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Playing with super: The housing affordability debate

Housing affordability is an escalating struggle for Australians, but using superannuation money for a home deposit is not part of the retirement savings system’s game plan. Krystine Lumanta investigates what’s at stake and whether any alternative solutions exist.

Super has been bandied about over the years as a way to get around rising house prices, but the majority of the industry affirms any strategy that diverts the system from its prime aim unequivocally puts retirement income at risk.

In early March, Treasurer Joe Hockey announced the government was prepared to look at a diverse range of proposals to help young Australians buy their first home by way of using their existing super balances.

The idea was also brought up last July by independent senator Nick Xenophon, who revealed plans to introduce legislative changes in the spring session of parliament.
Xenophon proposed a scheme similar to one used in Canada that would allow borrowers to access up to $25,000 from their super account to help pay for a deposit, which would lead to improved housing affordability.

Industry associations and bodies subsequently labelled Hockey’s proposition to open up super for this purpose as ridiculous, a raid on the retirement nest egg and one that would severely hamper the compulsory super system.

However, it also sparked debate about its merit.

Retirement income under threat

In its pre-budget submission, the Real Estate Institute of Australia proposed that the government consider a scheme to encourage young Australians to have access to their super for the purpose of raising a deposit for a first home.

One of the inherent problems with superannuation is that its principal objective has not been fully appreciated or understood, which in turn has allowed such debate about alternative uses.

Legislating the definition and purpose of super has been widely supported by industry stakeholders for some time and was a key recommendation in the Financial System Inquiry’s (FSI) final report.

This sentiment was backed by opposition treasury spokesman Chris Bowen, who believes establishing a clear objective for super would allow future policy ideas to be tested and measured against it.

Bowen told the Centre for International Finance and Regulation FSI Workshop in Sydney on 11 March: “I found this recommendation arresting in its simplicity.

“Many people would think that super already has an agreed objective, but actually it doesn’t, or perhaps the problem is that everyone has got their own.

“It’s natural enough when we have an asset like superannuation, which is now worth more than our annual gross domestic product, that plenty of people … want to use it for one purpose or another.”

Rockwell Olivier managing principal Peter Bobbin says from a policy perspective, Australia’s modern super system is about creating financial security in retirement.

“Everyone argues or expresses dismay with the continuing changes to superannuation, yet this would be such a structural change that is dramatically backwards, policy-wise,” Bobbin warns.

“Everyone acknowledged that the old super guarantee rate of 9 per cent was not enough, which is why it’s now steadily going up to 12 per cent, so to introduce a personal residential housing affordability element will drive account balances back to zero.

“To use superannuation as the strategy around housing affordability is simply dumb.”

Macquarie Adviser Services executive director David Shirlow says the super system is currently locked into a trend of increased scrutiny, which includes whether tax concessions are targeted at achieving the retirement income objective and how sustainable the revenue cost of the system is.

“Broadening the range of purposes to which super can be used is at odds with that trend,” Shirlow says.

“Having said that, the idea of accessing super for housing has emerged from time to time, certainly in the early ‘90s, and I suppose part of the argument is that owning your own home is an important component in achieving security in retirement – the home can be said to be the fourth pillar of retirement income policy in a sense, alongside the pillars of compulsory super, voluntary super and the age pension.”

He says national schemes, such as the government’s First Home Owner Grant, introduced on 1 July 2000 to offset the effect of the goods and services tax on home ownership, are better options.

Additionally, the First Home Saver Account, another savings vehicle for first home buyers, was officially axed by the current government and will be abolished from 1 July.

“At least these did not have the negative consequence of removing retirement income savings,” Shirlow says.

“But they’re demand factors, so it will make it easier to buy. Unless supply is increased, the result may simply be higher prices.”

He adds other jurisdictions are allowed access to super for housing purposes because they have far higher contribution rates.

“For example, in Singapore the contribution rates are more like 36 per cent,” he says.

“Our system simply doesn’t have that level of savings.”

A matter of supply

In an already limited supply environment, releasing a percentage of funds from super can only result in increased competition among home buyers and even higher bids without dealing with the supply problem.

It’s crucial to understand therefore that the housing affordability problem is driven by taxes on new developments and supply, Institute of Public Accountants technical policy general manager Tony Greco says.

“If we exhausted all other options and superannuation was the only thing left, I’d then consider it more seriously, but the problem lies elsewhere. The supply issue is something else altogether,” Greco says.

“We shouldn’t be adding to the problem by using retirement income to deal with things which aren’t focused purely on funding a person’s retirement because we know that even a small amount in super over an extended period will have a big impact. Also, we’re living longer.”

He says he expects Treasury’s tax white paper, scheduled for release by the government as its final tax policy statement ahead of the next election, to consider some of the tax impositions that are state-based as a way to relieve some of the pressure on first home buyers.

“For example, when you do have money coming in from other sources, stamp duty has been identified as a bad tax, so you’ve got opportunities to lessen the burden on the property sector,” he says.

“There are also state-based taxes on developments and the goods and services tax. So there’s scope for improvement.”

According to Bobbin, one way to address housing supply is by shifting populations and creating non-central business district infrastructure projects.

“Creating major infrastructure projects away from cities that are attractive to superannuation, I’m talking multi-member and SMSFs, will significantly result in decentralisation and would dramatically impact housing affordability,” he says.

“Don’t mix super into it because it’s prostituting the future to achieve the present.

“Newcastle, Wollongong and Nowra are in fact centres that people get attracted to, so creating infrastructure alone would take pressure off Sydney, per se.

“Regrettably, it seems to me that some of the infrastructure that the government’s directing is primarily CBD-based and doesn’t allow for decentralisation. Sydney’s population will hit 5 million by April 2016 – that’s one in five Australians that live in Sydney.”

Time for sensible debate

Australian SMSF Members Association (ASMA) chairman Grant Abbott says the problem with first home buyers using their super is that they’re never going to have enough money for a deposit.

“More and more we’re starting to see parents lend money to their children for the deposit, so what struck us is the potential for parents to use their super fund or SMSF to lend that deposit, subject to certain criteria,” Abbott says.

“If you went ahead with that, potentially the child may end up losing the tax-exempt concession when they sell that property because the money will have to go back to the parents, so the actual ramifications around how it would work are still very much up in the air.”

But that is not to say sensible discussion about such possibilities can’t take place, he says.

“Super is going to be a huge pot, but how can it be best used for Australia?” he says.

“The three big issues on the table are housing affordability, infrastructure, particularly around Sydney and Melbourne, and also regional sustainability.

“There should be devices and mechanisms where people can attach their superannuation to those three things.

“The ASMA board is looking at the mechanics of it, but I think we need an industry-wide debate and a lot of people want to have that debate. We’ve had initial discussions with the Property Council of Australia and other housing stakeholders.”

Abbott shares a possible scenario put forward by ASMA executive director Simon Makeham.

“Perhaps we can have a fund where SMSFs and super can effectively invest in property and that money then goes out and lends to first home buyers on a broader perspective, subject to strict conditions to prevent abuse,” Abbott says.

“It sounds good in theory. It might be better to put it into a pool and then lend it out so the parents aren’t directly attached to it.

“It’s not a gift to the child and it’s better to have it through arm’s-length conditions. Those terms should be set down by the government.

“What Hockey was saying is to make it a bit more flexible and how you look at that means there’s probably 101 options that need to be put on the table, so it’s not right to shoot it down in flames before everyone actually has a debate.”

He admits such strategies will have to be allowed for all super funds and not just SMSFs.

“If we do offer this, then it must also apply to the rest of the industry and I’m not sure that the other parties would be open to entering into something like this,” he says.

Bobbin cautions that despite the idea to keep it in the family, there are “absolutely massive risks” around such a strategy that uses the parents’ SMSF to loan to children for a home deposit, and it ultimately defies the structure itself.

“SMSFs are a privilege. Even the courts and the law say so. It’s a privilege to be given the opportunity to personally and independently manage your future retirement,” he says.

“The rules are designed to secure that money for the future.

“To introduce things like that will have a dramatic outcome and we’re effectively then propping up generations of people who don’t understand money.”

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