Does Steve Bracks’ Advice Meet the Best Interest Test?
Steve Bracks, Chair of Cbus was quoted last week as criticising the proposal by Denita Wawn of Master Builders’ Australia, also a trustee of Cbus, that superannuation fund members be allowed to draw up to $50,000 from super for use as a home deposit. Bracks and other critics raised several objections:
This would fuel a rise in house prices “…baby boomer housing bubble” and “..breaching preservation to allow withdrawals for housing would not be in our members’ best interests” Bracks
With other comments in support of Bracks or Wawn:
“negligible impact on construction”
“…draining workers’ retirement savings and funnelling funds into the construction sector”
“..the trade-off between a super contribution and assembling a deposit for a first home is real”
At a time of constrained income, coming after a long period of sustained house price rises, and without the benefit of meaningful interest rates on savings, for many, saving a 10% deposit seems difficult or impossible. Since people have to have accommodation, this forces them into diverting what would have been mortgage payments into rent.
Now, Philo generally thinks that compulsory super is a good thing but let’s examine the considerations which might apply to the choice of a young person or couple faced with a decision as to whether it is better to have their own financial assets – because, yes indeed Steve they are the members’ assets - invested in a superannuation fund or to use some or all of those assets as the deposit for a house.
Presumably unrelated to this debate, but an interesting aside, is that AIST, the industry funds association, is apparently talking with state governments about large scale investing in “affordable housing”[1] . Now remember, the one thing that underpins the superannuation regime in Australia is the sole purpose test. The funds are invested by the trustees for the benefits of members. It’s illegal to use your super to buy a flat for yourself or a relative unless it’s done on a demonstrably arms length basis. So it’s presumably questionable for an industry fund to invest in housing, affordable or otherwise, unless the returns are at least equivalent to the returns from equivalent investments of similar risk. Industry funds are not instruments of social housing policy, they are the investment vehicles of the members.
So from a renter’s point of view, there should be no advantage to renting from an industry fund rather than from the private sector.
Each individual or household makes their own choice about the optimum combination of housing and compulsory savings but there are some parameters to the decision which we can usefully consider:
The need to live somewhere with security of tenure. Security is both actual and emotional
Renting, by its nature involves less control over tenure than ownership
Both rental and mortgage payments have a first ranking claim on income, but mortgage payments create a claim on the value of the asset
Many economists think that the current central bank funding of (unprecedented) government debt will be inflationary. Real wage growth over the past two decades, especially of the lower skilled, has been very low, while the Australian experience is that property has been an inflation hedge. Gross rental yields of around 4% have chased the rise in house prices meaning rents have and probably will rise faster than inflation.
Australia has experienced significant population growth into urban areas over the 75 years since the end of WW2 and this seems unlikely to reverse. Australia is one of the most urbanised countries in the OECD. Population growth is a major driver of housing prices.
Financial unknowns include:
Inflation
The future 30 year returns from superannuation
How any particular superannuation fund will perform – APRA’s Heat map shows a range of 5 year returns for MySuper as at June 2019 of 3.75% to 9.83%
Real wage growth
The cost of mortgages
The future yield on rental property i.e. the cost of rent as a function of property value
Price inflation of property
So the equation, for each individual member is a set of genuine unknowns.
Behavioural finance tells us that people prefer certainty, and home ownership is an anchor of certainty.
So if you were the average 30 year old employed builder which would you prefer?
Take your $50,000 and your partner’s $50,000 and put down the deposit on a house, and accept that you super may be only 75% of what it would otherwise have been (Bracks’ estimate)
Trust that your superannuation fund will provide sufficient returns from $50,000 that a lifetime of renting – including 30 years of renting in retirement because you may be unlikely to buy a house for cash aged 65 – will lead to a better life than option 1
It’s not a binary choice – but the rate of home ownership for the cohort aged 29-33 is the lowest at that age of any cohort born since WW 2. [2]
[1] https://www.theaustralian.com.au/business/financial-services/cbus-chair-steve-bracks-canes-board-member-idea-for-superfuelled-50000-home-deposit/news-story/bcf155f02ca89bcaadbbec670d339637
[2] https://www.aihw.gov.au/reports/australias-welfare/home-ownership-and-housing-tenure