NEW POLICY! First Home Buyers - Pay Attention

There could be two new policies that get introduced by the government that would absolutely destroy the housing market.

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I'm not saying “destroy” because prices are going to collapse.

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I'm saying the opposite is going to happen, and I don't think it's actually a good thing as they could dramatically affect property prices over the next 5 to 10 years, affecting both property values and rental rates.

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So, if you're interested in what my thoughts are around these two policies, and what it could mean for you when it comes to property prices, then definitely keep reading…

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First Policy: Super for Home Purchase

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You may remember me discussing buying properties in your Super through a self-managed super fund. 

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However, this first policy is a little different. It is not about investing in your Super and something you can't touch for a couple of years, but actually being able to extract money out of your Super to buy your first home.

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You may be sitting there and saying: “Hey, this seems like a really good idea because I'm young and I want to buy a place. But, I can't touch my super for another 40 years. Let me go and listen to the rest of this.”

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However, before you get too excited, there's going to be some cons. So, let's just assess exactly what they're proposing, what it could mean and then I'll give you my thoughts.

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Accessing Super for Home Purchase

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The Coalition has amped up its push to let Australians use Super to buy a home despite modelling, showing the proposal could cost the government up to $2.5 billion a year by the end of the decade.

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First home buyers would be able to withdraw their entire Super balance for a deposit under the recommendation from a coalition-dominated senate committee, with its interim report, also canvassing: Withdrawal caps of $100,000 or $150,000.

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According to Deloitte modeling for the super industry, letting Australians buy their first home with superannuation funded deposits, would blow a hole of up to:

• $2.5 billion a year in the budget by the end of the decade.

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Deloitte also found that a couple of two 30-year-olds who withdrew $35,000 each from their super, COULD retire with about:

•  $195,000 less in today's dollars.

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Such a couple could be expected to receive:

• $3,270 more a year from the Aged pension; and 
• This $88,400 to the budget over their lifetime.

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The proposals go further than the Coalition's 2022 policy of permitting withdrawals of up to: $50,000.

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They are the clearest indication yet of the opposition's housing policy direction, after Guardian Australia in March revealed the proposed expansion of super for housing. Labour members of the committee in their dissenting response to Thursday's report, said that:

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"An expanded super for housing policy would reduce Australian savings and lock younger workers out of the market.....‍The policy fails by encouraging first home buyers to empty their super, lose compound returns and retire with less savings,” they wrote.

‍“Younger—and low and moderate income—first home buyers…don't have enough super to use for a deposit anyway.”

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What this means is that the Coalition is suggesting that:

• We should allow people to use their super;
• To bring it out; and
• Be able to go and purchase their first home. 

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Now, there are a couple of pros and cons to consider. While they may be obvious to some, for others, they are not so much and there might be something you miss here, so keep reading.

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Pros of Using Super for Home Purchase 

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Number 1 Pro: Purchase a Home in Your Own Name

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You can purchase a home in your own name and say:  “Okay, I don't have to pay rent anymore. It doesn't affect my savings, because now I've got my own property and I funded the deposit through my super, so it hasn't really touched my savings balance. It is a win-win.”

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Number 2 Pro: Compound That Growth in Your Property

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Another benefit is that you can compound that growth in your property, which could help you:

• Build a property portfolio; and 
• Retire on your own terms before you could even touch the pension or rely on your super. 

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Cons of Using Super for Home Purchase

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Number 1 Con: Buy Your First Home and Do Nothing With it

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The first drawback here is that most people will purchase their first home and then do nothing with it. Consequently, when they reach the age of 65 and rely on their super balance, they discover that it's either:

• They’ve got nothing in there; or 
• A large portion that should be in there is no longer there. 

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The latter occurs because they withdrew funds earlier, preventing them from compounding in growth, as highlighted in the modeling. In effect, that would then put further pressure on the government to have the age pension kick up higher.

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As we all know, inflation is going to continue being a problem in cycles over the next 30 to 40 years. So you then have the government having to fund more in terms of pension, which means more fake money comes into the system, and then we have everything going up in the cost of living crisis.

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Number 2 Con: Not Having Enough in Super Account

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Some people may actually be able to do this, which is great for those people, 

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But what about if you don't have enough in your super account?

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We already know house prices have hit an all-time high this year, and that's going to continue.  When you suddenly have people being able to take out money from their super and buy more real estate, this will put further demand on a housing market that has a full-on supply crunch. We simply cannot construct enough homes. 

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Consequently, homeowners benefit as prices rise, which they view as positive. However, for young individuals intending to utilise their superannuation for a house deposit, insufficient funds may pose a barrier.

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So, you are now stuck in a position where prices are going up even faster than before. 

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Yes! you can access your super, BUT you probably don't have enough in your 20s and 30s. 

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Now the whole system has screwed you over, leading to further pressure on rents because investment properties allow for an extra home to be rented, which means: More supply in rental stock.

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However, with an influx of buyers entering the market, purchases will likely be made from:

• Owner-occupiers; and 
• Investors. 

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While transactions between owner-occupiers may not significantly impact the rental market, purchases from investors reduce available rental properties. This contributes to upward pressure on rental prices.

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But what happens if someone is buying from an investor? 

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Suddenly, an owner-occupier purchasing an investment property removes one rental unit from the market, driving rental prices upward. 

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Now, you can start seeing the flaws in proposing such measures, as there are inevitably winners and losers in any policy. Despite these challenges, individuals must strive to optimise their circumstances.

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However, considering the existing concerns regarding supply shortages and acknowledging the economic challenges because some people decided to "kick the can down the road,” effectively, we are trying to do the same thing. 

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This perpetuates pressure on young individuals attempting to enter the property market, both in the short and long term.

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2nd Policy: Wiping Off Your HECS

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Now, the second policy that's also being suggested, which honestly leaves me scratching my head as to how and who came up with these ideas is wiping off your HECS.

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Yes, you currently have HECS, and you're thinking it's fantastic—you don't have to pay for your education, it's essentially free. 

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It might seem like an absolute Ponzi scheme, but let's delve into it. The federal government plans to slash approximately: $3 billion in student debts 

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By implementing a crucial change to the HECS and HELP programs. This change reverses last year's horror indexation hike, resulting in: A $1,200 saving for the average person.

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This measure, outlined in this month's federal budget, will guarantee that student debts cannot exceed wage growth in the future. It achieves this by capping the indexation rate for HECS and HELP loans, tying them to whichever is lower between the Consumer Price Index (CPI) or the Wage Price Index (WPI).

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The change, which requires legislation, would be retrospective and backdated to 1st June 2023. This effectively reverses last year's indexation rate of: 7.1%

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Which was the highest in more than a decade. This measure caused many loans to grow faster than Australians could pay them off.

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About 3 million Australians hold student loans, with an average debt of: $26,500

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This measure would cut approximately: $1,200 

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From their outstanding HECS/HELP debt this year, students with a loan of $50,000, would see their debt reduced by: $2,245

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While those with a loan of $100,000 would save: $4,485

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Now, initially, when I read the headline, I thought they were going to wipe out all of HECS debt altogether and I thought that would actually be really bad.  The reason is because if you wiped out all of the people's debts, when it came to HECS, it could do the following:

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A. Affects property

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The main way is that once HECS is removed, your borrowing capacity actually increases by a lot. It doesn't really matter how much HECS you have, it's the fact that you have it or don't. For example: 

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You have two borrowers. One borrower is named Brian, the other is Samatha. 

• Brian wants a loan but his HECS debt is $50,000.

• Samantha's HECS debt is $22,000.

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The banks still see them in the same exact way. They think that: “Well, you still have HECS. You are still going to have a portion of your income going towards that debt,” which means we're going to see it the exact same way. 

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Now, the only difference is Samantha might be in a position where she could just go and wipe out the $22,000 and suddenly she's debt free when it comes to HECS. That, in turn, then leads to: A higher income which the bank uses for the borrowing capacity.

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Now, that could still happen in a case where some people may be:

• Able to save a little bit more; and 
• Able to pay off their debt when it comes to HECS. 

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This allows their borrowing capacity to increase and come back into the market. However, what this is suggesting is: “No, they're not wiping out the entire debt that people have when it comes to HECS, it's just wiping out what happened last year.”

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We obviously had high levels of inflation, but we didn't have wage growth in that time so people were going backwards by having this indexation so high.

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While this sounds great, it almost feels like it's a “nothing burger.” The reason I say that is because:

If you've got $50,000 worth of HECS, $2,000 isn't going to change your life.

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It’s one year's worth of indexation and I feel like a lot of the policies and suggestions that we're about to see are all targeting young people.

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People like yourself are mainly affected by what's happening in the economy and don't get this wrong! The only reason we're in this position is because: The government got involved.

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I always say that it's a free market and it should be treated like one. However, housing is something that they just don't want to let go of.

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In 2020, I said that the government probably shouldn't go and print all this money. We should let the natural course of events play out.

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Yes, that may have caused us to go into a recession. 

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But if we don't do that now, the problem will be bigger in a couple of years. Does it not feel like the problem is so massive now compared to where we were in 2019 or even 2020?

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I know we were locked down in homes, but it just feels like:

• It is so much more difficult now as we all make more money;
• The cost of living crisis is so bad;
• Rents are high; and
• Property prices are even higher and it feels like we're not getting ahead.

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So, I hope you guys have learned a lot from this article. 

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I’ll catch you all in the next one!

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Thanks everyone!

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