Using super for housing is a really bad idea
Motivated by the need to make housing more affordable, recently a proposal has been floated from within the Commonwealth Government to allow first home buyers (FHBs) to access their superannuation to help fund the purchase of their house.
ACIL Allen recently completed a report for AMP which argues this proposal is a really bad idea, for the following reasons:
- It will be futile: any policy that just adds to housing demand, as this one does, will increase house prices, thus undoing whatever affordability advantages may be gained by giving FHBs access to this cash.
- The superannuation savings of FHBs will never recover, thus worsening their standard of living in retirement and increasing their reliance on the age pension. Super on retirement will be about one third lower. Counter arguments that people will at least have a valuable house instead of superannuation depend on the assumption that house prices will grow in the future as they have in the past. This counter argument is built on faith, not evidence. No one knows what will happen to house prices.
- Age pension costs to government will increase for two reasons: first, because people will have lower superannuation balances and so will access the pension earlier and in greater amounts; second, because more of people’s assets will be in their homes, which are exempt from the age pension asset test.
- Tax receipts to government will fall, worsening its structural fiscal position, for two reasons: first, because lower superannuation balances will mean lower earnings on super which will in turn reduce the taxation receipts from those earnings; second, there will be no offsetting increasing in taxation from having more assets in the family home, because both capital gains and imputed rent from the family home are tax-free.
- Capital will be diverted away from businesses who need the capital to grow. Superannuation savings are an important source of capital for Australian businesses. Diverting this capital towards housing, which already benefits from generous tax treatment, would be spectacularly counter-productive for the economy.
- More wealth will be concentrated in the family home, which will expose households to greater financial risk, and a possible catastrophic fall in wealth should there be a significant fall in house prices. It is never a good idea to have too much wealth in one asset.
- The scheme could easily be cheated, leading to no increase in home ownership, higher house prices and a reduction in superannuation savings. Depending on the scheme’s design, people could access their super, buy a house, sell their house, and spend what money remains after paying buying and selling costs. This will be lose-lose-lose.