Using super to buy a home… Is this the dumbest idea ever?
Recently I discussed the suggestion from various politicians including Barnaby Joyce that buyers trying to break into the market look to more affordable areas. The idea that currently has momentum, however, is allowing first home buyers to access their superannuation (super) early to use it as a deposit for a property.
Currently super can be accessed prior to retirement for a variety of reasons. These include severe financial hardship or permanent disability, but buying a home is not one of them.
The idea of allowing young buyers to dip into their retirement savings keeps coming up time and time again. Liberal MP John Alexander one of the biggest advocates. That’s despite it flopping when Paul Keating first raised it back in 1993, and even he, seemingly forgetting his election platform back then, has now rubbished the idea.
In my humble opinion, it’s the dumbest idea ever.
The argument for
The point of allowing first home buyers to access their super early is of course to enable – or at least help – them to get into the property market sooner, before prices rise even further out of reach.
Advocates point to New Zealand, which has adopted this policy, and has a quickly rising take-up.
And that’s about it for the positives of the argument.
The argument against
The arguments against the idea are numerous, far outweighing the positives.
The thing is, allowing first homebuyers to use their super for property is actually likely to worsen affordability. Prices are likely to be driven up due to an increase in the capacity for people to pay for housing. So, essentially it would be counterproductive.
Not only would it likely lead to a surge in demand, with more buyers in the market, but it will give those who can already afford a house more money to play with. Meaning they’ll be able to pay more for property, driving up property prices. Existing home buyers will be the only winners.
On top of this, it would severely compromise the whole point of super, which is to provide an income in retirement.
Not only will the lifestyle of our future retirees be significantly hampered, but they’ll likely be completely reliant on a government pension. But will we as a country even be able to afford to pay all these people to live? Probably not – which is why super was introduced in the first place.
Retirees might own their own home, but what will they use to live off? Don’t forget, this includes buying food and paying for living expenses.
The reality is that most young people don’t even have enough money in their super accounts for a home deposit. A recent analysis finding displays the average super balance for young people was lower than what’s needed for a 20% deposit.
You see, you get the most compound growth in super during and after your youth. This is when you’ll grow your balance. Making it a big part of why the money needs to be left there.
So if you ask me, this is not the time to tell someone with all their life savings in a quality super fund with a mix of asset classes to take out all their money and bet on one asset class – housing. This is especially the case since property prices are likely nearing – or are at – the top of the market in Sydney and Melbourne. So the potential is there to actually lose money if overzealous first homebuyers pay too much.
What should be done instead?
Investors have largely been blamed for rising house prices and for pushing first home buyers out of the market. However, nagging proposals to get rid of investor benefits such as negative gearing and the 50% capital gains tax discount have been supposedly taken off the table.
Market forces should be left to iron out the problems in the market. But if government intervention is needed, the best solution is likely to be an increase in supply. The 
supply is needed especially in Sydney and Melbourne.
It would also be wise for governments to invest in infrastructure in regional areas. Or those further from the city to draw people away from our capitals and into areas where demand is not so great.
According to basic economics, when demand is greater than supply prices are pushed up. So, if supply is increased but demand stays the same prices should level out. Or at the least, grow at a slower rate.
Conversely, if you increase demand, as allowing buyers to access super would do, but keep the supply the same, prices will be driven even higher.
So, what is actually going to happen? Will first homebuyers be allowed to dip into their super in Australia?
The Federal Government has committed to addressing housing affordability. However, for now they seem to have taken this idea off the table due to widespread criticism. Although we will have to wait and see what their solution is in the May budget.
I, for one, can’t wait for the next bright idea!
Dear Fellow Investors,
Cuts to Negative Gearing Stink
I get it. I get what Bill Shorten and the Labor Party are trying to achieve by cutting negative gearing…but it stinks for 6 reasons.
First, for those of you who might not know…Labor proposes to:
- Eliminate negative gearing to all residential investment properties other than new housing from the 1st of July 2017.
- Stop investors from claiming losses on secondhand properties against their wage income after that date.
- All investment properties purchased prior to this date will be “grandfathered” (meaning any current tax arrangement with your investment property will remain).
- Reduce the capital gains discount on all investment properties from 50% to 25%.
Stinky Reason #1 – How much will the budget be improved?
The latest data from the ATO shows that in the year 2012/13 property investors “negatively geared” or reduced their taxable income by approx $5.5 Bn. That’s $5.5Bn that the Government could have taxed (not necessarily collected).
Firstly, this data, the most recent available, was based upon a period when the RBA cash rate was higher than it is now.
Interest rates on borrowing have dropped since that time – meaning the losses investors can now claim will be reduced.
Back then, the outstanding rate of interest was close to 5.5%. It’s now close to 4.5%. That’s a drop of 18.2%.
I can currently get a 5-year fixed rate of 4.59% from NAB and there are many others…
If you reduce the amount investors have claimed in interest by 18% – there goes those negative gearing losses even allowing for CPI increases of other deductibles.
In order to get Labor’s forecast of $32Bn in savings over 10 years, Treasury must have predicted some significant increase in interest rates from years 6-10 right?
But let’s face it….Treasury can get it wrong – remember its forecast for iron ore prices? It was totally optimistic.
Stinky Reason #2 – Negatively Gearing new property only is risky business…
“Roll Up Roll Up”…I can hear the spruiker cry…
By allowing only new properties to be negatively geared….you are creating a “green light” situation for every spruiker to come out of hiding and promote new property to unsuspecting mum and dad investors.
Selling new property is far less regulated and commissions are rife. Time and time again I get offers to sell property to my database and receive a 10% commission on the purchase price. But I don’t.
Whilst I’d love the 10% my father lost all his super from the dodgy side of the property market and the last thing I’d want is for someone else to go through that experience.
Tip – Have you noticed spuikers generally only sell new property?
That said, not all people selling new stock are bad – currently most are good…but this type of policy might attract less scrupulous spruikers after a quick buck or two.
Stinky Reason #3 – The Reverse effect
I get it – Labor’s policy aims to increase home affordability particularly for first home buyers.
Yes. Australia is expensive on the world stage – BUT could stopping negative gearing actually inflate prices?
How? Well the first thing I thought when the policy was released was “no point selling any properties I currently negatively gear – I’m hanging on!”
According to those ABS stats I previously mentioned – there’s close to 3 Million properties that might not be sold if everyone thinks like me!
Now, I’m no Warren Buffet but I do remember one thing from economics…price is a factor of supply and demand and if you take away the supply….prices tend to head north.
Stinky Reason #4 – The elephant in the room
This stinky reason is a surprising one, and in all my research I haven’t seen any mention of it.
Whilst the Government may, in the long term, claw back some revenue if this policy is implemented, if property transactions decline, the States are going to be significantly impacted by way of stamp duty collection.
If investors hold onto stock…the building industry won’t be able to magically increase supply to make up the difference.
And if you have far less transactions, you have far less real estate agents, conveyancers, buyers agents, brokers etc paying income tax.
Stinky Reason #5 – Slippery Slope
Labor has also proposes to cut negative gearing on new share investments. This leads to a whole bunch of questions such as:
- By shares are we talking listed only or unlisted?
- How are super funds treated? Family trusts?
And back to property…
- What if I buy a commercial or industrial building? If bought in my own name it appears I can still negatively gear it. However, if that same building is part of a listed trust, then I guess I can’t. Please explain??
- Is “property” treated as land + building and plant and equipment separated? Because that’s how the CGT calculation is calculated.
I could go on…
Stinky Reason #6 – The Renovators
“New property” is not all about starting from scratch.
Don’t underestimate the amount of people who like buying and upgrading property. This has a multiplier effect in that money is being injected back into the economy through the employment of trades and the purchasing of goods and services etc.
Final Point:
Now I’m not going buy into the debate over whether negative gearing is for the “rich” or for the working class. I would’ve thought it was pretty obvious that those with higher incomes benefit more from negative gearing.
And I don’t buy the argument, from the Real Estate Institute of NSW, that rents will suddenly go up because negative gearing is taken away. Rent is a factor of supply and demand – not what it costs an individual to hold a property.
What I worry about is the risk/reward ratio. I think at this point of the economic cycle (China’s downturn, mining slump, drop in commodity prices and a property boom in most major capital cities around the world)… this policy is potentially playing with fire for very little reward.
I agree there are certain elements that need to be fixed to make the system fairer and here’s my thoughts on that.
Regards
Tyron Hyde
CEO AAIQS
PS – If you think I’m writing this article as a staunch Liberal Voter…you are wrong. I was brought up to vote Labor. In fact, my father ran for the seat of Lowe in 1975 against Billy McMahon! I’m currently politically agnostic (my father would be turning in his grave) – but times have changed!
One thing to remember with property investment is that your entry and exit costs are pretty high. You have to consider stamp duty, your advertising and marketing costs when you sell and the capital gains tax.
Overall, you make your money in property when you’re buying. That is, if you buy right. If you think about the developers, they make money buying land. When they buy the development site, that’s when they make money, when they buy at the right price.
It’s the same with property investors. When you buy at the right time, you should be able to afford to hold the property for an extended period and hopefully over time it will generate income. If you buy something when you’re 30 years old, by the time you’re 50, hopefully your yield as a percentage of your purchase price will be 15 to 20% per annum, which is pretty good. It is like dividend growth from shares.
I know a lot of things could come up that could force you to sell – you will have children, you could get married or get divorced. There are many things that could change your investment strategy over time too. But most people, I think, go into property with the idea of holding it for a long time. They want to own it for an extended period.
As with any other investment, you’ve got to look at making money from it. People need to understand the entry and exit costs of property, including capital gains implications. I don’t think enough people who sell properties try to work out whether they have made money or not. In order to cover all those costs, sometimes you really need to hold for a while.
A lot of investors don’t factor in the entry and exit costs when they work out their true profit. For instance, if you’ve bought a $500,000 property, you’ve got around $50,000 in entry and exit costs. So you need around 10% profit before you make money. But once you’ve done that, it is all blue sky.
Work out how much you save using our free property depreciation calculator or make it happen and get an obligation free quote for a depreciation schedule now.
This blog is an extract from CLAIM IT! – grab your copy now!
What are the tax deductions if I rent out a room?
Have you ever thought about renting a room out in your house on Airbnb for a few extra bucks?
I know I have.
Airbnb, in case you haven’t heard, is a website that allows you to offer short term accommodation to others, or, you stay at someone else’s place.
You can become a mini hotel operator. And there are some fabulous places out there..Look at the place I’m staying at in Amsterdam with my daughter this year. Pretty cool hey!
But what are the tax implications and can you claim depreciation if you rent out one room of your house?
The simple answer is Yes! There are definitely tax deductions from Airbnb available.
If you rent out one bedroom of your 2 bedroom apartment… you can claim depreciation based upon a pro-rated ratio.
This tends to be based upon a floor area calculation and split between the portion set aside to produce income and that portion not.
BUT there is a big catch regarding tax deductions from Airbnb:
By renting out part of your house you will not be able to claim the full Capital Gains Exemptions that applies to your main residence.
So you need to do a cost-benefit analysis that takes into account rental income received, depreciation claimed and potential Capital Gains Tax (CGT) payable.
TIP: If you think the market has peaked and will be flat for a while – then this strategy could be worthwhile. Get the property valued at the point you start renting out the property and if the value is the same in 10 years’ time… Well, there would be no CGT payable anyway!
In short, this is very dependent on case-by-case situations and peoples’ current financial status’ but it doesn’t hurt to check it out if you’ve got the space!
If you do own an investment property and need a depreciation schedule – get a quote here.
7 Reasons why I like Investing in Property
Reason # 1 – You can Add-value
You can buy a rundown old property and increase its value by getting your hands dirty (or paying someone else to)! It’s hard to add-value to my Commonwealth Bank shares. Sure I bank with them but I don’t think my savings account is going to affect the share price!
Reason # 2 – Limited Supply
Property takes a while to plan and build. The demand and supply equation has lots to do with the price of property. With shares, the company can do a capital raising at any time or issue options, this may dilute your shareholding and its value.
Reason # 3 – Capital Gains Exemption
Unlike any shares I currently own, the home I live in does not attract capital gains tax. This has been lucrative for many Australians and I can’t see the law changing in this regard any time soon.
Reason # 4 – Keep it Simple Stupid (KISS)
Property is easier for me to understand in comparison to shares. Granted I work in property, but I know if I buy a property for $500,000, I can get $500 a week rent and comfortably work out other expenses. Share prospectuses and annual reports are usually not as straightforward.
Reason # 5 – Master of my Domain
I’m the CFO of my property investment and answerable to the board directors that I care about, my wife. I don’t know about you, but I’m pretty sick of golden handshakes to CEO’s and directors that pretend they have shareholder value at heart. Really?
Reason # 6 – Don’t remind me
I like property because I’m not reminded of how much I have lost or made every day. I don’t want to wake up and wonder what the NASDAQ did overnight and what my share portfolio might look like at market open.
Reason # 7 – Margin Calls Stink!
Even if my property has gone down in value, which it hasn’t, it’s very unlikely a bank will make a “margin call” and force you to sell. Margin calls can be unsettling, as it may force you to either come up with cash quickly or sell stocks at a time when you don’t want to.
Give me property any day!
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