Young & Invested: Should you withdraw your super for a house deposit?
Withdrawing your super for a house? Here’s what you should consider first.
Welcome to my column, Young & Invested, where I discuss personal finance and investing for Gen Z and Millennials.
This column aims to be a resource for young investors navigating an ever changing financial, political and social landscape as they try to build wealth. Tune in every Thursday for the latest edition.
Edition 13
Your 20s are a weird time.
Your best friends are either getting married/settling down, returning from a 6-month backpack across Asia or discovering the trials and tribulations of share house living.
There isn’t one specific definition of success in your 20s – but for many, it involves the purchase of a first home.
This comes as no surprise. Real estate is our national sport. Home auctions have transformed from a casual affair, to a scene bursting with more tension than the final minutes of the AFL grand final.
As the Federal election draws closer, young people are being bombarded with promises, proposals and pledges, all supposedly towards their benefit. Despite this, it can often feel like things never progress – especially in regard to the housing crisis. The state of housing in Australia is something I’ve discussed extensively across previous columns:
Things have been incredibly difficult to digest with new developments announced at every media appearance. Both parties are attempting to make last-ditch attempts at appeasing Gen Z and Millennials, who have outnumbered the Baby Boomer voting population for the first time. Efforts to appease all voting demographics involve walking a fine line that avoids alienating either side.
Figure 1: House price growth over the last three decades. Source: CoreLogic, Domain. 2024.
What is up for grabs this election?
Below is a brief overview of what both major parties are offering:
The Coalition
- Superannuation for housing: First home buyers can access up to $50,000 or 40% of their super balance to pay for a deposit for a home. The amount initially withdrawn is required to be returned upon sale of the property, in order to support retirement.
- First home buyer mortgage deductibility: Applicants who purchase a newly built home as their principal place of residence can deduct the interest paid on up to $650,000 of their mortgage from their assessable income. This will be available to individuals earning up to $175,000 and joint applicants earning up to $250,000.
- Expansion of the Home Guarantee Scheme: The scheme allows the purchase of a home with a 5% deposit whilst avoiding lenders mortgage insurance (“LMI”). The income and property caps of the existing policy will be lifted to reflect the current market. Furthermore, the Dutton Government will remove caps on the number of applicants who can access the First Home Buyer Guarantee and Regional First Home Buyer Guarantee each year.
- Housing infrastructure fund: $5 billion pledged to pay for enabling infrastructure for housing developments including water, sewage and power to unlock up to 500,000 new homes.
Other notable policy includes a reduction in the Permanent Migration Program, a freeze of changes to the National Construction Code for a decade, a temporary ban on foreign investment and an incentive payment for employers to subsidise construction worker wages.
The Labor Party
- 5% deposits: Existing income limits under the First Home Buyers Guarantee will be abolished, with the Government guaranteeing a portion of all first home buyer’s home loans. This means property can be purchased with a 5% deposit and avoid LMI. Eligible property prices will also be lifted to reflect changing market conditions.
- Housing Australia Future Fund: $10 billion program to build 30,000 social and affordable homes within its first five years. This includes social housing, affordable rentals for those with eligible careers and indigenous housing to name a few.
- Build to Rent: Tax incentives for property developers to support the construction of ~80,000 new rental homes over the next decade with affordable options and longer tenancies.
- Help to Buy: A shared equity scheme that will allow eligible home buyers to purchase a property with a smaller deposit. The scheme will see the federal government make a contribution of up to 40% in exchange for a share, or proportional interest in the property. There are several eligibility criteria including an individual annual income of $100k or less, or $160,000 or less for a couple.
Other proposals include a $10 billion commitment to build 100,000 homes over eight years, exclusively for purchase by first home buyers. Furthermore, Labor similarly supports a temporary foreign investment ban on housing, and up to $5,000 in incentive payments to apprentices in priority areas such as construction.
How have we got into this mess?
The housing crisis is characterised by a complex web of factors that contribute to the aggressive house price appreciation we’ve seen over the last few years. Favourable investment property tax policy, rapid population increase, and demand/supply imbalance are to name a few.
If you feel failed by previous governments, you’re likely not alone – they hold their fair share of responsibility for what we are now facing. The average age of home ownership continues to increase with public policy contributing to the inaccessibility of the market. New housing proposals feel like an attempt to throw a wet rag on a wildfire.
What does my super have to do with owning property?
The First Home Super Saver Scheme (“FHSSS”) was introduced in 2017 and involves making voluntary contributions into your fund to help you build a first home deposit.
The FHSSS can be advantageous due to the 15% tax on concessional contributions, which is usually less than most people’s marginal income tax rate. Under this scheme, individuals can contribute up to a maximum of $15,000 in any one financial year and a maximum of $50,000 across all years. Further information can be found on the Australian Tax Office website. Shani has also provided a run down here.
Then what is super for housing?
Super for housing is a proposal put forward by the Coalition that gives first home buyers the ability to withdraw up to $50,000 or 40% of their superannuation to put towards a home. Upon the eventual sale of the property, this amount is to be returned to their super account.
Sounds good? Maybe at first glance – after all, accumulating the deposit is one of the hardest parts of home ownership in Australia. But I have a few issues with this.
Why I don’t like super for housing
The problem arises when we examine the fundamental purpose of superannuation, that is, to provide for retirement and nothing more. Not only does the initiative undermine the purpose of super, but also inadequately addresses the housing crisis.
Lost retirement funds
In a previous article, I refer to the policy as a packaged slap in the face of those already struggling to enter the market – and I stand by that. Housing provides stability and benefits society as a large, and young people shouldn’t have to forgo their retirement funds to attain a modest home in a capital city.
The basic maths of building wealth and the time value of money demonstrates what is at stake. Simply returning the amount initially withdrawn upon sale of the property can have harmful impacts on retirement outcomes.
If $50k is withdrawn from super and returned 10 years later, the opportunity cost of what could have been 10 years of compounding is significant. Assuming a return of 7% pa after fees and inflation on $50k, the future value in 10 years would be almost $100k. A return of the initial amount drawn would not make up for the compounding effect.
Accelerates housing demand
Increasing access to the market isn’t inherently a bad thing. But providing all first home buyers with immediate access to funds from super, without adequate time to ease supply-side constraints would risk exacerbating the crisis at hand.
The Association of Superannuation Funds of Australia (“ASFA”) argues that unaffordable housing and declining levels of home ownership cannot be solved by super for housing and could even exacerbate the issue. ASFA state there have been several comprehensive reviews of the superannuation system over the last decade, and none have recommended the release of superannuation for housing deposits, while several have made recommendations to the contrary.
Given the nature of the demand-side pressures in the housing market, standard economic theory suggests that the impact of additional nominal purchasing power – where available – would see an increase in the level of house prices.
We know it has failed before
Whilst super can be a tempting pot to raid, most analysis shows that it will not solve the crippling supply-side deficit that is largely fuelling skyrocketing house prices.
A quick look at our Kiwi cousins shows the result of running a similar exercise in 2010, where citizens could withdraw the majority of their superannuation to buy a home.
A report from the Australian Super Members Council deduced that the scheme didn’t address the systemic decline in home ownership for young Kiwis. Furthermore, in the decade before introduction, house prices rose 7.6%, whereas the decade after saw house prices grow 9.2%.
Latest statistics show that 77% of first-home buyers are withdrawing their retirement funds to help with a house deposit. This simply indicates a snowball effect where house price acceleration leads to increased levels of withdrawals to remain competitive.
Figure 2: New Zealand house prices and KiwiSaver withdrawals.
The strategy is designed to appeal to the masses yet provides no tangible solutions for young people. Whilst it enables individuals (who previously couldn’t afford to buy) to gain access to an expensive market, it also reinforces the prevailing price appreciation by increasing borrowing capacity and therefore demand, in a supply-squeezed market.
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