In the great pantheon of slapdash ideas, letting younger Australians access their superannuation for a house deposit occupies a special place.
Not because it’s a terrible idea. In fact, elements of it make perfect sense. But there are glaring flaws which, hard as we try to overlook, make the proposal a tough sell.
To be sure, giving more Aussies greater control over their super is something worth supporting. Having to contribute a 10th of your pay packet to superannuation every year is partly the reason why many people find saving so difficult.
But the problem with this idea is that it doesn’t go far enough. And what it does try to do, it does so in a way that would only worsen the problems it’s attempting to fix.
Under the proposal, young Australians would divert super contributions into an account for three years. On a $75,000 wage, which includes a dollar-for-dollar post-tax co-contribution, it would roughly equate to $45,000 worth of savings.
While sound in theory, the idea’s shortcomings are all too evident when you peek below the surface.
The first problem is figuring out what exactly constitutes a young Australian.
It’s all very well and good giving twentysomethings better opportunities to save a deposit. But whatever age group the government arbitrarily ends up making eligible would probably only anger the almost-certainly larger group that misses out.
You don’t need a degree in political science to see why this is rife with issues, and why it could translate poorly at the polls.
The only way the government could appease everyone is if it opened up the scheme to anyone over 18 and not in retirement. Yet, considering this proposal is targeted at ‘young’ Australians, that would be a non-starter.
But even the question of eligibility would be a minor hurdle compared to how this proposal would impact the housing market.
In theory, the government wants to improve housing affordability for younger Aussies. Yet it would be wise to remember that making it easier for more people to obtain home loans is the very reason the nation has a housing affordability problem in the first place.
As more buyers enter the market, the effect this has on demand, and the knock-on effect on prices, are clear for all to see. We know prices would go up, because we’ve lived with chronic interest rate cuts pushing up demand (and prices) for over a decade.
And though it might make it easier for first-time buyers to enter the market, it still wouldn’t solve the housing affordability problem. In fact, it’d make it worse by pushing up prices even higher. That would make it more difficult for Australians not included as part of this scheme to enter the market.
Not only that, but even those eligible would be racing against time. After three years of diverting money to a deposit fund, they may find their savings woefully short of what’s needed to buy into the market. That would certainly be the case in Sydney and Melbourne. Buyers there would be at a disadvantage to their peers around the country, where price growth is slow, stagnant or declining.
At best, a $45,000 sum would be enough for a 5% deposit in inner-city Melbourne. That’s nowhere near the recommended 20% deposit. And with prices in Melbourne rising 10% in the past year, you could be chasing your tail trying to catch up. Assuming you had a $45,000 deposit, you’d be no better off than when you started if prices continue rising as they have.
The real reason for the government’s super-deposit pitch
In truth, this proposal has little to do with housing affordability. The government seems more concerned about ensuring the property market continues to fly high.
And it’s no surprise they’d feel that way, considering how important the property market has become to economic growth. Rising house prices are one of the main reasons households feel comfortable about consumption spending. It’s certainly not because of rising wages, which are growing at the lowest rate in two decades.
If not for house price growth, the nation simply wouldn’t feel as prosperous as it does.
Because of this, the government needs to keep the ruse going. That is, it needs to ensure house prices keep rising. Otherwise, economic growth could stall, as it’s already starting to.
Looking at the latest economic data, you can see why the government is in desperate search of a short-term fillip.
The Westpac Consumer Sentiment Index fell again in April, the fifth straight month that it’s tracked below a reading of 100 (where pessimists outnumber optimists). What’s more, the ‘time to buy a dwelling’ index is down 20% since 2015.
Obviously, the government is keen on reversing that. Much more so than making it easier for young people to buy homes. The government knows what makes people feel rich and, more importantly, what keeps them spending.
Without growth in productivity gains, the government is pinning its hopes on the next best thing — trying to lift consumer confidence.
Unfortunately, if that’s how the government sees things, it has mistaken a bucket of oil for a bucket of water as it stands atop a burning fire.
Any proposal that increases the number of homebuyers with smaller (and riskier) deposits jeopardises the future of the economy at large. In the event of a housing crash, the economy, and the younger Australians that could benefit from this proposal — were it to see the light of day — would, to put it mildly, be left in a spot of bother.
Instead of trying to boost demand in the property market, we suggest the government focuses on what it’s good at — wasting taxpayer money. The housing affordability problem will sort itself out in time. Whether that comes in the form of a gradual downturn or a massive crash, we can’t say.
Either way, the last thing the government should be promoting is policies that expose an ever greater number of Aussies to an overvalued asset.
This week in Markets & Money
In Monday’s Markets & Money, Vern looked at the economic implications of the coming pension crisis.
According to Federal Reserve data, in 1952, the average public pension had 86% of its portfolio in bonds and cash. By 2016, this had declined to 27%.
When the next downturn arrives, how will the funds bridge the unfunded gap? Increasing employer contributions? Decreasing pension obligations? Or a combination of both?
One thing is for certain: The available options will lead to deflation. Just like subprime lending, this is a mathematical problem working its way to a disastrous solution. And, as Vern says, it’s being officially denied as a problem.
On Tuesday and Wednesday, Jason’s mind was on gold. Specifically, he wondered whether the next reserve currency will be backed by gold.
At the Mines and Money conference he attended in Hong Kong last week, most experts agreed that it would. The consensus was that China is underreporting its bullion stockpiles, and will back its currency with gold.
On top of geopolitical uncertainty, and the global economy drowning in debt, it seems that politicians are trying to distract the public from their problems by starting a global war.
Gold will benefit whatever happens, says Jason. Not only should it outperform during times of global uncertainty, but it should become a safe-haven during times of war as well. For these reasons and more, Jason’s recommending investors turn their attention to these particular stocks on the ASX.
On Thursday, Callum reported on an industry being dismembered right before our eyes. Real estate agencies are coming under heavy pressure from start-ups cutting out the middlemen altogether. But while traditional agents are feeling the heat, the market remains in good shape, according to Callum.
As he sees it, the changes suggest that the industry still has plenty of demand. For this reason, Callum doesn’t see a housing crash anytime soon. For more on this story, click here.
Finally, before we leave you, a reminder to tune into this week’s Financial Anarchist podcast. This week, Strategic Intelligence, Currency Wars Trader and Gold Stock Trader Editor Shae Russell joined Dan to discuss the punishment Aussie savers are being put through.
In this week’s episode:
What the ‘War on Cash’ really means…
Why savers are being led to the ‘digital slaughter pens’…
Why the Reserve Bank is afraid to raise interest rates…
How the housing boom is making problems in the wider economy…
And much more…
Until next week,
For Markets & Money