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10 reasons owning your home beats super in retirement

Owning a home - with its tax-free status, exclusion from social security tests and spectacular price rises - has paid off handsomely for nearly every household over the long term. While the superannuation industry implores members to put as much as possible into retirement savings, it is better to buy a home, especially for retirement. Owning a home is as much a lifestyle, security and self-determination decision as it is financial, and most Australians are willing to borrow to the hilt to join the party. The leverage has driven significant wealth creation, and the same people would never dream of borrowing such large amounts to buy shares.

In a speech to the National Press Club on 5 April 2023, Reserve Bank Governor Philip Lowe said:

“The price of land is high because of the choices we made as a society, where to live, how to tax housing and how to invest in transport.”

Successive governments have upheld policies making it highly attractive to own our homes, and it's unlikely to change. Over time, Australians have spent an increasing proportion of disposable income on housing, and the willingness to lock into 30-year mortgages sustains prices. Unfortunately, more people than ever cannot afford their own home, and it's made more difficult for them by deposits and income locked in superannuation.

Residential real estate in Australia is overwhelmingly owned by individuals rather than institutions and accounts for most personal wealth. Here are the market sizes:

  • Residential real estate, $9.3 trillion
  • Australian listed securities, $2.8 trillion
  • Superannuation assets, $3.4 trillion
  • Commercial real estate, $1.3 trillion

But this article is not about the merits of investing in residential real estate generally. It focusses on owning a home. If anyone with sufficient resources has the choice between owning their home and putting more money into superannuation, the case for the home is strong.

1. Ability to ignore market volatility

“Stocks provide you minute-to-minute valuations for your holdings whereas I have yet to see a quotation for either my farm or the New York real estate ... if a moody fellow with a farm bordering my property yelled out a price every day to me at which he would either buy my farm or sell me his – and those prices varied widely over short periods of time depending on his mental state – how in the world could I be other than benefited by his erratic behaviour? If his daily shout-out was ridiculously low, and I had some spare cash, I would buy his farm. If the number he yelled was absurdly high, I could either sell to him or just go on farming.”

- Warren Buffett.

Given that the long-term returns from residential property are almost the same as returns from investing in local shares, as shown below, why are far more Australians willing to borrow to their maximum potential to buy a home? There are easy ways to gear into shares (geared ETFs, geared managed funds, margin lending, warrants, etc) but the daily mark-to-market of the portfolio is too painful for most to handle. Fortunately, when it comes to a home, despite what Warren Buffett says, nobody stands over the fence of a property and yells out a bid or offer each day. Homeowners hang on and benefit from long-term gains.

Source: AMP

Buyers of their own home have considerable risk tolerance because they think of it as their home first and a long-term investment second, and they are confident that over time, it will increase in value. Losses are not felt as long as mortgage payments can be sustained, and owners do not panic when the headlines scream 'Sharemarket loses $60 billion in a day' even if residential property prices fall 10% in a year, as they did to March 2023.

From 10am to 4pm every weekday except public holidays, the Australian stockmarket marks a portfolio’s scorecard. It tells investors how well or badly they are doing and drives much of the short-term mentality that plagues equity investors. Many equity investors do worse than the index because they buy when markets are high on confidence and sell when markets are low on doom. Research by DALBAR shows investor behaviour drives returns, with their 30-year data indicating the average investor in the US S&P500 achieved 7.13% while the index delivered 10.65%.

2. Australia’s short-term market and rental stress

My wife and I are friends with a couple in their forties who have two primary school children. We met them a few years ago when they lived near us. Their two-bedroom apartment was modest but within their budget, and the school was nearby. Then the landlord told them he was selling the apartment and gave them a month to leave. Stressed and desperate, they eventually found another affordable place but not with good transport, so they moved the kids to a closer school. This apartment leaked and as soon as the 12-month lease was up, they moved again. Overwhelmed by their nomadic existence, they bought a townhouse in the property boom of 2021 after watching prices spiral painfully upwards while they rented. 

Contrast this with 1985 when I was working in Switzerland, and a Senior Vice President from Swiss Bank Corporation invited my wife and me to dinner. He proudly showed us around his grand home, including his books filling a library. A big oil tank in the basement to fuel the heating sticks in my mind. I asked him how long the house had been in his family.

“Oh, we don’t own it,” he said, sounding surprised by my question. “We have a 30-year lease. Why would anyone want to put all their money into a single asset like a house?”

Anybody? Try most Australians. Renters here face the insecurity of short-term leases and the potential to return to the market before they have settled in.

The National Debt Helpline reports that rent is one of the two most-reported worries, and the Reserve Bank has noted that renter stress and affordability are worsening as rents outstrip CPI and renters bid against each other. The cost of renting has become the second-highest component of the CPI.

CPI rents versus advertised rents (2019=100)

3. Humiliating renting experiences

Senior superannuation industry professionals argue the merits of super then return each night to a comfortable home where they can knock a nail in the wall without a real estate agent berating them. 

Let’s put aside the financial aspects and consider what renting in retirement might look like. A 65-year-old is told to leave their home in a month, with the hassle of packing, storing contents, Saturday mornings inspecting new places, moving in, unpacking … and repeating all this a year later.

Here is what the landlord can do, according to NSW Fair Trading.

“A landlord, agent or authorised person acting on their behalf can generally only enter the property without the tenant’s consent if they provide notice to the tenant.”

Sounds fair, but what are these notice periods?

  • To inspect the property: 7 days’ notice, up to four inspections a year.
  • To assess for maintenance: 2 days’ notice.
  • To repair a smoke alarm: 1 hour's notice.

And on it goes. If the property is for sale, the tenant must allow access twice a week on 48 hours’ notice and be given reasonable opportunity to move belongings to avoid being videoed or photographed. Check if the bathroom is clean? Please come right in. Imagine someone coming into your home and demanding you move your stuff for a decent photo of your bedroom. 

It would take a lot of superannuation to want to go through that experience, then repeat it a year later when the landlord decides to up the rent by 50% or renovate the bathroom. No amount of admiring your superannuation balance compensates for being kicked out of your ‘home’.

4. More money needed by subsequent generations

Compulsory superannuation for most Australians was introduced in 1992, starting at 3% of salaries but escalating now to 10.5% on its way to 12%. In previous generations, much of this money would have gone into a home. 

In 2021, according to the latest ABS data, of the 9.8 million Australian households, 67% were homeowners, of which 32% did not have a mortgage and 35% did. Home ownership is highest among older people, at around 80%, as younger people struggle to find the required deposits and income. 


Click to enlarge

5. Housing shortages and greater competition for renters

Australia is facing a surge in population driven by high immigration levels, and at the same time, housing approvals are down. This chart from Westpac shows building approvals, and the vital number, 'Total dwellings', is down 31% from a year earlier.

The National Housing Finance and Investment Corporation (NHFIC) estimates Australia will face a shortage of 106,000 dwellings by 2027, with 1.8 million new households forming in the next decade. Fewer apartments are being built, as shown below from Urban Development Institute of Australia (UDIA). 

Thousands of building companies have collapsed in the last two years, and the most notable recent casualty, Porter Davis, left almost 2,000 homes unfinished.

According to CoreLogic, rents across Australia are 10.1% higher than a year ago, and vacancies are at record lows. Competition for scarce rental properties will only intensify in years to come as 650,000 migrants arrive over two years, with the biggest population rise in Australia's history at about 900,000. 

6. Better tax breaks for homes than non-concessional super

While superannuation is lauded for its tax advantages, the only savings vehicle with a lower marginal tax rate than an own home is pre-tax (concessional) super, which is limited to $27,500 a year. For people on lower incomes, the tax in super of 15% may be higher than their marginal tax rate.

The chart below from the Grattan Institute shows the tax advantages of owning a home.

7. Home ownership assumed in retirement standards

The most-commonly referenced amounts required to live a comfortable or modest lifestyle in retirement are the ASFA Standards.

What is often overlooked is the short explanation in the footnotes to the tables, which is not even mentioned in the document showing the detailed break up:

“Both budgets assume that the retirees own their own home outright and are relatively healthy.”

So even the Association of Superannuation Funds of Australia (ASFA), the body representing large super funds and industry service providers, assumes home ownership before advising members how much money they need to meet a given lifestyle.

8. Social security incentives

The Principal Place of Residence (PPR) is excluded from capital gains tax on personal income and from asset eligibility tests for age pension and other social security pensions. However, superannuation assets are included, which means a person with a large super balance may not qualify for social security and the related health and pensioner benefits, but another person with the same value of assets held in a PPR qualifies. The full age pension for a couple with supplements is $1,604 a fortnight or $41,704 a year. That’s an annual incentive to buy a house rather than put more into super.

There is a concession to home ownership in the assets test. For example, a homeowner couple is eligible for a maximum age pension when assets are $419,000 or less (excluding the value of the home) whereas a non-homeowner couple is allowed a higher level of $643,500.

The Government even issues a sort of warning not to sell the family home. How much more privileged can an asset be?

“Your family home, if you live in it, isn't counted as an asset. However, if you decide to sell, it could affect your pension.”

9. An alternative source of money to live on

The Home Equity Access Scheme (HEAS, formerly the Pension Loan Scheme) allows homeowners to use real estate as security to generate retirement income. There are also many commercial home equity access schemes which offer different characteristics.

We have discussed the HEAS previously and the full terms are described here. A few key features are:

  • The pension payment can be up to 150% of the maximum pension rate. That is $60,000 a year for a couple.
  • It is available to people who are not on a government pension.
  • There is a no negative equity guarantee, meaning the amount owed on the loan can never be greater than the market value of the property less any mortgage.
  • Lump sum advances are possible.

Loan payments are only required from the estate or when the property is sold, and the current interest rate is an attractive 3.95%, although this may increase.

10. The value of 'psychic income'

In a world where it's easy to know the price of everything and the value of nothing, living in your own home carries considerable non-financial rewards. Economists call it 'psychic income' when pleasant surroundings, safety, security and even prestige contribute to wellbeing in a way not measured in money terms.

Once on the property ladder, especially in a house with land, there is often potential to invest in the value of the asset for personal use and financial gain. Fix the bathroom, install a new kitchen, build a sunroom and extra bedroom on the back - these are all great ways to invest in an asset over time, improving surroundings and lifestyle as financial resources and time allow. Many Australians have renovated their way to financial freedom after a modest start. 

And here come some caveats ...

We could double the length of this article with qualifying statements, as every person is different. 

Yes, some landlords reward good tenants, maintain their properties and rollover  leases year to year.

Yes, new homeowners who bought at the peak in 2022 now face rising interest rates and mortgage stress. This article is not arguing everybody should own a home, as borrowers need the financial resources to service their debt.  

Yes, the case for the most tax-advantaged, concessional amounts up to $27,500 a year into super is stronger than the non-concessional contributions from after-tax resources.

But, but ...

Arguments about the right time to buy could be made at many times in the last 100 years. The home I bought in 1989 was worth less four years later in 1993 (after 'the recession we had to have') but we did not sell until 2020. Baby Boomers did not pay 11 times earnings for properties but interest rates were far higher.

Renting in Australia is not a pleasant experience for many people. It is made more frustrating by successive government policies that have encouraged home ownership to such an extent that younger generations are locked out of the opportunity that their parents and grandparents took for granted.

As Governor Lowe said, that's the unfortunate reality of the system we have created. It would be political suicide, for example, to tax capital gains on a family home or include the PPR in the assets test for the age pension. No government will go there. The advantages of home ownership are unlikely to disappear, and it's more important for financial plans to consider the journey to home ownership than how superannuation should be invested.

 

Graham Hand is Editor-At-Large at Firstlinks. This article is general information and does not consider the circumstances of any investor.

 

64 Comments
Jason
February 08, 2024

It is pretty tough. The main issue is conflicting policies at a local, state and federal level. Most councils run secret zero population growth policies to protect homeowners at the expense of renters and future residents. Even local business would prefer the renters without the development as more bottom level shopfronts would mean more competition for successful businesses. Anyway, the shop landlords are the main beneficiaries of a zero population growth policy, rather than the existing business owners.

In conflict of this is a federal government which sees Australia as a lifestyle superpower and can use the migration tap to turbocharge the economy (partly via the home appreciation wealth effect and tax on increased rents, suppress wages whilst maintaining a tax base, avoiding a recession and diluting debt.

The states are in the middle. They are short on tax revenue always (vertical fiscal deficit) and politically hamstrung in relation to imposing a land tax. The lack of revenue affects infrastructure building and the capacity to buy back privately owned real estate to stimulate developments. Even Perrottets feeble attempt to impose one was scuttled. Investor land taxes are simply too low.

There is a strong argument that all land value appreciation above CPI should be returned to the state government, or at least substantially taxed. The ACT has a betterment tax on uplift due to rezoning, infrastructure spend, as a means to manage corruption and generate revenue. Last time I was in Canberra I saw more cranes than in Sydney so the developers haven't fled the capital. I note that property investor consultants don't advise their clients to buy investment properties in Canberra, probably because of land tax. Land banking is pointless in the ACT whereas in Sydney it is huge considering all the decrepit buildings and empty blocks in high value areas near established transport infrastructure etc. If developers could just build that 30 story tower rather than the owner waiting for the zoning laws to trend more and more in their favour, Sydney would be a prettier, cheaper and more dynamic place.

Land appreciation after CPI is pure economic rent that shouldn't be privatised. Maybe someone can claim that they themselves have done something that has led to high land price appreciation, eg planted nice trees in their spartan community that attracted incomers. However, most with an eye on the bottom line will argue that they took the punt that they would profit from land scarcity, dysfunctional zoning policy and should be rewarded for that speculation, tax free. Examples of this dysfunction include only building low density housing where high density is needed, lack of infrastructure. Land banking.

I guess a hefty land tax is not a political reality, and even then their would be various grandfathering arrangements, concessions for pensioners. Maybe it could be recouped on an individuals death? A deferred estate tax.

One last thing is that governments tend to argue that leaving renters to deal with the free market is in their best interests (RBA also argues this). However, they never argue (although the RBA does) that property owners should also be left to the free market. Sure, you pay market value for a property but then rely on NIMBYism and council zero population growth policies to ensure scarcity in the market. What if the housing system was deregulated? In other words you can build what you want on your land, or more likely sell it to a developer who can respond to the market? A big problem with this is transport. People want private cars but as our cities get denser it is simply not a freedom that can be supported. Parking in big apartment towers needs to be curtailed to a few share cars only. Scared of noise? Place decibel limits on vehicles and introduce trading hours. Build with better materials.

Of course a Utopian Georgist dream

BTW more than 50 percent of marriages end in divorce so does that mean all parents wanting to help their kids into the property market should get legal advice to protect their prodigy? The trick might be to help your child without strings attached if grandkids come along. At least then you can help yourself by financially helping the "unworthy" spouse with less "generous" parents maintain a relationship with your child's children in case of divorce.

Brian Hor
April 14, 2023

Great article. If I may add to all these arguments on both sides, all I can say is that after doing estate plans for thousands of clients over 30 years ranging from "ordinary" couples with kids and age pensioners on one hand, to billionaires on the other, in practice owning your home trumps super EVERY TIME.

Mark Hayden
April 11, 2023

Graham, with all due respects, that appears to have been written by a short-term focused journalist. Lawyers consider the opposing view. Also there are two “cases” to address. Super is a tax vehicle. Shares are an asset. Super vs the family home needs to consider the Government incentives to both. Clearly governments do not want house prices falling but they will also incentivise savings to off-set age pension liabilities. Shares vs houses as investment assets needs to consider returns over long term periods. Some of your analysis addressed periods when interest rates solely decreased.

Graham Hand
April 11, 2023

So Mark, an article that quotes 100 years of data and other evidence over 40 years is written by a 'short-term focused journalist'. Yet you say 'Shares vs houses as investment assets needs to consider returns over long term periods' which is exactly what the article does.

Jake
April 10, 2023

Nice article - I wonder if the holds true for Gen Z?

Ken
April 10, 2023

What this article and most of the comments overlook is the fundamental distinction between value and price. The value of housing is that it provides shelter - a basic human right - and I suggest that our biggest social policy failure in Australia is that we have turned housing into an investment category.

I bought my house nearly 50 years ago for $28,000 but if I put it on the market today it would probably fetch $1 million. But how has that helped me? If it was still "worth" only $28,000 it would make no difference to me because my house has provided me with what I bought it for: a place to live, a roof over my head, somewhere to bring up a family, an anchor into the local community. I bought it for these reasons and it has delivered in spades; the increase in market value is immaterial because if I sold, the purchase price of anything else I bought would also have increased so where's the benefit?

James
April 11, 2023

" the increase in market value is immaterial because if I sold, the purchase price of anything else I bought would also have increased so where's the benefit?"

You now own a CGT free, reasonably inflation proof, valuable asset that if required you can sell and downsize, or pay for a deposit in aged care or borrow against it as a reverse mortgage for greater income in retirement should it be required. You have options that some don not have!

Alex
April 15, 2023

The value of CGT exemption in this context is questionable once you take into account all the money you spend on interests and other outgoings associated with owning your primary place of residence.
Also, borrowing against a house (by way of reverse mortgage) for "greater income" is a highly misguided statement - since when "borrowing money" is synonymous with "generating income"? They are fundamentally different things.

RickD
April 10, 2023

Question: When a real estate agent tells me that property in a suburb I have interest in purchasing in has gone up 50% in the past ten years, how would they be determining that? Could it be the average sale price in that suburb 10 years ago compared to today? If so, how are varying forms of capital improvements by individuals accounted for in the rise in value.

Andrew
April 09, 2023

What do shareholders spend over and above what they paid for their stocks on improvements to their asset?

What do households spend on renovations, maintenance and improvements?

Can you really compare?

Dudley
April 09, 2023

Renovations and improvements are capital investment - like buying more shares.
Depreciation / Maintenance is non-capital - like income (including capital gains) tax on shares.

Owners pay no tax on imputed rent (equivalent market value) - like tax free share income.

To compare for homes and shares calculate:
= internal rate of return (Closing value - Opening value + income - expenses)

To lessen sensitivity to first opening and last closing values, statistical regression over multiple periods (eg yearly, quarterly, ...) can estimate the growth rate.

Trevor
April 08, 2023

You say: “a place of security, of wellbeing, of lifestyle. It's a place to call home, owning not renting. If there is one thing that beats super hands down in retirement, it is owning a home, a place to rest your head without the fear of a landlord throwing you out. In super, we develop strategies on asset allocation and portfolio construction, but greater focus is needed in financial planning on the route to owning a home."
.
Yep. Agree wholeheartedly with you! BUT..."without the fear of a landlord throwing you out." rings rather hollow to me !

If you don’t pay your rates to the council then they can sell your property right out from under you! "In August last year Lismore City Council (LCC) announced that 15 properties would be sold at auction to recover unpaid rates, some with overdue rates of up to $42,000."

So real estate and home security can be an illusion unless you can afford to pay your rates on time. So you had better "factor having sufficient cash" into the retirement equation as well .

Dudley
April 08, 2023

"pay your rates on time" ... ""factor having sufficient cash" into the retirement":

Age Pension. Don't be without home when eligible. Oodles of income for pensioner discounted rates.

Alex
April 09, 2023

Spot on Trevor. In other words, home ownership is contingent on the "owner" being able to meet their financial obligations (e.g. rates, body corporate, etc.) to parties who are not even named in the title, even if the mortgage is fully paid off. Interestingly not many people realise this.

Mark
April 08, 2023

I'm 55 and still rent and it was the best financial decision I made after my divorce and the ex got the house.

S2H
April 08, 2023

I don't know if it's just me, but does one else think it is obscene that a country with one of the lowest population densities in the world has seen residential real estate return 10.8% pa over a period of 100 years? That's a shameful reflection on local councils, state and territory governments, and the federal government who have consistently buggered up the supply side and decided to throw fuel on the demand side.

Economist
April 08, 2023

I think it's just you, S2H. I don't have a problem with the net wealth of our country being improved by a thriving economy that people want to migrate to. The supply side could have been managed better in recent years for sure, but it wasn't an issue for most of the 100 years as urban sprawl dominated.
Nothing obscene here that I can see.

S2H
April 08, 2023

Fair enough. Personally I think the return of an asset should be based on its risk premium, and it makes absolutely zero sense that residential real estate returns should be in the realm of equities. I'm also not sure how sustainable our 'net wealth' is when most of it is parked in a single highly-levered asset that seems to have no correlation to household income.

Alex
April 10, 2023

Just because you can't see the problem, doesn't mean it doesn't exist. The problem with house prices is not just a supply issue. The demand for it has been grossly over-inflated not just by migration, but also by the decreasing cost of borrowing in the last couple of decades (and not to mention, this country's unhealthy obsession for real estate). In any case, you are mistaken if you think that the increasing property price is a reflection of a greater net wealth of this country - no great economy is built by shifting rocks or buying/selling real estate.

Jake
April 10, 2023

An economist who celebrates investment in unproductive sectors like housing, rather than productive ones. Only in Australia, eh. Not the only cheerleader though - almost every economist here seems to hold a similar view. No wonder productivity has been in the doldrums for a decade and counting.

Economist
April 12, 2023

Love the way folk take a short comment on a specific topic and turn it into a 'celebration' of something.

But of course I celebrate the expansion of home ownership in Australia, driven by migration. People wanted to come here and play a part in our 20th century expansion - why shouldn't that be celebrated. Those people, and their growing families needed to be housed, so we invested in that housing. What's wrong with that? As PART of an overall functioning economy what would you rather have happened? All those new workers living in shanty towns?

And lower interest rates because we got inflation under control is a problem? Nah, not in the economics I studied.

For goodness' sake, people, all I was saying was it's not obscene that house prices have done bloody well! And it's not!

James
April 12, 2023

@Economist: "But of course I celebrate the expansion of home ownership in Australia, driven by migration. "

Many of our young already can't afford to buy a house. Too much demand, insufficient supply (as well as other policy/investment causes). Builders going broke and a long wait list for social and affordable housing! Available rentals limited and costs sky high. Yet massively increased immigration helps this, how? Surely largely increased demand with little capacity to increase supply!

" I don't have a problem with the net wealth of our country being improved by a thriving economy that people want to migrate to"

But is it? Net wealth per capita is not improving! The governments immigration smoke and mirror/sleight of hand Ponzi scheme creates that illusion. As for a thriving economy, well that's debatable and very subjective!

Economist
April 13, 2023

James

This article and my comments are about a much longer time frame than you seem to have in mind.

The issues you raise are relevant but the question of affordability for younger people is not the result of long run successes. It's the result of shorter run failures. Not what either the article nor my comments was talking about.

Alex
April 13, 2023

"Lower interest rates because we got inflation under control...." is a misguided statement, considering the low interest rate has artificially inflated house prices. I guess the "economics you studied" is too narrow-sighted. "all I was saying was it's not obscene that house prices have done bloody well! And it's not!" - Price is just a function of demand and supply. An increasing price isn't necessarily a reflection of something "doing well". In this case, the increase in house prices is the result of government's heavy intervention on the demand side (in addition to the decreasing interest rate and Australia's obsession with real estate).

Dudley
April 07, 2023

"Grattan Institute": Graph has substantial errors.

The tax rate on domestic share gross dividends is the share holder's marginal tax rate and tax rate on long term capital gains is half the shareholder's marginal tax rate.
Grattan's graph shows a 45% marginal tax payer paying 45% on 'Foreign equities' and 20% on 'Domestic equities'.

The tax rate on imputed rent (rent that owner 'pays themselves' equivalent to market rent) is the owner's marginal tax rate. The owner does not pay such a tax so pays a 'negative tax'.
Grattan's graph shows 0% tax on 'Own home' whereas shows -45% tax on 'Super pre-tax'.

Grattan's graph terms 'Super pre-tax' and 'Super post-tax' are peculiar.

AlanB
April 07, 2023

"Renting in Australia is not a pleasant experience for many people."
True, but I enjoyed the youthful freedom of a group house. Oh, the stories I could tell. Later, I rented out my single property investment and that was definitely not a pleasant experience. Tenants damaged the property, delayed then stopped paying rent and had to be evicted. So I sold the rental property and invested in shares, which came with the advantage of no tenants, no land tax, no agents and no abuse. Rental availability will fall and rents will rise if private investors switch from housing investments to the easier and more attractive alternative of shares.
I agree home ownership is a priority over super. My question is what is the best way to help your son/daughter into a home, while protecting the funds you give from a relationship split? Maybe deserving of a separate article.

George B
April 07, 2023

"My question is what is the best way to help your son/daughter into a home, while protecting the funds you give from a relationship split?"
Easy, instead of gifting money make it a documented loan instead repayable on demand (with interest?). The loan may be called in at any time including following a relationship split.

AlanB
April 08, 2023

Thanks George B. I plan to get legal advice on a future home deposit loan/gift from myself to a son/daughter, but was wondering what the experiences were with such an arrangement and how robust when tested. I suppose it has to be a loan to both partners (so they are jointly liable), but what has happened if the other party refuses to agree to the arrrangment, or to comply with a call-in? If parents are going to give funds to help a child into home ownership they don't want those funds lost on the high chance of a relationship split.

M Taylor
April 10, 2023

We did the loan and lodged it as a second mortgage.

Lainie
April 10, 2023

Give the child a mortgage, or a second mortgage, with a zero or low interest rate. Have it professionally drawn up.

Then if the house is sold on a marriage split, the amount of the mortgage is indisputably yours.

Please note I am not a lawyer and this is not financial advice.

I had a family experience of this, many years ago in the UK. An uncle had built a new house for himself and his wife, so he gave his old house to his newlywed daughter and her husband. The marriage lasted less than a year. The husband ran off with his boss, leaving my cousin with a new baby, and he insisted the house was sold and he got his half of the proceeds. My uncle was quite upset about it at the time, and always carried a grudge over it. Justifiably, but grudges and vindictiveness tend to eat away at your soul. It ended slightly more happily, as my cousin married the deserted husband of the boss, who was a really caring and principled man, they had a child, and they lived happily ever after with the two boys in a lovely home on the waterfront.

Mic Smith
April 07, 2023

Neither Super or a home pays the outsized returns like investing in yourself. If you are a tradie get a ute and good tools so you can efficiently do weekend work. (Big cash money in this) If you are a clerk, do night study and learn to be an accountant. If you are scared of public speaking and need to, do a public speaking course If you have a business with potential, invest in it. And remember good old Mr McCawber, and save more than you spend. Do all the above.

Charles
April 06, 2023

And I will add an 11th reason. The super rules keep changing. There must have been dozens of changes since I started putting money away. It's meant to be a long-term savings vehicle for long-term planning, and then every new government has other ideas.

Taxy
April 07, 2023

Yet it is still (by far) the most tax advantaged vehicle for saving toward one's retirement... Go figure... A purpose built vehicle that does what it is designed to do... In fact, it is doing so well that people are saving TOO much (according to Government).

CC
April 08, 2023

"people" are not saving too much in Super. The average Super balance for a current 60 year old is less than 400K. It's only a very small percentage of the population with 3 million in Super

Greg
April 06, 2023

House first, super second. I am surprised that young people do not grab onto this concept. It is morally corrupt to force young people to put 10.5%, increasing to 12.0%, of their salary into super when they do not have a home. If there is to be forced saving it should be for a home first.

Alex
April 07, 2023

If you go with house first, you'll likely end up being forced to be paying off your mortgage before investing for your retirement - and paying off mortgage on brick and mortar isn't synonymous with 'saving'.

Lyn
April 12, 2023

Hi Alex, loan at 22 as 'enforced saving' was a set of training wheels, learned OK for small treat even if a tin of paint for cheapest dump... to young readers, a dumpy rung on ladder not to be missed, it generates free funtime. Friday 3 piles(cash pay): loan, food, bills, every Mon. to bank to pay loan, said couldn't weekly, insisted as scared would spend so a lesson in how fast interest reduced. Little wonder crusty old bank manager not happy but he gave a chance, knowledge, a wry smile with shake of head every Monday and silently a plan for life.

Alex
April 14, 2023

@Lyn, thanks for your response but I stand by my statement that 'paying off debt' is not synonymous with 'enforced saving', even if the debt is used to purchase real estate.

Ian Saines
April 06, 2023

Graham - refreshing to see someone so well respected in the sector reinforcing the obvious truth that owning a home is easily a superior investment to superannuation. The self-interested resistance to the notion of withdrawing to own a home is really the great lie. If only more people were alive to the fact that owning a home IS superannuation.

Michael O'Hara
April 06, 2023

The argument is an old one.

Property 'wins', because of the continual and massive local, state and federal government subsidy pile-on. And worse - taxpayer subsidies are directed at demand, and not supply, which only exacerbates the supply/demand equation.

Property also 'wins' through blind acceptance of articles in theoretically informed media with headlines like.. "number of properties sold at a profit" - a profit which excludes all buying/selling and running costs? West Australians who have bought Perth property around 2014 will often sell below their purchase price - excluding all those costs. It genuinely does matter when you buy and sell, which is not a story you will read very often.

The promotion of property relies on the longer-term historical earnings which are the same as shares (subject to all the obvious caveats). Shares are sold as risky, but property prices fall by a few percentage points - from globally-recognised overheated price levels - and property is declared "a bargain". Yet the true bulk of return from residential property relates to gearing and a bank system whose statutory soundness is anchored on residential property. The clear and present risks of gearing are casually negated by these eternal suburban property myths. It really is a farce.

The article is correct in so many ways, but still represents a distortion of facts. Without the enduring taxpayer subsidy, much of the article's detail would be wrong. The fact that the subsidies are likely to continue doesn't alter the underlying risk of any government-supported industry. It just skews risk more subtly towards Black Swan event risk.

But the article is absolutely correct about the difficulties and traumas of renting vs owning from the perspective of a retiree couple. There is an emotional security of enormous value sitting in that home ownership. The 'system' is tilted to favour property ownership, which means higher risks from any strategy outside this bell-curve rump.

Australian wages have generally grown higher in real terms than our developed nation buddies. And that's with mandatory super. Super is not stopping property ownership. Property ownership is reducing simply because of excessive price escalation seeded by a generational bull run in falling interest rates and demand-creating taxpayer subsidy of the largest store of wealth in the country.

From a national point of view, we are yet again stoking demand (through immigration) without stoking supply. All subsidies are directed at demand - not supply. Why would anyone wonder about the current position and the likely continual entrenching of subsidies to tackle the wrong side of the property equation?

In retirement, property trumps superannuation (if you can't have both). But the advantage is based on a series of market distortions.

Andrew Smith
April 07, 2023

I concur, every media outlet in Oz is spruiking property nowadays while ignoring salient factors in support of property including LNP policies of past generation? However, it's framed for now, not the future and ignores demographic trends, not to forget the suboptimal data and analysis in Australia of property* (vs. shares) inc. purchase costs and real value over time.... presumes policy settings will remain the same (*much data described as 'real value' but ignores most property holding costs ex. CPI). Australia's working age passed the working age 'demographic sweet spot' pre Covid, baby boomer bubble is in transition to or in retirement, our supposed 'high immigration' &/or population growth is due more to temporary churn over (caught under the NOM border movements), not permanent migration (declined in proportional terms). This is reflected in increasing 'Old Age Dependency' ratio that also highlights the need to protect budgets to protect services inc. means tested pensions for more retirees and oldies. https://data.oecd.org/chart/72oV Australia - OECD (2023), Old-age dependency ratio (indicator). doi: 10.1787/e0255c98-en (Accessed on 06 April 2023) House median values have stagnated if applying the 7% discount rate i.e. the headline price should double every decade, but 2010-2020 it didn't (using RE data), FIRE media rely upon indirect (PR) indicators provided by the sector and many apartment developments in CBDs &/or inner suburbs are off the public market? Think it would be a different narrative if there were neither direct or indirect subsidies, nor stoked up sentiments for property ownership, very Anglosphere thing.

Dudley
April 06, 2023

"more people than ever cannot afford their own home, and it's made more difficult for them by deposits":

Small real interest rates result in large prices and slow savings compounding making cash-on-the-knocker purchasing more difficult.

Ideal is large real interest rates while saving and small real interest rates when owning and selling.

The individual's clock is not synchronised to the market clock: birthday lottery.

Joost Daalder
April 06, 2023

I find this whole approach of "either super or a home" quite ludicrous. Most people obviously need both! The problem with the new approach is that it limits super. Indeed, Australians will most likely now spend yet more on houses, and "use up" super more quickly. That would be just the wrong way round.

Mark
April 06, 2023

No one is being stopped from having more than $3M in Superannuation. Just some of the favourable tax treatment for amounts over that amount. One can also save and invest outside the Superannuation system.

There is simply no hindrance to be wealthy if you are in a position to become wealthy.

David Wells
April 09, 2023

I certainly don’t fall into the $3m category but it is obviously impossible to acquire that amount when limited to $27,000per year. So these people would have already paid a substantial tax when depositing these funds
Or am I missing something

Dudley
April 09, 2023

"missing": May have capital outside super to drawdown to make maximum concessional an non-concessional contributions plus nice returns on capital within super: = NPER(10%, (1 - 15%) * -27500 + -110000, 0, 3000000) = 12.36 y. "paid a substantial tax": If have no capital outside super, to pay maximum contributions and minimum expenses in minimum time, then need: Net income / y: >= 27500 + 110000 + 20000 >= 157,500 Gross income / y: >= $217,438 ( https://paycalculator.com.au/ ) Tax / y: = $59,937.86

Mark
April 09, 2023

@David Wells, I disagree that it is impossible now to get a balance of $3M+ in ones Superannuation.

Certainly harder but not impossible, age would play a factor. I'm 55 and a factory worker and in the early years my Compulsory Super payment was only 3% and I have not contributed a lot to my Super above employer contributions. I am an in an industry fund too. I have a high balance because I took an interest in how my money was invested and took up the direct share option of my fund, studied the markets and trends and have outperformed the fund most years to achieve my balance. Starting out at 22 with 10% + contributions from employer and doing the same from now it would be easily achieved to do it again.

Another option for someone is when the do reach a decent level, go SMSF and invest in property directly. By the time you're 65 it would be not that hard to have amassed 3 properties in your Super.

Most people on the whole have either been lazy or ignorant of what could be potentially their greatest asset and just left it in set and forget mode with their fund and pay no need to it until suddenly they are 5 years from retirement and realising they don't have enough Superannuation.

Graham Hand
April 06, 2023

Well, Joost, 'ludicrous' is a strong word. And 'Most people need both'. Some people (increasing numbers rapidly) need to choose between the two, not everybody can have everything. Which is why I wrote about the super industry pushing for more in super: "It has been a disservice to anyone entering retirement who could have owned a home instead." If you have enough money for both, well done.

Sean
April 06, 2023

Probably need to include the cost of ownership in that return comparison chart. Cost of owning the ASX200 = 0.05% p.a. Cost of owning a house = 2% p.a (?). Insurance, maintenance etc etc is expensive and would be a significant drag on that return. Agree with most of the points made for owning a PPR although people invest into property and totally disregard the cost of owning a property. Got to keep the property Ponzi scheme going!

Alex
April 06, 2023

"The Home Equity Access Scheme (HEAS, formerly the Pension Loan Scheme) allows homeowners to use real estate as security to generate retirement income". Since when "borrowing money" (whether it's secured against real estate or not) is synonymous with "generating income"? If it is analogous with income, why would it attract interests?

Dudley
April 06, 2023

'synonymous with "generating income"': Isn't. Like withdrawal from Super isn't an 'income stream'. Synonymous with cash out, withdrawal, drawdown, disbursement.

Alex
April 06, 2023

You can own an asset that generate income in super (e.g. dividend paying shares). Of course withdrawal from super isn't an 'income stream', and that's not what I was referring to in my original comment.

Dudley
April 06, 2023

"when it comes to a home, despite what Warren Buffett says, nobody stands over the fence of a property and yells out a bid or offer each day.": A number of websites offer estimations including: https://www.domain.com.au/property-profile

Alex
April 06, 2023

Have you been colluding with Phil Lowe who put the scares into renters yesterday, calling it a crisis and rental stress is at least as big as mortgage stress. But he also warned that higher rents will mean higher inflation and higher rates. Which will mean landlords put up rents even more to cover the higher rates, leading to even higher rates. How does that solve anything? The cure is becoming worse than the disease.

DT
April 06, 2023

Hi, Over the seven years that I have been reading Cuffelinks/Firstlinks I recall a few articles on the subject of helping your children into the property market and how to avoid pitfalls in doing so.

I now need to find those articles, but have not had much success with the search function. I have tried a few search terms including “bank of mum and dad” but have yet to find anything like what I recall.

Any assistance would be greatly appreciated. BTW: keep up the good work; always enjoy Firstlinks each Thursday.

Lisa
April 06, 2023

I would also like to hear more about the pitfalls/advantages of giving my young adult kids a headstart. Very relevant at the moment with the rental crisis, high property prices and rising interest rates.

MW
April 06, 2023

I would also appreciate articles about what young adults starting out and their supportive parents can do to build toward a home and adequate super, please.

Dudley
April 07, 2023

"toward a home and adequate super":

Offer to show how to arithmetically model acquiring a home and retirement. Most would not be interested.

Geoff D
April 07, 2023

Lisa, if you can afford to help your adult children buy a home then do it. We helped by ours using some superannuation money and do not regret it one iota, particularly in relation to one son and his family in Brisbane. Because they own their property they can do what they like with it physically, subject to council regulations of course, whereas they couldn't with a rental property. Thus the cars and motor bikes in their backyard! And they don't have to worry about rent increases either! The greatest risk is a relationship breakdown for your child so you need to assess the risk and take the appropriate legal steps to protect your "investment" in your child. I say do it but do it carefully.

Geoff R
November 30, 2023

>I have tried a few search terms including “bank of mum and dad” but have yet to find anything like what I recall.

DT the easiest way is in Google search type:

site:firstlinks.com.au bank of mum and dad

that limits the search to the specific site and in my case gave "About 152 results (0.26 seconds)"

hope that helps

Leisa Bell
November 30, 2023

To DT, Lisa and others... Searching the tag "BoMaD" could help: https://www.firstlinks.com.au/tag/bomad

Mark
April 06, 2023

It wouldn't be political suicide to include the PPoR in the asset test for pension for houses over X limit. One only has to read comments on articles "taxing the rich". The majority of comments are along the lines, make them pay their share, tax the rich, so in time an asset test on the family home is not out of the question.

The governments own home equity release scheme could well turn out to be the thin edge of the wedge for making people with a house valued above X amount having to use some of that equity prior to getting a pension. The reality is we have pressures on the Federal Budget coming with the ageing population, don't rule out any possible measures to boost the budget with changes to taxation.

Of course, some are more likely than others but they may not be enough so further measures would be used.

The government are well aware the number of workers per retired persons is dropping. Wages are not growing as fast as in the past. High paying manufacturing jobs are disappearing, lower paid gig economy, service and hospitality jobs are becoming the norm.

As for buying a home, for me it has been financially more rewarding to have rented post divorce, still rent, and invest in my Superannuation.

I'm 55 and by the time I'm 60 and retire on my Superannuation, I'll pay cash for a house and have a substantial sum to live off. Far more than if I'd bought a house back then instead

Jim
April 09, 2023

I think it is a big assumption to suggest that the ‘family home’ will never figure in calculation of ‘asset tests’.
With notice and a reasonable exemption rate I think it would be electorally acceptable to most - and would potentially assist the housing shortage if larger homes were sold by aged occupants.
The problem would be selecting the lowest possible exemption rate - such that it would affect behaviour

Jack
April 06, 2023

Spot on. But how many people know if they buy a house with 10% deposit, and the market falls 10%, as it has, they do not lose 10%, they lose 100% of their capital. How would they react if they lost all of a share investment?

 

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