The Magic Pudding



‘The Magic Pudding’ was written by Norman Lindsay nearly 100 years ago. Albert the pudding has thin arms and legs and is a bad-tempered, ill-mannered so-and-so into the bargain. His only pleasure is in being eaten. No matter how much of the pudding one eats, it always magically reforms into a whole pudding again.

Superannuation certainly has magical properties.  It glitters with tax advantages, survives divorce and is unaffected by bankruptcy. Contributions are compulsory and pour in.  APRA says Albert the pudding is worth $1.5 trillion and grows by $22 billion a quarter.  He would make quite a feast.

The finance and real estate sector would dearly love to slice off some equity and serve to happy home owners wanting dream homes but lacking a deposit. After all, it is their own money.

David Potts at Fairfax is quite keen on this, arguing it is better to pay interest to your super account than to a bank.  The REIA demands it. 

Mark Bouris wants bank loans treated the same as super, a deftly-wrapped argument for the tax deductibility of mortgage interest.  Mark is intensely conflicted on this issue as the Executive Chairman of Yellow Brick Road Wealth Management.

Superannuation’s miraculous dance through the tax laws is because it provides an independent retirement income stream and relieves the government of future old age pension obligations. 

If home-buyers divert retirement savings to home-buying, odd things happen.

Firstly, land prices rise, by the whole of the new deposit base available PLUS the extra borrowing power banks will allow on a larger deposit. The benefit is inflated away the moment it appears.

Secondly, the future retirement income of those who make withdrawals shrink, most strikingly compared to those who leave it alone.  Young withdrawers lose the powerful benefit of early compounding.

Existing owners will be very pleased with their profound foresight in investing in this asset class ahead of the once-only change as land costs inflate.

Apart from this ‘head I win, tails you lose’ consequence, accessing superannuation for homeownership has other nasty features.

If first home buyers can withdraw, those in financial trouble will demand the same.  A very large proportion of the homebuyers with mortgages carry eye-watering debt relative to their incomes.  They are able to meet repayments only because interest rates are at unprecedented emergency settings.  Sorry, I misspeak.  Interest rates are ‘highly accommodative’.

If rates rise or one of the two incomes funding the debt gets the sack, the pressure to dip into super to ‘save the house’ would be immense. Panicked people do not make good decisions.  And once this gate is opened, superannuation balances would be captured in bankruptcy and the tax concessions lose all credibility.

Immense pressures emerge if house prices fall and trap the heavily mortgaged in negative equity, owing more than they own.  The USA is congratulating itself as the number of homeowners in negative equity falls to 6.4 million – 13.3 per cent of all properties with a mortgage –five years after the bottom when ten million households owed more than they owned.

They have been wracked by doubt, wondering if they would ever get free, while making those monthly instalments year after year after year.  They couldn’t move to a better job, or change their circumstances in any way: five years and counting is a very long time to hang by the fingertips.

With access to super, your friendly neighbourhood banker has a smooth answer to difficulty.  Struggling?  Overcommitted on your loan?  In arrears perhaps?  A once-only transfer would make you whole.  After all, your circumstances are identical to those lucky, lucky first home buyers.

Nevermind that anyone trashing their super faces a very bleak retirement.  The current generous old age pension will inevitably be reduced over time as baby boomers retire en-masse.  Being young and poor is tough; being old and poor is a living hell.

Buyers dipping into super to stave off difficulty would do wonders for the banks too.

If super can be drawn in times of need – real or perceived – even fewer mortgages would fail. The very low provisions for doubtful debts the banks are making on their mortgage books would be entirely vindicated. And their share price would soar on this de-risking.

So, the price of allowing FHBs to access superannuation creates some real winners: existing landowners, banks and the handful of buyers able to buy before the land-price jaws inevitably snap shut again.  Everyone else loses – now and in retirement.