Breaking into the property market has become more difficult for first home buyers in Australia as of late mostly because of reasons I’ve explained in detail on this blog before. It’s not an easy problem to solve as many of the options championed by self proclaimed experts are politically charged and increasing the housing supply isn’t as simple as many people think it to be. Thus many of the measures that the incumbent government suggests are often things that don’t address any of the underlying issues directly and instead look to put more money in the hands of potential first home buyers. Joe Hockey’s recent brainwave to address this problem, by allowing first home buyers to dip into their super for a deposit, is a classic example of this and it will neither help first home buyers nor address the underlying issues that they face.
Whilst it’s not a formal policy they’re looking to submit yet (hence the lack of detail around how the actual scheme would work) Hockey says that he’s been approached by lots of young people looking to tap into their superannuation in order to fund their first home purchase. On the surface it sounds good, younger Australians get to put a roof over their heads and get their foot into the property market, something which should hopefully sustain them for the future. The main problems I see with this are two fold; firstly most people won’t have enough super to make a difference and, secondly, it will likely set most people back meaning their retirement will likely not be fully funded by super.
On average your typical superannuation balance at 25 is on the order of $10,000, not a whole lot in the grand scheme of things. Even the most generous loans that let you get away with a 5% deposit would only see you able to get a loan for $200,000 with that amount of cash, not exactly the amount that many now first time home buyers are looking to finance. That figure doubles by the time they reach their 30s but that’s still not enough to finance the home on its own. Indeed first home buyers are likely to need double or triple that in order to buy their first homes which means that they’ll need to have at least $20,000 in savings for those meager amounts of super to help push them over the line. If they’re able to save that you’d then think that bridging the gap wouldn’t be outside of their reach, at least within a reasonable timeframe.
This then leads onto the conclusion that the opposite situation, one where someone couldn’t save that much and required their superannuation to bridge the gap, is the least preferable scenario for a first home buyer. You see a savings track record proves that someone will be able to cope with the repayments that a mortgage requires whilst at the same time still being able to afford everything else they need to live. If you don’t have this and are looking to get into property diving into your super isn’t going to help you, instead it’s going to put you in the unenviable position of having even less money available to you, eradicating any chance you had at getting ahead. You’d hope that the last batch of lending reforms would prevent most people like this from getting a loan in the first place but I think we’ve all seen people get themselves into this situation before.
On top of this using most or all of your super would essentially put you back 5 or 10 years in planning for your retirement. That might not sound like much when most people will have 50+ years of working life but a lot of the power of super comes from compound interest. When you take an axe to your initial savings it resets the clock, pushing back the compounding rate significantly. That means you hit the high growth part of your super much later in life, leaving a lot less than you’d expect for retirement. This would mean more people getting onto the aged pension sooner, something which the whole superannuation system was designed to avoid.
I’ll hold off on any other criticisms until I see an actual policy on this but suffice to say the idea is rife with issues and I think the only reason that they’re entertaining it is to win back some favour with the youth vote. If they do put a policy before parliament though it’ll be interesting to see how they address criticisms like this as I know I’m not the only one to find fault with this policy. Heck I’d love to see more people getting into property since it’d bolster my investments but honestly I’d rather see the underlying issues, like lack of supply and the owner-occupier CGT exemptions, tackled first before they start looking towards trashing people’s futures for short term gains.
I wasn’t always interested in the world of finance and making money work for you. No for a very long time I was the product of my not-so-well off parent’s financial education: save everything you can so you can buy a house one day and then use every spare dollar you have to pay it off. If I’m honest that advice is probably the best advice most people can take as it appears that anything more exotic than that gets thrown in the too hard basket along with any notion of fiscal responsibility. However it seems that there’s a distinct lack of financial knowledge prevalent in Australia (although if I’m honest it’s not unique to us) and the number of articles that keep popping up showing this have really got me worried.
Most of the ones that have been crossing my path recently (from news.com.au and yes I know, I should stop. I have a problem) are regarding Australians, both young and old, voicing their concerns over their superannuation. It appears that some Australians believe that their inheritance, you know that supposed financial payment you get when your loved ones die, will be their saviour come retirement time. Other’s are worried that their super won’t be enough for them when they retire, which is a valid concern for many, but such worries are usually born of poor planning without a thought given to what retirement and superannuation are really for.
I’ll forgive my generation for not knowing this but there was a time, and it wasn’t that long ago, when superannuation wasn’t a guaranteed thing. Indeed it wasn’t until 1992 when the Keating government legislated for compulsory superannuation that it became required for employers to contribute a percentage, then 3%, of their employee’s income into superannuation funds. It was a long game manoeuvre as the next 2 decades were going to see many of the baby boomer generation move into retirement. The pension system would be unable to cope with so many retirees and thus the government hoped to head this off at the curve by making everyone save for their own retirement (and created the oft-quote “self funded retirees” sound bite).
For all of my generation they will have spent their entire working life contributing to a super fund and whilst it probably isn’t anything to write home about at the moment it will be quite something when it comes time for them to retire. I ran some quick numbers using the median Australian wage as a base ($66,820 if you’re wondering), the current 9% super contribution and a modest super return rate of 5% per year (the average is closer to 6.5%). If we say that the average Australian has a working life of 45 years, from the age of 20 to 65, then they end up with a rather healthy sum of $960,000 in super when they finally reach retirement age. At 5% return rate per year this means a retiree can draw down almost $50,000 per year without eating into their super at all. This is about 71% of their working life income which wouldn’t be too bad considering you’d expect their expenses would be a hell of a lot lower.
The situation for people not in my generation is completely different however as many of the assumptions I made can’t be said for everyone else. I haven’t even touched on things that can increase that final figure dramatically (like super co-contributions) which would make retirement even easier. Still the point stands that anyone in my generation in Australia who thinks they won’t have enough to retire on obviously has little idea about real financial planning.
As for those nearing retirement and wondering if they have enough super I can’t really say much without knowing their situation (there’s a whole mess of variables that can change things dramatically when you’re within 10 years of retiring) but the fact that there are people worrying about it should serve as a warning to the rest of us. It’s not something you should be thinking about when retirement is looming over you, although that seems to be the norm around here.
I really could go on for quite a while longer about this but I think I’ve already driven my point home. Us Gen Y’s are going to be pretty well set up for retirement when the time comes and anyone who’s relying on some kind of influx of cash in order to retire has more than one kangaroo loose in their top paddock. I’m not saying you need to fret about it every day but if you keep an eye on your super, keep those home loan repayments up and keep your bad debt low then you’ll really have nothing to worry about. Not doing this will leave you in the same situation as many baby boomers are now finding themselves in and you’ll find no sympathy from me should you ignore the lessons to be learned from their plight.