Family and life events

Should you be using super to buy your first home?

21 April 2017

Backyard of house

Money & Life team

Money & Life contributors draw on their diverse range of experience to present you with insights and guidance that will help you manage your financial wellbeing, achieve your lifestyle goals and plan for your financial future.

With the Australian Treasury looking at early access to super as one of their measures to tackle housing affordability in the May budget1, is this opportunity a blessing or a curse for a new generation of home buyers?

Housing affordability – what’s the answer?

There’s no doubt first home buyers are finding it hard to compete in the Australian residential property market. The deposit they need to get a foot on the property ladder is becoming a challenging goal to reach. With values still rising steadily in the state capitals of Canberra, Sydney and Hobart2, and the current economic climate of low wage growth and interest rates, first home buyer savings just aren’t keeping up.

So housing affordability is a pretty hot topic for the government right now and there are many different opinions about how best to tackle the problem. For some the solution is to overhaul negative gearing policy in an attempt to put the brakes on investor spending on property. One of the proposals that’s been in the spotlight recently is giving young buyers early access to their superannuation for an instant boost to their deposit savings.

Learning from the first-home owner grant

Although this opportunity might seem like a welcome gift for frustrated first home buyers, there are a couple of important consequences we could end up facing with this approach. The first issue is that in stimulating even higher demand for homes in popular cities and suburbs, this is a measure that could actually end up making the housing affordability problem even worse than it is now.

In the past, measures that put more money into the hands of homebuyers have fuelled higher demand for properties, sending values higher still. This was one of the outcomes seen when first home owner grants were introduced in July 20003. By making a new source of funds available for buyers to compete in areas where values are already on the rise, the extra money from super savings could end up putting home ownership even further out of reach for current and future generations of buyers.

Super sacrifice – spend now and lose out later

When you take a look at the opportunity cost of the super solution to boosting first home buyer deposits, it’s pretty clear that the numbers add up to limited benefits for their buying power and a significant risk to the savings and income they’ll be looking forward to when they reach retirement.

The average super fund balance of a 20-24 year-old is currently $51184. Most people in this demographic haven’t been working for long, so their compulsory employer payments haven’t had time to accumulate. They’re also yet to reap significant benefits from interest or investment earnings on their super balance.

In today’s housing market, an extra $5k of spending power is unlikely to make a big impact on a successful bid or offer on your first home. If you’re aged 30-34 on the other hand, your average super balance is a much more substantial $30,9375. This kind of money could definitely come in handy for boosting your property purchasing power.

But when you look at the income you could be missing out on when you retire, the figures are compelling. Spend your $30k in super savings at 30 and you’ll be missing out on compound earnings from that sum and that’s going to have a significant impact on your future super balance. Let’s say you hang on to that $30,000 when you’re 30 and that amount earns compound interest at a rate of 7.5%.  By the time you’re 50, you’ll have a balance of $127,436. In another 20 years, as you pass the retirement milestone, you’ll be sitting on savings of $541,327 thanks to that initial $30k you kept in your super fund.

Fuelling the super gap

If the current proposal becomes government policy and first home buyers rush to take up this opportunity, the impact on their retirement income could become a significant problem. Without the benefit of 20-30 years of compounding returns on their super, future generations may become more dependent than ever on government benefits to fund their living expenses and aged care and health care needs in retirement.

If you’re saving and making plans to buy your first home, a CERTIFIED FINANCIAL PLANNER® professional can offer valuable advice on budgeting and saving to meet all your financial goals, now and in the future.

Footnotes

  1. ABC News “First home buyers: Assistant Treasurer won’t rule out access to super before retirement” Henry Belot and Stephanie Anderson, 14 March 2017 http://www.abc.net.au/news/2017-03-14/government-wont-rule-out-first-home-buyers-accessing-super/8352482
  2. Core Logic National Housing Market Update, March 2017, https://youtu.be/rF4SwOJTJDw
  3. The First Home Buyer Grant and house prices in Australia, David Blight, Michael Field, Eider Henriquez, 2012 https://ojs.deakin.edu.au/index.php/dpibe/article/view/52
  4. Superannuation account balances by age and gender, Ross Clare, Director of Research ASFA Research and Resource Centre, December 2015
  5. Superannuation account balances by age and gender, Ross Clare, Director of Research ASFA Research and Resource Centre, December 2015