The prize for the stupidest idea of the year so far must go to those in Canberra who are suggesting that first-home buyers should be allowed to access part of their superannuation for a house deposit.
Not only would it drive up house prices, the plan has two other major faults: it ignores the true cost of home ownership and it subverts the purpose of superannuation.
![The truth is, not everyone can afford to buy a home and renting is cheaper than buying.](/web/20170320123807im_/http://www.theage.com.au/content/dam/images/g/u/j/m/1/u/image.related.articleLeadwide.620x349.guovua.png/1488686977727.jpg)
Certainly, falling interest rates have reduced the gap between owning and renting but owning is still considerably dearer than renting.
Take a $450,000 property that rents at $450 a week: the tenant gets occupancy for a total yearly cost of $23,400 – in contrast, the repayments on a mortgage of $400,000 at five per cent over 25 years will be $2330 a month or $28,000 a year. And the mortgage repayments are not the end of it; add at least $3000 a year for rates and maintenance and total annual expenditure becomes $31,000.
From a cash flow perspective, the tenant is $7600 a year better off than the owner.
Clearly, renters who cannot save could end up with serious financial problems if they are suddenly handed enough money for a home deposit.
Then there is the concept of superannuation. It has one major goal – to provide people with a retirement income so they won't be living on the streets in their old age when the government runs out of welfare money. How much you have when you retire depends on three factors: the amount contributed, the rate earned, and the time the money stays invested. Reduce any of these and you reduce the final payout.
Suppose two people invest $3000 a year for 40 years. If one earns 5 per cent a year and the other earns 10 per cent a year, the end benefits are $400,000 and $1.6 million respectively. Doubling the rate of return quadruples the end benefit.
Obviously, the primary objective of anybody with money in superannuation is to achieve the highest returns possible – you could never achieve this if you borrow money from your superannuation account and use it to reduce a low-interest home loan.
Yes, home ownership is a worthy aim, but superannuation is not the vehicle to fund it. If you are renting and want a home, the solution is simple. Find a home you like, work out the monthly payments on the loan it would take to buy it, and then add $250 a month for ownership costs. Start an aggressive savings campaign with the difference between that figure and the rent you are paying.
If the difference between renting and owning is $883 a month, as it is in our example above, simply bank $883 every month into a special account. If you can earn 2 per cent interest you will have over $10,500 in the bank in one year and almost $22,000 in two years. By then you will have convinced yourself and your bank of your ability to pay off a home loan.
The major message of the 2015 Intergenerational Report is that government resources will come under increasing pressure as the population ages. Young Australians should do everything in their power to gain a good knowledge of finance so they can build a portfolio to rely on when they eventually retire. Dipping into their superannuation because they can't save a deposit is moving in the opposite direction.
The powers that be need to remember that the genesis of the global financial crisis was President Bill Clinton's belief that every American was entitled to home ownership irrespective of income or assets. This led to billions of dollars of bad debts, repossessions and plunging real estate prices. Australia can't afford for this to happen here.
Noel Whittaker is the author of Making Money Made Simple and numerous other books on personal finance. His advice is general in nature and readers should seek their own professional advice before making any financial decisions. Email: noel@noelwhittaker.com.au
- Also read: Daryl Dixon on the case for letting first home buyers use super.
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