Joe Hockey’s suggestion of allowing superannuation to be used for buying the first home has been unfairly panned by Paul Keating and David Murray — the latter saying it was inconsistent with retirement income purpose of superannuation.
But despite this vocal opposition, Australia’s Superannuation System would actually be strengthened by letting super savings be used for property.
Superannuation is mainly a mandatory store of savings designed to be a fully-funded scheme, which basically means the money in your account is yours. Entirely, irrevocably and undoubtedly yours. So, as a matter of principle, if you can choose your super fund provider to invest your own money, or manage that investment as a SMSF buying property, why shouldn’t you be allowed to invest in your first home?
In the words of the relevant government regulator, the Australian Taxation Office, if you set up an SMSF, you’re in charge – you make the investment decisions for the fund and you’re responsible for complying with the law. But here is the catch: to set up an SMSF is quite a complex venture with high fixed costs, which means only more affluent Australians are generally able to invest for themselves – including using their SMSF to buy properties.
From this perspective, nothing is more democratic and fair than to allow average Australian workers to use their super savings to buy property too, and especially their first home. Of course checks and balances need to be put in place in order to avoid savers gaming the system. For instance, should the house be sold, the super money used—including the respective capital gains on it—needs to be returned to a super fund account.
Furthermore, contrary to Murray’s belief, there is a strong case to state that super savings to buy home ownership is indeed consistent with retirement income. Not surprisingly, this is allowed in many international cases. For example, Canada has a Home Buyer’s Plan that allows people to withdraw up to $25,000 in a calendar year from their retirement savings in order to “buy or build a qualifying home for yourself or for a related person with a disability”. In Singapore, as another good case study, part of super contributions can be used to buy property as well as cover education costs.
A house is by nature a very tangible and solid long-term asset that can be used appropriately to allocate retirement savings. In the short term, prices can go up and down, but in a life-cycle horizon, economic fundamentals will determine its commercial value. Besides, owning your home means you will not have to pay rent in retirement, and therefore, boost your purchasing power in twilight years.
Another incorrect (and unfair) argument against the idea is that it would inflame the already heated house market. Yes, allowing new entrants in the house market would increase demand, and therefore other things equal, prices would go up. Yet, the roots of the steep house price growth in the past decade lie in the supply-side constraints preventing to meet an increasing demand. Apart from that, to deny young workers access to these funds to be used in their housing is an unfair and indefensible palliative to the housing market price issue.
Economic research also praises the salutary financial effects of home ownership, especially on the younger demographic who are struggling to enter the housing market. For instance, lauded economist Hernando de Soto highlights the positive psychological impact of formally owning a home. In other studies, home ownership also proved to positively impact civic participation rates, encouraging home-owners to improve their community and invest more in social capital. Not the least, the quest for home ownership providing financial security, especially in later stages of life, is part of Australia’s way of life – hence why the exemption of primary residence from the Pension Age’s asset test is so hard to break.
In short, using your super savings towards your first home is a fair and valid idea worth serious consideration.
Dr Patrick Carvalho is a Research Fellow at the Centre for Independent Studies.
Home > Commentary > Opinion > Fair and logical to put super into homes
Fair and logical to put super into homes
But despite this vocal opposition, Australia’s Superannuation System would actually be strengthened by letting super savings be used for property.
Superannuation is mainly a mandatory store of savings designed to be a fully-funded scheme, which basically means the money in your account is yours. Entirely, irrevocably and undoubtedly yours. So, as a matter of principle, if you can choose your super fund provider to invest your own money, or manage that investment as a SMSF buying property, why shouldn’t you be allowed to invest in your first home?
In the words of the relevant government regulator, the Australian Taxation Office, if you set up an SMSF, you’re in charge – you make the investment decisions for the fund and you’re responsible for complying with the law. But here is the catch: to set up an SMSF is quite a complex venture with high fixed costs, which means only more affluent Australians are generally able to invest for themselves – including using their SMSF to buy properties.
From this perspective, nothing is more democratic and fair than to allow average Australian workers to use their super savings to buy property too, and especially their first home. Of course checks and balances need to be put in place in order to avoid savers gaming the system. For instance, should the house be sold, the super money used—including the respective capital gains on it—needs to be returned to a super fund account.
Furthermore, contrary to Murray’s belief, there is a strong case to state that super savings to buy home ownership is indeed consistent with retirement income. Not surprisingly, this is allowed in many international cases. For example, Canada has a Home Buyer’s Plan that allows people to withdraw up to $25,000 in a calendar year from their retirement savings in order to “buy or build a qualifying home for yourself or for a related person with a disability”. In Singapore, as another good case study, part of super contributions can be used to buy property as well as cover education costs.
A house is by nature a very tangible and solid long-term asset that can be used appropriately to allocate retirement savings. In the short term, prices can go up and down, but in a life-cycle horizon, economic fundamentals will determine its commercial value. Besides, owning your home means you will not have to pay rent in retirement, and therefore, boost your purchasing power in twilight years.
Another incorrect (and unfair) argument against the idea is that it would inflame the already heated house market. Yes, allowing new entrants in the house market would increase demand, and therefore other things equal, prices would go up. Yet, the roots of the steep house price growth in the past decade lie in the supply-side constraints preventing to meet an increasing demand. Apart from that, to deny young workers access to these funds to be used in their housing is an unfair and indefensible palliative to the housing market price issue.
Economic research also praises the salutary financial effects of home ownership, especially on the younger demographic who are struggling to enter the housing market. For instance, lauded economist Hernando de Soto highlights the positive psychological impact of formally owning a home. In other studies, home ownership also proved to positively impact civic participation rates, encouraging home-owners to improve their community and invest more in social capital. Not the least, the quest for home ownership providing financial security, especially in later stages of life, is part of Australia’s way of life – hence why the exemption of primary residence from the Pension Age’s asset test is so hard to break.
In short, using your super savings towards your first home is a fair and valid idea worth serious consideration.
Dr Patrick Carvalho is a Research Fellow at the Centre for Independent Studies.
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