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Housing affordability has been a political football for many years now, but debate has heated up around government policies as we near election day.
Scott Morrison just last week announced a new policy to help first home buyers enter the market through the ‘Super Home Buyer’ Scheme. In a nutshell, the proposal would allow first-home buyers to withdraw up to 40% of their superannuation balance, up to $50,000, to be used for a deposit on a home loan. Any borrower who utilises this scheme must return the total amount they choose to withdraw, plus or minus any capital gain or loss, when the property they purchased is eventually sold.
Essentially, the proposal allows first home borrowers access their superannuation balances, but only to assist those borrowers to enter the property market. Those in favour of the move say that the compounding leverage you make when you sell your first home should outweigh any compounding interest if you left the funds in your superannuation account.
YBR Home Loans Executive Chairman, Mark Bouris, was adamant that the policy is being overly politicised, saying: “It’s just another policy. It’s election time and to be frank with you, It’s a good policy. But equally, Labor’s policy has its pros and cons as well. The bottom line is, anything that can help a young buyer get into the property market, right now, is a good one.”
We’ve examined the Coalition’s policy and wanted to show you what this might look like in a real life scenario.
If you analyse the policy by comparing historical long term property price growth against superannuation returns, there could be some great benefits to first home buyers.
Let’s look at a typical scenario:
Michael is a 32 year old, single male looking to buy his first home. He earns a salary of $80,000 a year with a current Super balance of $60,000. If he wanted to withdraw 40% of his Superannuation balance, he would have an extra $24,000 to go towards his first home deposit.
There are three issues to consider if Michael was to withdraw from his super:
Scenario 1 Question: What happens to Michael’s superannuation balance if it remains untouched?
Scenario 2 Question: What happens to MIchael’s superannuation balance if $24,000 is withdrawn to be used as a deposit for his first home and the money is not repaid?
Scenario 3 Question: What happens to their superannuation balance if the $24,000 is accessed and subsequently repaid into superannuation plus any pro rata (or proportional) capital gains after 10 years time?
Scenario 1 Answer: Michael’s superannuation balance, if it remained untouched until he retires at the age of 65 would leave him $1.12m. This does not take into account other assets which might have been accumulated outside of Superannuation.
Scenario 2 Answer: In the second scenario, we analysed the compounding impact of withdrawing money from superannuation and not returning it. Michael’s closing superannuation balance at 65 in this scenario is $972,000, so the $24,000 withdrawal costs almost $150,000 if it is not paid back into Superannuation. Again, this is not considering other financial assets owned outside of super. It is this cost that critics of the policy will focus on despite the benefits offered by home ownership.
Scenario 3 Answer: This scenario is what the majority of cases will look like for Australians who take advantage of the scheme, as very few people live in their first home for the entirety of their working life. In this scenario, the $24,000 plus the value of the capital gain that needs to be re-paid into superannuation would leave Michael with a closing superannuation balance at 65 years of age at $1.146m, which is higher than if Michael was to leave his superannuation untouched.
There’s plenty of commentary from super funds raising concerns about Australians losing money in the long-term by pulling from their super early on, due to compounding interest. However, this scrutiny fails to consider the net benefits once you sell your first home. It’s true that in scenario two, if Michael takes out 40% of his super balance with this scheme and does not end up selling, Michael’s super balance would end up at under $1million by retirement age ($972,000). This is not ideal. However, that’s a little short-sighted, as it doesn’t illustrate the benefits the scheme delivers outside of superannuation. Scenario 2 is highly unlikely as most people sell their first property to upgrade as their home ownership needs change.
As Mark Bouris said, “For first home buyers, this could be a once-in-a-lifetime opportunity to help enter the market sooner.”
“From a lender’s point of view, we take the view that it’s going to be insignificant in terms of pushing house prices up, because the number of people that will take advantage of the scheme will be low. The number of first home buyers in the country in any one period is relatively low when compared to the number of buyers overall. So we don’t think it will have a major effect on house prices.”
“Everybody has this view that house prices will go up as a result of government incentives, but it really doesn’t have that impact. It’s all about supply and demand. The question is: how do we increase the supply of new housing in this country? That is the critical issue and that, unfortunately, is not a federal government issue, it’s a state government and local council issue.”
“The bottom line is, as long as anyone who takes advantage of the proposed scheme ends up selling their first home, compounding on leverage should trump compounding in the super fund on its own. There is daylight between the two. If you utilise this policy efficiently, you get to benefit from the leverage effect of property price growth and potentially create substantial wealth outside of superannuation.”
Disclaimer*: Modelling of superannuation balances and property capital growth have been based on long term returns, with the same returns assumed for each of the three scenarios as well as underlying assumptions around the Superannuation guarantee percentage. The modelling is based on historical averages and is not to be used as a predictor of future returns for either Superannuation or Property investment.