Accessing retirement savings won’t fix Australia’s housing affordability

With the Australian Federal Budget being announced tonight one of the hot topics over the past few months Using retirement savings to fund a home deposit is not the answeris around housing affordability in Australia.

The median house price in March 2017 according to CoreLogic is $585,000 based on averages across the main Australian capital cities.

With Sydney coming in at a whopping median price of $805,000.

There is no doubt that the great Australian dream of owning your own place is getting harder for first home buyers.

So it being on the political agenda is no surprise.

Accessing Super for a deposit

An idea that has been floated around the past few months in the media is to allow first home buyers to access what they have in their Superannuation to contribute to a house deposit.

Basically it is reducing someone’s retirement savings by allowing them to invest in buying their first home.Why this is a really dumb idea

Prices will be driven up further

At the time we brought our first property in 2009 the first home owners grant was doubled to $14,000 during the global financial crisis.

The main effect this had on the market at the time was that the extra money just helped to drive up prices further.

It is pretty safe to say that a similar effect would be experienced if someone was able to access say $20,000 of their retirement savings.

Housing affordability simply cannot be fixed by increasing demand.

We don’t even need to speculate to know this would be the case. Canada had a similar scheme and now has some of the most expensive housing in the world.

The winners will be the existing home owners

Prices are already sky high in our capital cities and expected to be flat or even fall a bit next year.

So creating more demand right now puts our first home buyers at risk of having negative or no equity in their property for a long time.

In essence it helps to transfer more worth to sellers who have been in the market and wish to cash in on the remaining part of the property boom we have experienced recently.

Retirement savings will suffer

Unlike the scheme to double the first home owners grant, this new idea not only increases demand, it has a dramatic effect on the amount of funds someone will have available in retirement.

As it is, even with the compulsory 9.5% contribution, people will not necessarily have enough money saved in their Super to fully fund their retirement.

This will put pressure on the government to have to deal with an unprecedented increase in future government aged pensions. And the way to combat this will be to raise taxes.

Leave Super for retirement

The idea to tap into Super goes completely against what the objective of Super is – to fund retirement.

I don’t actually think our politicians will be dumb enough to go through with this, but you can never say never.

Ironically, a proposal to do this a couple of years ago was deemed a bad idea by Malcolm Turnbull himself. So the fact it is still being discussed is laughable.

So how do we fix the affordability issue?

I wish I had the simple answer to how we fix the affordability issue.

I don’t question other generations that will say they had to sacrifice a lot to buy their first place, and eight years ago we did the same and lived on next to nothing for almost two years.

But when you have a median house price in Sydney of over $800,000, that is a pretty daunting figure for any new home buyer.

I worry a lot about what the world will look like in twenty years when my girls will be looking to buy.

Some things that have been introduced or discussed to help with affordability are explained below.

Make it harder to get an investment loan

APRA (the Australian Prudential Regulation Authority) have already done their bit in looking to slow down investment loan growth, with the aim to take some investors out of the housing market.

They have placed capped on the Banks and Credit Unions to limit investment loan growth to 10%, and also put a 30% limit on the number of interest only loans they can hold in their loan book.

We are already starting to see this has taken some Credit Unions out of the market entirely, and as a result investment loan interest rates are getting more expensive too.

Whilst this might have some effect on slowing growth, as interest rates are still quite low investors would simply look to lenders who are not regulated by APRA.Using retirement savings to fund a first home deposit is a terrible idea

Which is worrying in itself to have too much of a shift to second or third tier lenders.

Make changes to negative gearing and capital gains tax

The other ideas to slow down the growth of investors is to make changes to the concessions of negative gearing and capital gains tax.

In essence it has been discussed that reducing these concessions would make property investing less appealing to investors, allowing more first home buyers to enter the market.

With more than 95% of our politicians having significant investments in property I cannot see them doing anything too drastic in this area.

Make changes to stamp duty

The cost of stamp duty is a significant amount when it comes to buying a first home. It also is a significant barrier into why older generations are not able to downsize their home affordably.

In New South Wales you could easily be looking at $25,000 or more that is needed to cover this.

It makes the Government big dollars though, so it will be interesting to see what comes of this.

Victoria recently announced that it would waive stamp duty for first home buyers. But to me this isn’t really the answer as all it does is make more demand.

It would be better in my view to make stamp duty exemptions for those people looking to downsize so that the supply side of the equation comes into play.

Better infrastructure or better regional job prospects

The issue with Australia is that the population has to be located around the main capital cities in order for most people to get a decent job.

Take me for example working in marketing. There is just about next to no opportunities in regional towns or the country. And those that do come up pay a lot less than capital city wages.

If we had a train network like some of the bullet trains overseas where you could get from one city to another quickly, then the spread of population could mean that people could live further away and still commute to the city.

The cost to do this would be many billions so I cannot see this happening anytime soon, if at all.

With the move to digital technology I would like to think that more home based jobs would be available, giving people more flexibility about where they live.

As someone who reports to a baby boomer at the moment, I get the feeling we are at least a generation or two away from working from home becoming more mainstream.

A final thought

I tried to think what I would do now if I was starting out again. I think I would still want to purchase a property but would go down the path of rentvesting.

So I would purchase a place and try and make it a dual income property to cover as much of the holding costs as possible. Then rent a place in the area we wanted to live.

Any surplus funds I would invest in an index fund because I am starting to come around to the idea that dividend income is the way most FIRE (financial independence, retire early) bloggers have reached their retirement goals. So I have been doing a bit of research into this area, for now my baby step has to start small with an Acorns account.

Are you finding it difficult to enter the housing market? Do you have any thoughts on what might make buying a home in Australia a reality for you?

Are you finding it difficult to enter the housing market? Do you have any thoughts on what might make buying a home in Australia a reality for you. 

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2 Comments

  1. Definitely agree. More fuel to the fire will not fix anything.
    Would be buyers may need to either move cities, get creative, rent instead, or rent out rooms or go the dual income style property as you have done.
    Good job moving over to the dark side (shares) 🙂
    To aid your research perhaps look at some old listed investment companies (LIC’s).
    There are a few with long histories of steadily increasing dividends.
    Some good ones to look at are Argo, Milton, AFI and BKI.
    Happy researching!

    1. Well at least the Super First Home Buyer Scheme the Government have proposed doesn’t decrease the current balance of a first home buyers retirement savings, so overall I think it is an alright option.

      Thanks for the advice in LICs. I have seen people mention them and I had no idea what they meant. Lots to learn! It is kinda fun actually.

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