It’s high time superannuation stopped being seen as a cure-all for the country’s social and economic problems. Every time an issue is identified as requiring an immediate solution, the cry goes up – tap into the $2.2 trillion sitting in superannuation savings. It’s like a giant lolly jar, and everyone wants to get their hand in.
The latest problem for which super is being flagged as offering a quick solution is housing, or, more accurately, how rising house prices, especially in Sydney and Melbourne, are excluding first homebuyers from the market.
The argument to allow first homeowners access to super is flawed in so many ways it is hard to know where to begin. Simple economics suggests such a policy would only increase demand for housing, driving prices higher, thus achieving the opposite outcome of what its proponents want, increased supply.
Indeed, in all the debate around housing prices, the demand side of the equation seems to dominate. Yet, as the “13th Annual Demographia International Housing Affordability Survey: 2017” highlights, Australia’s urban consolidation policies over the past three decades are the prime culprit. Only since the late 1980s, when state governments started to actively limit the spread of cities, have housing prices risen sharply.
The report says: “[There is a] realisation that housing and land supply matters. The most powerful infographic of 2016 was produced by The Wall Street Journal. It showed what happened to house prices in US cities that had expanded their residential areas between 1980 and 2010 – and those that had not. As was to be expected, greater land supply went hand in hand with lower price increases. The same link can be seen internationally. Yet the supply side of the debate gets far less attention.”
Economics aside, it is simply bad policy to use superannuation to tackle housing affordability. It will damage the superannuation system, reducing its ability to deliver retirement income. Moreover, it contradicts the government’s chosen primary objective of superannuation: “to provide income in retirement to substitute or supplement the age pension”.
Even though the objectives of superannuation are still not legislated, pursuing a policy that does not meet the government’s chosen objective will destabilise the system. Allowing people access to superannuation to fund housing will tell the public that superannuation policy is subject to ongoing change, that it is a ‘honeypot’ governments can use to pursue other policies. This view undermines confidence in superannuation, deterring people from making the long-term savings decisions required to build adequate retirement savings over their working lives.
Allowing the use of super savings to fund a house deposit shifts the financial impact of housing affordability from today to impacting on a person’s finances on retirement. Saying this does not deny the negative financial impact of poor housing affordability on people seeking to enter the housing market today. But this is not an argument to give housing preference over retirement savings. If people can access super to fund a house deposit early in their working lives, it will reduce the level of their retirement savings over the long-term as they lose the benefit of compound interest.
Lower incomes in retirement will have two significant effects: reducing the standard of living for many Australians and placing increased pressure on the federal budget through increased age pension reliance, creating long-term financial issues for individuals and government.
Another line of argument by some proponents is that housing investment has provided better returns than super in recent years. This justification is predicated on the notion that the historical performance of housing as an investment class will continue.
In general terms this is an imprudent method to construct an investment portfolio to deliver long-term returns to fund retirement income. It also fails to consider that using superannuation to fund house deposits will reduce diversification of a person’s savings and increase concentration risk.
Additionally, allowing people to access superannuation to fund house deposits also blurs the tax treatment between superannuation and housing. With superannuation, contributions and earnings are taxed concessionally and withdrawals are tax-exempt for people aged over 60. Owner-occupied housing is bought from after-tax income, earnings (imputed rent) are tax-free, and proceeds from house sales are tax-free.
Shifting to a model where superannuation funds can be used to purchase owner-occupied housing shifts the tax model, making owner-occupied housing more attractive than superannuation, again increasing demand – as we have said before, the last thing proponents of this proposal want.
Housing affordability is an important issue; governments, state and federal, are rightfully giving it due attention, both from a supply and demand perspective. But one option that needs to be ruled out is tapping super; it is bad economics and even worse policy.