market they are not necessarily helping those that are saving for a deposit as the rates being offered by the banks on deposits is at an all-time low.
In addition to the above there is already a First Home Owner Grant scheme in New South Wales which currently provides a grant of $15,000 but only applies to eligible first home owners who purchase a new home or build their home.
Last week I was interviewed by Australian Broker TV on the topic and I have to say that in the process of trying to form an opinion, I discovered what an absolute mine field this topic is.
So what are some of the disadvantages and advantages of the proposal?
Advantages
- The main advantage is that first home buyers would have access to funds that they would not otherwise have access to for a deposit. In the Sydney housing market where prices are significantly higher than other areas of the state this could assist greatly.
- Owning your own home is an asset and many believe that it should form part of a retirement plan in any case. The advantage of home ownership come retirement is that you do not have to worry about having to find the money to pay rent along with having enough income to fund your day to day living expenses.
Disadvantages
- Once the funds have been withdrawn from their superannuation they won’t be available come retirement adding pressure to retirement savings.
- There is an argument by some that it will bring more buyers into an already heated market and that this will drive up property prices even further.
- If the superannuation is used to buy a house in the wrong area they could in fact go backwards financially.
- The proposal somewhat goes against the goal of assisting people saving and funding their own retirement through initiatives such as the Superannuation Guarantee contributions
Having considered the advantages and disadvantages I have to say that there are counter arguments for each and while the government has announced they are thinking about the initiative there is not much detail available at this stage.
Here is some more food for thought
- Similar schemes are available in Canada, New Zealand and Singapore. In Canada for example the amount withdrawn from superannuation has to be paid back in a certain time period. This obviously minimises the effect on the available superannuation come retirement.
- What happens with the funds that are withdrawn from superannuation when they sell the home and purchase another, or what about the case when they don’t purchase another home?
- What will happen when they actually retire how will the funds they withdrew be treated?
- What happens should interest rates go up and they cannot meet their mortgage repayments, or they lose their job and they subsequently default on the mortgage. In this case they have lost their home and the superannuation that went into the purchase of that home.
- Just like house prices and capital growth, the performance of your superannuation is not guaranteed and who is to say what amount you are going to end up with come retirement. If the market goes down you could in fact lose more that the amount that was pulled out to purchase the home.
- What impact would there be on pension costs and the pension available to those that took advantage of the scheme if it was introduced. (if in fact there is still a pension scheme available for those younger first home buyers by the time they retire)
- There are sceptics that believe that the Government is trying to be seen to address an issue in an attempt to gain votes, in this case from the younger generation who are not indicative of the normal Liberal voter.
The proposal somewhat fails to address the underlying issue of the current market conditions that have made it harder for first home buyers to enter the market. That issue takes you off into a whole other minefield where you would need to look at the issue of housing affordability, negative gearing and supply and initiatives such as new land releases, higher density housing.
So in summary while I think the idea has merit, I think significant thought needs to go into the detail on how the proposal would operate and what protections are put in place.