A realty check for accessing super early

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When it comes to the basics of life the issue of finding shelter - putting a roof over one's head – ranks high on most people's list.

So as the dream of home ownership continues to recede further into the financial distance for younger Australians in our major cities it is not surprising that the public debate about levels of housing affordability is increasing in volume.

Australians have an ingrained faith in property – both on the shelter front and as an investment.

Residential property is like other investment markets and it moves in cycles and it is strongly influenced by things like interest rate rises or jumps in unemployment but convincing younger Australians that property prices may fall in the future is one of the great communication challenges of our time.

Today we are living in a record low interest rate environment. That – as someone who had their first mortgage application rejected at a time of 16% variable rates – has not always been the case nor can it be relied on to stay that way forever.

The economics of supply and demand will play out over time particularly as house price growth outpaces household income levels and we are already hearing warnings about oversupply particularly in apartment markets in Melbourne and Sydney.

This is not to dismiss the need for a public debate on the issue of housing affordability. Clearly that is a significant social issue and a key challenge facing our state and federal political leaders.

It also impacts different parts of our community in different ways – there is the obvious challenge to the aspiring new home buyer but increasingly it can also involve parents providing loans or guarantees to enable children to enter the property market.

It is also not surprising that when housing affordability is being discussed alternative funding solutions are often raised. Recently the idea of allowing access to superannuation accounts to help finance house purchases has again surfaced.

In investing, as in life, it is all about trade-offs. The appeal of allowing part of your super balance to be used to buy a home is understandable. For a start as a younger person your super is locked away for what seems a long, long time. So being able to access it to do something useful and personally beneficial right now is instantly appealing.

The immediate risk is that markets will adjust accordingly and all you will achieve is artificially inflating house prices to allow for the additional loan from the super account. Beneficiaries are more likely to be the sales agents courtesy of the commission structures in the industry rather than new home buyers.

But the longer term risk is that by taking a lump sum out of the super account investors will lose the impact of compound earnings over several decades. You do not have to be much of a mathematician to work out that your retirement account balance will be significantly lower than it otherwise would be.

Independent consulting firm Rice Warner modelled the impact on a fund member aged 35 who is earning average wages and takes $100,000 out of their super account to use as a housing deposit.

The loss of compounding investment earnings over many years would dramatically affect the young member's retirement balance. Rice Warner calculates that allowing someone to withdraw $100,000 from their super account would mean the federal government would have to pay them an additional $92,000 in age pension.

What is often not well understood is that the investment earnings usually represents a larger component of the retirement benefit than your contributions.

So a short-term solution on housing could mean long term pain on retirement savings.

Written by Robin Bowerman, Head of Market Strategy and Communications at Vanguard.

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