Chapter 2Superannuation for housing
Introduction
2.1Home ownership remains a key aspiration for most Australians.However, with house prices dramatically increasing over the last decade, in addition to higher interest rates and other cost of living pressures, Australians are struggling to both purchase homes and meet higher loan repayments.
2.2Home ownership forms a considerable component of voluntary savings towards retirement. Those savings are one of the ‘three pillars’ of Australia’s retirement system alongside the age pension and compulsory superannuation.
2.3Despite home ownership significantly contributing to better retirement outcomes, evidence suggests that fewer people are retiring while owning their own home given difficulties entering the housing market.
2.4In light of declining home ownership rates and the clear benefits of home ownership for retirees, there is scope to consider innovative policy options outside of current government proposals to boost ownership rates. In particular, options to harness superannuation to increase rates of home ownership are increasingly being explored.
2.5Evidence to the committee explored a range of different options to use superannuation to aid entry into the housing market. These include withdrawing superannuation savings for housing purchases, entering into house purchases on a shared equity basis with superannuation funds, using superannuation as collateral on a home loan and superannuation saving schemes.
2.6Depending on policy variables and application, financial assistance towards home purchase is likely to increase demand and possibly have an inflationary effect on housing prices. Supply-side concerns with the housing market must therefore also be addressed for any policy seeking to increase home ownership to be effective.
2.7This chapter will consider some of these overarching matters in more depth.
2.8The following chapters assess the desirability and efficacy of a range of approaches for improving the experience, choice and outcomes of individuals preparing for and reaching retirement with a particular focus on using superannuation savings to address reduced rates of home ownership in retirement.
Home ownership and financial security in retirement
Home ownership is important for financial security in retirement
2.9The security and financial stability of owning your own home during retirement is widely acknowledged. Evidence provided to this inquiry echoed the importance of home ownership for financial security in retirement, and throughout the lifetime of home owners.
2.10For example, the Housing Industry Association highlighted ‘significant benefits’ that home ownership provided regarding financial security in retirement. They endorsed policies to support higher levels of home ownership instead of leaving people to rely on renting in retirement.
2.11Mr David Orford expressed the view that owning a home in retirement was important on the basis that rent keeps increasing with inflation, and retirees who own their home do not have to pay rent. He also expressed concern that young people have their economic security adversely affected, including in retirement, from being limited in obtaining housing.
2.12The Centre for Independent Studies (CIS) outlined that the objective of superannuation policy is to provide security in retirement, and that policies should try to accommodate people paying off mortgages, instead of accumulating superannuation balances, provided the money is still used for retirement purposes.
2.13Home ownership can also bring other benefits in retirement that are not available to people who don’t own their home. For example, Grattan Institute has previously identified that ‘older Australians who don’t own their own home by the time they retire are often punished by the assets test for the Age Pension, which ignores housing equity but captures other savings in full’.
2.14This sentiment was echoed by Mr Michael Rice and Mr Jonathan Ng who submitted that the gearing effect of home ownership provides significant benefit over other forms of saving. They identified a number of advantages in retirement for home owners, including greater financial security and favourable conditions for the Age Pension means tests.
2.15Indeed, Mr Rice highlighted that the reason home ownership is so valuable is the ‘perverse way that we do means testing on renters’ which sees them ‘penalised quite considerably’. He demonstrated the advantages in retirement for home owners, particularly in terms of access to the Age Pension in the following example:
…If you had, say, a married couple with $800,000 all in superannuation and they rented they wouldn't get any age pension. But the value of an age pension for a couple, if they got a full pension throughout retirement, would probably be of the order of $900,000. That's something they would forgo by having all their assets tested under the means test. If you owned a home worth, say, $600,000 and your super was only $200,000, you're in the same financial position. You would get the full age pension, about $38,000 a year. You would have a lot less super, but you would be able to draw some of that super and then later in life draw equity out of your home.
2.16The CIS acknowledged that the debate about allowing people to use superannuation for housing is controversial. However, they identified important benefits of home ownership, including financial, such as exemptions from the Age Pension means test, and non-financial, like security of tenure and freedom to renovate.
2.17Indeed, discussions regarding the level of home ownership and its importance for retirement outcomes have been the subject of various recent reviews, including the Retirement Income Review by Treasury in 2020 and an inquiry by the House of Representatives Standing Committee on Tax and Revenue in 2020 (Tax and Revenue Committee).
Box 2.1 Treasury’s Retirement Income Review The Treasury’s 2020 Retirement Income Review (RI Review) assessed the Australian retirement system. While it found that, by large, the system was effective, sound, and its costs broadly sustainable, there were areas for improvement. The RI Review observed that home ownership is an important factor influencing whether middle-income earners achieve an adequate retirement income, with compulsory superannuation alone insufficient to achieve this. The RI Review further noted that, given its significance for retirement outcomes, some suggest that home ownership should be a pillar of the retirement system in its own right. The RI Review was unambiguous about the importance of home ownership for positive retirement outcomes: The home is the most important component of voluntary savings and is an important factor influencing retirement outcomes and how people feel about retirement. Home owners have lower housing costs and an asset that can be drawn on in retirement. If the decline in home ownership among younger people is sustained into retirement, there will be an increasing number of retirees who rent. The system favours home owners, such as through the exemption of the principal residence from the Age Pension assets test. The RI Review found that, in order for the retirement system to deliver positive outcomes for retired Australians, the ‘pillars of the system need to interact effectively and be flexible and responsive to allow individuals in diverse circumstances to achieve adequate retirement incomes’. |
But home ownership rates are declining
2.18Despite Australians’ continued dream of home ownership and acknowledgement of the benefits throughout life and into retirement, home ownership rates are on the decline – a clear reminder of a growing housing affordability crisis.
2.19The CIS referred to Australian Bureau of Statistics (ABS) data to illustrate that first home buyers are overwhelmingly in younger age categories, and that home ownership is much lower in this cohort (see Figures 2.1 and 2.2).
Figure 2.1First Home Buyers by Age
Source: ABS Housing Occupancy and Costs, Australia, 2019–20.
Figure 2.2Home Ownership Rate
Source: ABS 2021 Census, reproduced via Australian Institute of Health and Welfare
2.20Blueprint Institute (Blueprint) highlighted Australia’s current housing affordability crisis, which is placing considerable financial pressure on younger generations and prospective first homebuyers. They noted that since 1971, the proportion of 30–34-year-olds who owned their own home had decreased from 64 per cent to 50 per cent. Similarly, the proportion of 25–29-year-olds owning their own home has decreased from 50 per cent to 36 per cent in the same period of time and that the ratio between house prices and incomes had more than doubled in a generation.
2.21In The Australian Dream report, the Tax and Revenue Committee pointed to evidence that home ownership had fallen among people approaching retirement, with significant implications for retirees and taxpayers. Namely, they found that lower ownership rates would make retirees poorer and more financially insecure and would increase welfare costs.
2.22That report also identified modelling from Grattan Institute which suggested that by 2056, just over half of people over the age of 65 will own their own home, with dwelling prices growing much faster than incomes since the mid-1990s.
2.23ABS census data shows that from 2001 to 2021, as house prices have increased, the average age of a first home buyer has increased, the number of retirees with mortgages has roughly tripled, and the proportion of Australians in the 55–64-year-old range who own their homes has dropped by approximately 25percent.
Superannuation can assist with home ownership
2.24Various stakeholders highlighted how superannuation might assist Australians into home ownership and better secure their retirement.
2.25For example, Menzies Research Centre (MRC) identified that the greatest barrier to home ownership is saving for a deposit:
The largest hurdle to entering the housing market is saving for a deposit, and it now takes about 10.8 years to save for a 20 per cent deposit. On top of this, rent now makes up around 26 per cent of weekly income.
2.26The MRC observed that rising costs, such as the costs of rent and utilities, make saving for a deposit prohibitively hard in the early stages of life. This has resulted in the age of first home buyers being driven up, and loans being taken out by first home buyers overall decreasing by more than 25 per cent.
2.27Ms Michelle Levy, who authored the Quality of Advice Review, suggested that superannuation could be used for assisting members to own their own homes:
… the Retirement Income Review found that the retirement income system was working relatively well except for those who did not own their own home. Expressed another way, the most significant contributor to retirement outcomes was not how much superannuation a person retires with, but whether they own a home. At the same time home ownership is declining and the Government wants superannuation funds to invest in low cost housing.
Is it possible that the most effective way a superannuation fund trustee could assist their members in the cohort of retiring or retired members who do not own their own homes would be to provide them with that home? Rather than paying a pension, the member's superannuation balance could be put towards the purchase of a house.
2.28Being able to harness superannuation to assist with home ownership may be one way to provide an opportunity for people who otherwise couldn’t afford to enter the market.
2.29Some retirees draw down their superannuation savings at a rate that leaves significant sums of money untouched throughout retirement. As highlighted by the Treasury, ‘Most people die with the majority of wealth they had when they retired.’This untouched wealth could be used to improve an individual’s standards of living during working or retired life.
2.30At the same time, age pensioners who are not home owners tend to consume assets faster than other households. The Treasury has identified ‘few retirees use the equity in their home to support their standard of living in retirement’.
2.31Using superannuation early to secure housing can lead to better retirement outcomes. For example, Mr Rice and Mr Ng expressed the view that, combined with accompanying policies for easing supply-side constraints on housing in order to alleviate inflationary pressures, access to superannuation savings for house purchases could offer improved financial positions in retirement and higher Age Pension entitlements.
2.32The MRC argued that the sooner a person can enter the housing market and begin paying down the mortgage on their home, the less superannuation savings that the person will need in retirement.
But perhaps the largest benefit is the financial gain from the imputed rent—that is, the rent not having to be paid each year. It is estimated that the imputed rent value for a typical retiree that owns their own home is around $23,000. This is almost equal to the entire yearly pension for a single person and is higher than the individual amount paid to a person as a couple. Just by owning your own home in retirement, you are getting the equivalent per year in savings to the full aged pension.
And is already being used by some Australians
2.33While strict barriers exist to restrict non-retirees from accessing their superannuation to own a home, retirees frequently use their super to pay off housing debts once they are able to do so.
2.34Dr Cameron Murray identified the practice of using superannuation lump sums to pay off mortgage debt at retirement:
A bit of a pattern in the past 20 years has been repaying mortgages with lump sum withdrawals of super at age 60.
…
There is a survey that found that, of lump sum withdrawals from superannuation, I think it was 14 per cent was used to pay a mortgage. There was another category in that survey of using that money to upgrade a home as well. It is an equivalent thing, whether you pay the mortgage on your current home or take the lump sum, sell your current home and move to a better one where the kids are or up the coast. One of the top, most common uses for lump sum withdrawals at age 60 was repaying the mortgage.
2.35HomeSuper also identified that it is common to use superannuation upon retirement to reduce mortgage debt, a trend which they state is set to continue as debt levels and age of first-time home buyers increase. HomeSuper warned that the status quo, where people wait until retirement to reduce or pay off mortgage debt, is untenable and inconsistent with the intent and the purpose of the Australian retirement system.
Harnessing superannuation may not result in higher price inflation
2.36A number of stakeholders cautioned against any scheme boosting demand for home ownership, noting unintended consequences on housing supply and pricing are likely.
2.37Submitters noted that without supply-side intervention, any benefits of financial assistance towards home ownership may only be short term and benefit a limited cohort. For example, Blueprint Institute highlighted that the relationship between supply and demand in the housing market is highly inelastic. They explained:
The supply of appropriate dwelling stock to meet current and forecasted demand is critical to housing affordability for first-time home-buyers. The opening up of increased capital to first-time home buyers will only permit short-term additional participation in the housing market if there is insufficient low cost dwelling stock to absorb additional demand created by policy as new participants in the housing market will be soon again priced out.
2.38Dr Peter Tulip, Chief Economist for the CIS, also commented on the impact of superannuation withdrawal:
Like any other demand-side measure, it will help the favoured recipients by making housing more expensive for everyone else. If we don't increase supply, then all policies like this do is reshuffle the fixed housing stock.
2.39The McKell Institute similarly submitted that governments have a disproportionate focus on demand-side approaches to housing affordability, advising that these measures typically increase prices and lock more prospective first homebuyers out of the market. Ms Rebecca Thistleton, Executive Director of The McKell Institute noted such policies would help one small initial group of buyers with existing adequate super balances, but causing significant implications for the rest of the market longer term.
2.40In contrast to the above concerns, several submitters questioned the size of any inflationary effect of superannuation for housing type schemes. The committee was advised that any increase in prices caused by a superannuation withdrawal scheme would either be negligible, temporary, or no greater than current trends.
2.41Dr Murray was critical of what he identified as the two arguments dominating the debate around using superannuation for housing, namely that people are excessively leveraged into housing with mortgages lasting later in life, and that it would result in house price increases.
2.42Dr Murray submitted that for prices to spike after implementation, a scheme would have to be in operation for a brief and defined period of time. Dr Murray identified that if a scheme operated indefinitely and participants were free to use the scheme at a time of their choosing, they could delay buying their first home until it suited them. Dr Murray submitted that this would moderate any corresponding increase in demand by ensuring that it was spread out over an extended period. He explained:
I think the concern about price effects is mis-categorised as 'this will put all prices up forever,' rather than during that transition period when new buyers can enter. There might be a little bit of bringing forward of buying and a small rise in prices but that can't really last very long; otherwise investors will leave because yields are down, because people using their super are buying at higher prices. So I think the price effect is probably small, and definitely temporary, and in the debate we don't get that subtlety … it will probably smooth back to where it would have otherwise been, and from then on everybody who can use their super gets the benefit.
2.43He posited that, where people can afford to purchase a house, it does not necessarily follow that they will purchase a house if to do so would be a bad investment. He argued that any price effect from access to superannuation for housing would be limited by the fact that there will be time for the market to adjust, and further limited if superannuation were allowed to be spent on non-housing items which would take the pressure of housing alone.
2.44Grattan Institute highlighted the relatively small effect that access to superannuation would have on the housing market, given the size of that market:
I've seen some claims today that we'd see a $70,000 increase in prices and the like. And that does seem excessive given we're talking about a $10 trillion housing market and the additional money made available out of super, depending on how it's designed, is going to be a small share of that in additional demand.
2.45Menzies Research Centre also disputed claims that a super withdrawal for housing scheme would substantially increase house prices. In her evidence to the committee, Ms Freya Leach, Director, Centre for Youth Policy at Menzies Research Centre labelled reports that super withdrawal schemes would increase house prices by as much as $80 000 as ‘fearmongering’ given the relatively low superannuation balance of first home buyers.
2.46Mr James Mathias, Deputy Executive Director at Menzies Research Centre also noted that in the Canadian experience house prices had increased at a faster rate prior to the introduction of the Canadian Home Buyer’s Plan than they did after the implementation of that scheme. Further, Mr Mathias submitted that any financial pressures caused by an increase in house prices would be offset by higher rates of home ownership and the corresponding increase in wealth.
2.47Mr David Orford submitted that access to superannuation to overcome the deposit hurdle earlier would increase demand for homes and therefore prices in the short term. He outlined:
… once the initial temporary increase in demand is satisfied – and that demand increase will be spread over several years – the demand for homes will revert to the long term level. To the extent that new home owners build homes, this will stimulate the economy in the short term.
2.48The CIS expressed their view that enabling individuals to borrow from their superannuation facilitates home ownership at little cost to the taxpayer.
2.49Dr Peter Tulip from the CIS expressed the view that there have been overestimations of the price increases from allowing access to super for housing:
I saw some numbers in the paper just this morning of $75,000, and that seems way too high to me … it seems implausible that it would be anywhere near that big … We have very little basis for making an estimate like that because there's no experience of these things. We have had experience of financial assistance to first-home buyers and that's had very big effects on lending by those people. It hasn't had a very big effect on overall house prices.
2.50Further, Dr Murray claimed that any additional financial pressures resulting from an increase in prices caused by the scheme would be offset by higher rates of home ownership. He underscored that the two major arguments against using superannuation for housing ‘aren’t the big deals they can appear to be at first glance. A home is the best asset to own in retirement and super is already used to buy housing.’
2.51Dr Murray also identified that superannuation funds are already involved in buying housing directly, through investing in build-to-rent projects, and with approximately $200 billion from self-managed super funds invested in property. While it is unclear how much of this property is residential, Dr Murray estimates this could be up to 200 000 dwellings owned by Self-managed superannuation funds (SMSFs).
2.52The committee was advised that governments are already attempting to address any supply issues, including measures by State governments through relaxed zoning.
2.53The HIA indicated that supplying a mix of housing types is also important in respect to individuals’ needs or stages of life. Mr Croft advised that in increasing supply, greater densification and downsizing opportunities for households and retirees is important, in addition to increasing housing supply in metro, regional and coastal areas ‘to provide greater housing choices for people across all age profiles’.