Using funds in superannuation accounts for first-property deposits?

I had an idea for a potential policy and I’ll write it here to keep a record of it.

Using superannuation for first-property deposits. While the purpose of super is savings for old age (and reduced dependence on the state), people might find it difficult to enter the property market in Australian capital cities due to high house prices. Compulsory super has resulted in many workers having a pool of super.

Some advantages: potential access to many thousands or tens of thousands of dollars to help obtain a residential property deposit – reduces the difficulty (the “potential barrier” in physics-talk) to obtain a residential property deposit.

Some disadvantages: diverts part of an individual’s super pool into one particular investment and so reduces the “degrees of freedom” for super managers to invest the money where it will result in the greatest return. The individual can have negative impact on the value of the investment as they have control over the property.

I’ll find out a bit more about this.

 

Update: Super funds could also be drawn upon to pay off a substantial fraction of a first-property loan – this would reduce the on-going costs of a mortgage if the length of the loan isn’t commensurately reduced. You could have some combination of super being used to help pay the deposit and help pay off a part of the loan. While I would expect that, on average, the return to an individual’s superannuation account would be reduced as part of the super has been fixed into one investment (unless the property market goes exceptionally well), this cost could be outweighed by the greater ability for people to enter the property market.

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13 Responses to Using funds in superannuation accounts for first-property deposits?

  1. Guy says:

    I think it’s a generally worthwhile idea that makes pretty good .

    Housing affordability is a problem that needs to be addressed, and the homeowner / renter divide has become one of the new defining divides of our age. It would of course be preferable if housing could be made more affordable and accessible without people having to dip into their retirement funds, but under certain circumstances or criteria set by the government, I think it should be allowed.

  2. Guy says:

    that makes pretty good … economic sense! :)

  3. Sacha says:

    Hi Guy,

    One disadvantage I can see with the idea is that, on average, the return on an individual’s total superannuation (including any amounts they use for a property deposit) would be less than otherwise, unless the property market does better than all other investments in the next few decades.

  4. Sacha says:

    There could be all sorts of problems associated with bringing property prices down – what many people want (to my mind) is to have the opportunity to get into the property market. The idea I’ve described here would probably give more people the opportunity to enter the property market without the downsides of forcing property prices down.

  5. Rajat Sood says:

    I think this is a tough one. I an see the superficial attraction, but I have several reservations.
    1. Most people saving for their first home deposit have got very little in super anyway. For example, even though I was/am a relatively high income earner and I bought my flat when I was 30 (after working for 5 years), I only had about $40-50K in super at the time. The average first-home buyer would have much less, so is this likely to be a useful reform?
    2. Given the way home equity loans work these days, mortgagees often have a great deal of latitude to use their home equity for present consumption. For example, say I am buying a $400K property and use $40K of savings combined with $40K of super to put down a 20% deposit rather than a 10% deposit. Ignoring mortage insurance, my bank would be willing to led me back the $40K I have contributed to spend on whatever I like. This defeats the purpose of super and you can bet financial institutions would ruch in to exploit the opportunities.
    3. Of course, this change could drive up the prices of first-home-type properties, so the benefit is captured by the vendor.
    I think the answer is to be more relaxed about the current state of disequilibrium in the residential property market, where rental yields are so low. What does it matter if people rent for the next 3-4 years?

  6. Sacha says:

    Rajat, I’m sure that banks would definitely be willing to loan you the $40K!

    I’m not too fussed about people renting – personally, I’ve always rented!

  7. Sacha says:

    I think your points are pretty valid, Rajat – with point 1., I was thinking that even $20K could help first-property buyers. Of course, it wouldn’t help them during the first few years that they’re working, but it might later on (as people don’t have much super in their first years of working). There’s the possibility that the amount of the super that could be used to help buy a first property could limited somehow (so that the effect on savings is lessened).

    I havn’t thought about this in terms of whether a problem exists and whether this would be a good way to help deal with it – I’ll leave that for people who have access to all relevant figures and knowledge – it was just an idea I had.

  8. Guy says:

    Perhaps it would be good if financial institutions offering both super investment funds and home loans (or partnering with other institutions that do) could allow young homeowners to use their super funds as an offset to their interest repayments.

    I guess there wouldn’t at first glance be much in it for the banks, but I would imagine reducing initial interest payments to some extent for first home buyers in this way would also encourage more young people to take the plunge and take out a home loan.

  9. Dave Bath says:

    The problem with the Future Fund putting money into housing is the risk of getting a return, or indeed making a loss, given that The Economist considers (as of last year) that the Australian housing market has the second worst bubble in the world (55% to 75% overpriced) next to Hong Kong (but they don’t exactly have land, so demand upping prices is sort of understandable).

    If the market normalized the Future Fund will lose money.

  10. Sacha says:

    Dave, is the Future Fund going to put money into housing?

  11. cam says:

    Sacha, We raided our 401Ks (the US equivalent of superannuation) to put a deposit on our first home (condo). IIRC the tax on it was pretty brutal, but it got us over the edge on the path of property ownership.

    IIRC Nicholas Gruen has written articles on ‘default saving’. I think if superannuation can be used (with tax penalties to discourage its use in this way) then I think it kills two birds with one stone.

  12. Sacha says:

    Hey cam, could you explain a bit more about this for people unfamiliar with the US system and “default savings”? Cheers

  13. Damien says:

    It has been over 1.5years since the idea of using Super Funds to buy or pay off your first home came to light. I have always had the opinion that money in my pocket is better than money in the banks investment strategy. In 2004,2005 AMP lost a large portion of my super. Now Asguard has lost since 2008 almost 40% of the total value of my super. I still don’t have a house and with ever increasing rent , grocery and fuel prices I am now further from buying a property then I was at aged 17.5 in 1998
    Now there is little super left in my account, and would only help me avoid property insurance payments if the property was ridiculously cheap, but it would at least get me in to the market.

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