Meet the FHSSS! (First Home Super Saver Scheme)

Normally here at Little Hedge our articles focus on small cap research, however with the budget release last night there was some interest in understanding one of the new measures to support first home buyers.

We promise that our next stock idea is not far away, and we are really excited about putting forward our first research note covering one of our reader’s requests!

Hopefully you will still enjoy this more general article about the FHSSS. We may do more of these articles in the future, so please let us know if it is something you would like to see more of!

What is the FHSSS?

The First Home Super Saver Scheme (what a mouthful!) is a new initiative from the Federal Government unveiled in the 2017 budget last night. (check it out in full here!)

The FHSSS (fact sheet is available here) is designed to incentivise first home buyers to save for a house deposit. It does this by allowing the prospective first home buyer to make additional contributions to their superannuation account which can then be withdrawn as a deposit when purchasing their first home.

What the FHSSS is NOT

The FHSSS is not allowing first home buyers to dip into their existing superannuation savings to fund their first home purchase (contrary to much debate and speculation).

Under the FHSSS you are only allowed to withdraw funds from your super account generated via salary sacrificed super contributions (on top of the minimum 9.5%) that you make above and beyond your mandatory contributions.

The FHSSS will therefore not result in a net reduction in superannuation savings for participants (as withdrawals are only allowed from the extra contributions).

How does it work?

Voluntary contributions can be made via salary sacrifice from July 2017 and each first home buyer is eligible to salary sacrifice up to $15,000 per year (total eligible contributions are capped at $30,000 per first home buyer).

Contributions are taken out of pre-tax salary using a salary sacrifice arrangement with your employer and are taxed immediately at the normal superannuation contributions rate of 15%.

Withdrawals are then allowed from July 2018 in order to fund the purchase of a first home and are to be taxed at the individual’s marginal tax rate less a 30% offset (making withdrawals close to tax free for most individuals).

Earnings made from the superannuation investment can also be withdrawn, however these earnings are strangely calculated at a hypothetical rate of return based on wholesale interest rates plus 3% (current return 4.78%) and do not reflect the actual returns earned by the superannuation investment.

A handy example was put together with the budget release below! A calculator was made available here.

Will the scheme be effective?

We think it is likely that the FHSSS will be both unpopular with first home buyers, and ineffective at increasing home ownership. The reasons for this are two fold. The benefits of the program are not large enough to be meaningful for the average home purchase, and historically these schemes have been over complicated and therefore unpopular.

Currently the median price for a house in Sydney is $1,151,565, whilst the median house in Melbourne will set you back $843,674.

This means that a 20% deposit would range between $170,000 (for the house in Melbourne) and $230,000 (for the house in Sydney).

Looking at “Michelle” from the earlier example we see that she is earning $60,000 a year and putting away savings of $10,000 a year into the FHSSS.

The tax saving due to salary sacrificing is $1,750 a year for Michelle, and once she reaches the maximum $30,000 contribution she will have received a tax benefit of $5,250 over 3 years.

However, looking further into the average cost of living for someone in Michelle’s shoes shows that these savings and contributions will leave her a far cry from home ownership.

Michelle earns $60,000 a year.

She salary sacrifices $10,000 into the FHSSS (contributions tax of 15% mean that only $8,500 is deposited into her super account).

Michelle’s normal super deducted from her salary of $4,337.

Income tax is applied of $6,387.

Annual rent of $12,886 ($248 a week).

Other basic living expenses of $14,488 ($278 a week).

Surplus savings (for travel and emergencies) of $7,603 a year, or $146 a week.

It would take Michelle more than 10 years to save for her house deposit! Good luck Michelle… you might need to cut down on that smashed avo!

The government is expecting in the order of 95,000 accounts to be opened, which will cost $250m in forgone tax revenue. There is also an additional cost of $9m which will be paid to the ATO to maintain the scheme.

Isn’t this just another First Home Saver Account?

In 2008 there was a similar scheme set up by the Labor government to promote savings for first home owners called the First Home Saver Account.

This was a special deposit product which paid both the bank rate of interest (at the time up to 8%!) plus an annual bonus interest payment of 17% on contributions paid for by the government. Interest was also then taxed at a concessional rate of 15% as opposed to normal bank interest which is taxed at the marginal tax rate. Contributions were capped at $6,000 per year making the maximum government contribution $1,020 per year (the 17% interest on $6,000).

The FHSA product was incredibly unpopular, with only 46,000 accounts opened before being shut down in 2015 (one of them was mine!) and total scheme balances of $521m. This was against a goal of 730,000 accounts to be opened by 2011.

One of the most disliked features of the program was that the deposits were unable to be withdrawn for 4 financial years, even if you had a house lined up to buy in 1 year! This made the product incredibly inflexible and coupled with the fact that unused balances would be migrated into regular superannuation this was the key reason for the product’s demise just 7 years after being launched.

At the time of the program shutting down the average balance of FHSA was only $11,000. Ouch!

What are the risks of a FHSSS?

One key risk that the FHSSS presents (that was absent from the FHSA) is that prospective first home owners are taking on additional equity market risk via increased investment in super.

Having more funds in super generally wouldn’t be a bad thing, however in this case the purpose of the savings are to support a near to medium property purchase. Exposure to market volatility is perhaps unwanted (and therefore a more stable deposit product would be preferred).

The target return profile of most superannuation funds is for an extremely long investment horizon (retirement!) and therefore rises and falls in the equity market can be absorbed. The investment time horizon is much shorter for prospective home buyers and it is unlikely that falls in equity markets can be absorbed by house deposits (which essentially should be saved in a near term savings account).

Conclusion

It appears that lessons have not been learned from the failure of the FHSA scheme, and we have been presented with an incomplete savings proposal in the guise of supporting first home buyers.

We don’t see significant policy being very popular with first home buyers and we definitely don’t see the FHSSS having an impact on housing affordability.

It would be nice instead of the FHSSS to see a more flexible (no 4 year requirement), “souped up” version of the FHSA (with larger and more regular government contributions), however time will tell if the FHSSS has hit the mark with Australian savers.

It is worth noting that the effectiveness of the FHSSS is disappointingly similar the FHSA, with government contributions of 17% for the FHSA, vs. an effective tax offset for most individuals of 17.5%.

Let us know in the comments below your thoughts on the scheme. Would you or first home buyers you know see a use for the FHSSS? Do you think it will be more successful than the FHSA scheme?

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