A bad policy proposal
It is closing in on the election date and we are seeing some stupid proposals coming as politicians are worried over getting re-elected/elected. The LNP’s proposal for first home buyers to access their superannuation balances for a deposit for their first home purchase is one I am highlighting. I consider this a thoroughly bad proposal from an overall society point of view for several reasons.
Firstly, I am not a fan of Australian’s superannuation system as the way it is constructed has resulted in:
- The percentage cost of management of this money is amongst the highest in the world despite the average balances also being amongst the highest in the world. Fund management is a business where there are obvious economies of scale and instead of cost-efficient management to the benefit of the people saving, we have a situation where there is significant leakage to a variety of industry participants (yes, I know that I am amongst them but Montgomery has no mandates from any superannuation funds so at least there is one less level of leakage for our investors).
- The tax concessions primarily favour high income earners in the way they can substitute a high marginal tax rate now for a lower tax rate in the future. Lower income earners do not get the same benefit from this due to their lower marginal tax rate and hence the whole superannuation system is a regressive tax system.
Despite this, if we accept that we should have a superannuation system along the lines currently implemented, there is a value to society to try to maximise the balances in people’s super accounts when they retire.
This is because super balances are included in the means testing for the pension whereas your permanent place of residence is not. If we get a transfer of a substantial portion of a person’s super money into property, especially at an early stage of a person’s savings journey before compounding has had a chance to work its magic, the chances that this person will qualify for the pension will be substantially higher.
If you listen to the proponents of this proposal, it is aimed at helping primarily young people. Given the suggested cap of 40 per cent, you need to have a balance of $125,000 in your super account to be able to access the maximum $50,000. Very few young people have been able to save up this amount of money in their super accounts so it is likely the policy would primarily benefit older people and not young people.
According to the ABS, the median super account balance for the 25–34-year age group was $25,000 in 2020 meaning that this would release about $10,000 at the median level. Quite different from the headline $50,000 number.
My biggest objection is another demand-side intervention that will inevitably be capitalised into higher house prices and hence not addressing the underlying source of the unaffordability problem.
Australia already has one of the worlds most overpriced property markets and one of the most indebted populations. The last thing we need is a policy that will result in even higher house prices.
What Australia needs instead is investment in infrastructure enabling decentralisation away from the large metropolitan cities enabling people to work/commute effectively from more affordable regional areas taking the upwards price pressure away from central Sydney/Melbourne/Brisbane (and yes, I say this as an owner of a house in Sydney).
It is not just me who thinks that releasing superannuation money into housing is a bad idea, even our former finance minister and current secretary general of OECD Mathias Cormann said back in 2014 that:
“Increasing the amount of money going into real estate by facilitating access to super savings pre-retirement will not improve housing affordability. It would increase demand for housing and, all other things being equal, would actually drive-up house prices by more. That is, it would reduce housing affordability, including for first home buyers.“
And our former prime minister Malcom Turnbull described the idea as “Thoroughly bad” when it was again raised in 2016.
Let’s hope we can get politicians to come up with smarter solutions to the housing affordability problem with policies won’t exaggerate the problem.