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SUMMARY: SMSF property investors need to keep a self-interested eye on the current housing affordability debate.
Aha. It must, officially, be time to hyperventilate over property prices.
The “unaffordability crisis” is nightly news again.
Political leaders are increasingly jawboning about strategies to help first-home buyers. Occasionally, they just get silly enough to act on it. History has shown this is usually disastrous. So much of the time they get it horribly wrong and end up adding fuel to the fire.
In the last month, this has seen kites being flown for two potential “solutions” – both of which would have an impact on superannuation and retirement incomes.
Reportedly – and reportedly means media speculation and rumour – both are up for consideration by the Federal Government.
The first of those two proposals is to allow younger Australians to access their superannuation to purchase homes. We’ve dealt with this idiotic, self-interested, idea on several occasions in recent years. But it needs to be dealt with again.
The second is a concept to reduce the disincentives for older Australians who wish to downsize their homes and release equity for income streams as they approach retirement.
And both of these scenarios have potential impacts beyond those who are obviously affected – more broadly on self-managed super funds who are, increasingly, involved in the residential property market.
Using super to buy homes … is A-grade dumb
The news cycle is short, I know. But it’s only about 2.5 years’ ago that Senator Nick Xenophon raised the idea of allowing young Australians to access their super to buy their first homes. And was embarrassed by how roundly he was shouted down.
Now, there is speculation – denied by the Government – that it is looking at the proposal again as part of this year’s Federal Budget.
It’s stupidity on a grand scale. Nothing has changed in relation to this argument in the last 2.5 years. Here is what I wrote in response to Xenophon at the time (read here, 6/8/14 and a later floating of the idea in more pre-Budget speculation here 25/3/15 by then Treasurer Joe Hockey).
The concept is incredibly flawed and fails Economics 101. Those arguing in favour at the time cited Canada as their prime example. Canadians could access up to $25,000 in super to buy a new home, but were supposed to pay it back within 15 years, or face tax penalties.
About half of Canadians repaid not a cent. The rest somewhere between zero and what they should have.
It would do nothing more than push up the bottom end (the first-home buyer market) even further.
Now, however, we have some further research to add to the “no” argument. Actuaries Rice Warner say that allowing a 35-year-old on average wages to pull $100,000 out of super as a deposit for their first home would cost the government $92,000 (in today’s dollars) in extra age pension payments when that couple retired.
And I’ve not yet read about the “tax dodge” that would occur if people knew they could get their hands on their super to do so. For a few years before they wanted to purchase, they would “salary sacrifice” to the max, swapping a 34.5% or 39% marginal tax rate for a 15% super tax rate to super-size what they could get out of super faster.
Well, the smart, or well-advised, ones would do that. About a 20-24c in the dollar tax incentive to get money into super, so you can withdraw it for a bigger home deposit.
The idea needs to be burned, or have a stake put through its heart. The only people who support the idea are the self-interested. That is, the real estate industry, property developers, mortgage brokers and, of course, some politicians who don’t understand economics, but think there might be a vote in it.
Even Senator Xenophon is now cautious! “We need to learn what has happened previously [in Canada] … I don’t want to do anything that would be inflationary,” Xenophon said last month.
One ABC reporter, however, went a little far. While I loved the headline “Superannuation for housing deposits would facilitate intergenerational theft”, the theme that younger Australians accessing super to purchase property would support a ponzi scheme are childish.
Ponzi schemes, as pointed out in the article, are run by criminals like Bernie Madoff. The Australian property market, no matter how hot it gets, is not run by criminals. It is not one scheme promoter stealing from one investor to give to another, earlier, investor. (Unless you would like to consider the impact of state governments and stamp duties – but they’re more simply clipping the ticket.)
Winners from such a policy?
As I have pointed out earlier, the beneficiaries are those who are selling property to first home buyers (currently, roughly, Gen Y).
They would include Gen X, who are moving on to their second homes, Baby Boomers selling their investment properties, and property developers (both inner-suburban density developments and house and land packages on the outskirts).
And, of course, SMSFs, who have been quickly accumulating predominantly lower-end property, with the help of the limited recourse borrowing arrangement (LRBAs) rules.
I should declare that I would probably benefit from seeing a policy like this go through (as a mortgage broker, financial adviser, property investor and SMSF property investor). But it is rubbish policy that would fuel a bubble and only make things tougher for the next generation. I’m certainly arguing against self-interest.
A drawcard for downsizing?
Also apparently being considered is to give incentives for those who would like to downsize their family home.
Downsizing, in theory, should allow older Australians to get a property that requires less physical and financial maintenance and release equity to be used for retirement.
If you could sell, say, a $1.3m home and downsize to an $900,000 unit, then arguably you could release around $400,000 to use for your retirement.
Of course, it doesn’t work like that. First, there are the sales costs of selling the home. Then there are stamp duty costs. This could chew up around $100,000 of the $400,000.
But then you have, say, $300,000 in extra assets … and this might impact on your ability to receive a full, or part, government age pension. Particularly so in light of the changes that came into effect in January, which dramatically lowered the cut-off thresholds in assets to receive a part-pension from around $1.178m to around $816,000 for a couple.
Alternatives to avoid those penalties include holding on to the more expensive houses (because homes are exempt from the assets test) and using reverse mortgages to slowly access that equity.
But it appears the government is giving some consideration to helping older Australians downsize, without it having the added impact of cutting them off from their pension.
These might include quarantining the released equity from a home sale for a period.
What would be the impact on property prices? Well, I’d argue that the greatest number of sales would probably be selling the equivalent of second homes to repurchase properties back in the traditional first-home buyer market. It could actually exacerbate demand for those properties.
The impact on SMSF investors
If the government were silly enough to allow people to access their superannuation to buy property, SMSF investors should have a right giggle all the way to the bank.
Many of those same SMSF investors, who are also investors in typical first-home buyer property outside of super, should laugh doubly. But it shouldn’t, and fingers crossed, won’t.
SMSF property investors need to keep an eye on the situation in their home markets, however. So much is happening on a state by state basis, which can override any bigger picture changes being considered by the Federal Government in its upcoming budget.
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The information contained in this column should be treated as general advice only. It has not taken anyone’s specific circumstances into account. If you are considering a strategy such as those mentioned here, you are strongly advised to consult your adviser/s, as some of the strategies used in these columns are extremely complex and require high-level technical compliance.
Bruce Brammall is managing director of Bruce Brammall Financial and is both a licensed financial adviser and mortgage broker. E: bruce@brucebrammallfinancial.com.au . Bruce’s new book, Mortgages Made Easy, is available now.