25 words that change home ownership, super

We need to discuss ways for buyers to take to take money out of their superannuation or pledge future contributions to increase equity in a first home.

In 25 carefully chosen words, ­Michael Callaghan, Carolyn Kay and Deborah Ralston started a revolution that in time will turn the superannuation world as we know it upside down.

The fact that the words were buried on page 44 of their Retirement Income Review did not lessen their impact.

The 25 words were: “Owning a home has a positive influence on a person’s standard of living in retirement. Whereas, in retirement, renters have higher levels of financial stress.”

Put another way, an enormous amount of effort and money has been poured into superannuation as a means of making retirement less stressful and reducing the burden on the public purse. But Callaghan, Kay and Ralston have discovered that the dwelling is the most valuable asset a couple or person can have in retirement.

And, of course, the vast majority of Australians already know this via their own experiences or through their parents.

In Australia we have just seen a mass exodus of money from superannuation after the government opened the gates marginally, showing that many people do not value superannuation. Sometimes they see it as a hindrance because it makes funding a dwelling more difficult.

It’s time to find a way to make superannuation and the ownership of the most valuable asset in retirement — a dwelling — work together to enhance the retirement outlook of Australians and lower the bill to the public purse.

Before I canvass what most in the super industry will regard as heresy, I want to illustrate how people currently are using their super to help them finance a dwelling. In the last week I encountered two first-home buyers aged in their late 30s. The first was a middle to higher-income couple who had secured a $1.7m housing loan. The second was a lower but stable-income couple who secured a $900,000 loan.

In both cases the couples had little chance of paying off the loan by the time they reached a conventional retirement age. Their plan was to use their lump sum super retirement money to pay off the mortgage. Any remaining money in super would reduce reliance on the government pension or finance living.

That’s not the way superannuation was designed to work but people are using current rules to implement the truth behind those 25 words. It’s time to make the rules work a lot better.

A few weeks ago I suggested that perhaps couples could be allowed to take money out of their superannuation or pledge future contributions to increase equity in the first home. That prompted a call from former tennis great John Alexander, who now sits in federal parliament in John Howard’s old seat of Bennelong.

Alexander said my suggestion was a start but would not restore the falling home ownership levels. There may be better schemes than the Alexander plan, but it sets us on the right path.

Alexander believes that one way around the problem is to have the superannuation fund actually buy all or part of the residential dwelling so payments into super, which are tax deductible, would help provide the deposit and help repay the loan. Over time, money could be invested in conventional superannuation assets, where the income would be then offset against the home interest. Such a scheme makes it easier and more efficient for a person to get onto the housing ladder earlier in life.

On retirement the dwelling would be a normal superannuation asset and part of the means test on the government pension. Any realised profit on the super fund investment (as distinct from rollover) would be assessable income in the fund. As an alternative, it is possible to have the house and mortgage in a different account to traditional superannuation and offset one against the other. In the end that achieves a similar result.

To protect a retired person, special retirement living mortgages would be used to boost income while providing total security of occupancy, which could be transferred to a different dwelling.

Under the current system, the residential house does not affect your pension entitlement and the capital gains are tax-free.

But the increasing cost of houses is pricing people out of the market and leading them to financially “stressful” retirements.

The first reaction from the super industry will be that such a system would simply put up house prices even further and make them even harder for residential buyers to access.

And that’s exactly what would happen without a secondary measure to regulate “investor buying” aimed at the rental market. The need for rental properties would fall because more people could buy their own residences.

Alexander says that it would be necessary to have monthly variations in the amount of interest that could be deducted from an investment house.

If home building stimulation is required, then all those who take a mortgage for an investment property would get 100 per cent interest deduction for the length of the loan. If the housing market was becoming overheated, the interest deduction rate would be decreased to, say, 50 per cent for the length of the loan. Such a measure could be used to boost or depress house prices as required.

Many in the super industry will be horrified at any move to link houses to super, which would ­require major administration changes in large funds.

I put forward the Alexander plan to generate discussion about those 25 words. Whichever way we go, enabling happier retirements, a more stable ­society and a reduction of the burden on the public purse is going to require a very different approach to housing and superannuation.