When talking with our clients, it is clear that housing and property ownership is a major concern. The implications for their financial plans are significant, whether they are worried about:
- how their children will be able to afford their own home
- where they will live in retirement
- what to do with the family home once their children move out.
It is hardly surprising, therefore, that two of the most talked-about measures in the May 2017 Federal Budget were to do with housing and affordability – the super tax break to encourage downsizing, and the First Home Super Saving Scheme.
While the measures deal with opposite ends of the property owner spectrum, first home buyers and downsizers, they both respond to the same issue of the lack of housing supply in key markets.
The key question is: will the new policies achieve what they are intended to achieve, or are they simply policies in response to populism?
First Home Super Saving Scheme
There have been previous government measures to attempt to help young people get their foot on the property ladder, but their success has been debateable. Some schemes, such as the First Home Buyer Grant, were criticised for doing more to push up house prices than help buyers.
The First Home Super Saving Scheme (FHSSS) attempts to avoid such issues by instead offering a tax-advantaged way to save for a first home, but there are a number of questions unanswered.
The idea is to allow first home buyers to take advantage of the lower taxed superannuation regime to save for a deposit, as well as allowing them to benefit from the deemed earnings generated by the super fund. If the proposal is passed, people will be able make voluntary contributions of up to $15,000 per year to their super fund which they can then withdraw to help buy a first home.
One key question is how super funds will honour the deemed earnings (calculated at the bank bill rate plus 3%). Investment earnings can’t be guaranteed so how will the deemed earnings be funded in years when the fund doesn’t generate returns above the rate used?
Another question is how quickly super funds will be able to release the money for practical purposes. With a house auction, funds for the deposit are required on the same day as the offer while for a sales process, the exchange cannot occur until the deposit is received.
Another concern is how this scheme will operate for couples where one partner is a first home buyer and the other is not.
The reality is that the amount that can be saved through the scheme alone won’t accumulate enough for most home deposits in major cities. Most people will need a multi-strategy approach in conjunction with the FHSSS to accumulate a meaningful deposit.
Nonetheless, the discipline of sacrificing regular amounts to superannuation could be a way for younger people to engage with their superannuation.
The Budget also included changes designed to encourage retirees to tax-effectively downsize from their family home, but they may leave some retirees worse off financially, particularly with the potential impact on the age pension.
The government has proposed that retirees will be able to put an extra $300,000 each (or $600,000 per couple) into super from the proceeds of selling their family home after they turn 65. Overall, it is a positive move for many people who are over 65 and no longer able to contribute any more into super.
This could include those who do not pass the work test (this would be the majority) or who have total super balance above $1.6 million (this would be the minority). A couple with accumulated assets outside of their home of greater than $821,000, or a single person with more than $546,000, may benefit from these changes.
However, selling down the home and placing the proceeds into super may not be the best strategy for everyone. The family home is exempt from the assets test for the age pension, but super is included. With the new assets test taper rate of $3.00 a fortnight for every $1,000 of assets, this works out as a reduction in pension payments of $78 in pension payments for every $1,000 now included in the assets test.
It is unlikely that these changes will be the driving factor into downsizing. Lifestyle factors nearly always head the list, such as being closer to family or the home just being too big to look after.
Perhaps the best measure of success for these proposals will be whether they encourage people – both young and old – to engage more with their superannuation and consider strategies to put more money in while they can. On their own, the proposals are unlikely to have a significant impact on housing affordability, but they may, in small, incremental steps, make it easier for older people to move out of big homes that they struggle to maintain, and for young people to take their first foray into property ownership.
Jonathan Philpot is Wealth Management Partner with accountants and business and financial advisers HLB Mann Judd Sydney.