Tapping super for a house deposit unlikely to boost affordability

House prices in New Zealand continue their upwards march. Flimin/Flickr, CC BY-SA

Independent Australian Senator Nick Xenophon is planning a legislative push for first home buyers to be able to access their superannuation savings to pay for a house deposit, mirroring a similar policy in Canada.

As with Australia and Canada, home ownership in New Zealand continues to be seen as a birthright and there is concern about home affordability as house prices, in the main centres at least, continue to rise.

When New Zealand’s workplace-based retirement savings scheme - KiwiSaver - was launched in 2007 the government included several incentives to make the scheme more attractive. One of these was the ability to withdraw contributions to enable the KiwiSaver member to purchase his or her first home.

The government also offers a first-home deposit subsidy of NZ$1000 per year of KiwiSaver membership, with a minimum of three years and a maximum of five years. Both benefits were in response to concerns that the deduction of KiwiSaver contributions from a young person’s pay packet would restrict their ability to get on the home ownership ladder.

How it works

Withdrawing savings for a first home becomes an option after three years or more of KiwiSaver membership. The member’s own contributions can be withdrawn, along with those of their employer. However, the government’s contributions, comprising a NZ$1000 kickstart for new members and a member tax credit of up to $521.43 per annum, cannot be withdrawn.

The availability of the deposit subsidy is more restricted, with limits on income and the maximum purchase price of the property. Both benefits are only available for the purchase of a first home, with very limited exceptions, and never for an investment property.

These incentives were important in making the controversial scheme more palatable to the public. However, research has shown these incentives are less important to KiwiSaver members than the other government incentives. (Although this is likely to reflect the fact that many members will have already purchased their first home).

Incentives aren’t helping affordability

The benefits for first home buyers do little to assist with home affordability, which relates to the ongoing cost of home ownership. The latest report from Massey University’s Real Estate Analysis Unit found home affordability across New Zealand had deteriorated by 7.6% over the year to May 2014.

The benefits are also likely to have limited impact on house prices overall, particularly given the purchase price restrictions associated with the deposit subsidy. Certainly no restraining impact has been indicated, with house prices continuing to rise and ongoing concerns of a housing bubble in New Zealand.

While the benefits could also potentially help push prices up by increasing demand from first home buyers, there is no evidence this has occurred. The purchase price restrictions associated with the deposit subsidy will help curb any potential inflationary impact on house prices. The persistent increase in house prices, particularly in Auckland, continues to be driven primarily by immigration and speculation.

However, KiwiSaver’s first home benefits do assist New Zealanders into their first home by helping them meet the minimum deposit levels required to be able to obtain a loan, something made more difficult with the introduction of loan-to-value ratio (LVR) limits by the Reserve Bank of New Zealand in October 2013. (This has meant that 90% of a bank’s new home loans require a deposit of 20% or more).

The most recent figures available pre-date the LVR changes, but show that more than 10,000 New Zealanders withdrew savings of more than NZ$120 million from their KiwiSaver accounts to assist with their first home purchase in the year to March 2013. In addition, nearly 5000 subsidies worth more than NZ$15 million were provided in the year to May 2013.

While it’s likely some KiwiSaver members have simply taken advantage of the availability of these benefits, for many young people they will have been vital to helping them achieve their goal of home ownership.

It could be argued that allowing withdrawals from KiwiSaver accounts defeats the purpose of retirement savings. While we know that the earlier you start saving the better, the reality is losing three to five years’ worth of contributions at a relatively young age will not be a disaster – and the retention of the government contributions means the member does not go back to square one as a result of the withdrawal.

Helping young people to help in retirement

While the lifetime benefits of renting versus home ownership continue to be debated, the New Zealand Retirement Expenditure Guidelines identified the financial benefits for retirees who own their own unencumbered home, compared to those who are renting. This suggests assisting young people to make their first home purchase will provide benefits for them in the long-term, and improve their retirement prospects.

Another reason to support home ownership is that it provides more secure accommodation for families, compared to renting. Fundamental changes to the property rental market in New Zealand would be needed to change this.

However, there is a large difference between a 25-year old withdrawing three years of contributions and a 50-year old withdrawing 10 years of contributions –the latter will be significantly disadvantaged in terms of retirement income. To counter this it would be sensible to restrict the withdrawal amount or the age at which withdrawals can be made from the scheme.

While the ability to use KiwiSaver savings to achieve a greater level of home ownership has been a successful policy in New Zealand, there is a strong case for introducing some limits to protect its underlying focus on retirement.