This post argues that super for housing will keep coming back as an idea.^[1]

The key source of psychic distress is that young Australians cannot complete the life script that they (and others) believe that they should.^[2]

This will focus the mind on the awkward financial portfolio that compulsory superannuation forces non-boomers to hold through their working life - significant debt alongside significant savings.

And from that, comes the obvious suggestion to let people use super for housing

The Aussie Life Script (for Boomers)

The core life script that forms the expectations of most Australians is embodied in the narrative version of the life of the majority of Boomers. The key savings behaviour is to move through these stages sequentially:

1. Start work - No savings: You start off with low pay and low savings rate (measured as savings as a % of income)
2. Meet someone - Save through housing (via a deposit): This takes a period of months.
3. Get married - Save through housing (via paying down the mortgage): Once you "settle down", you save in housing by paying down a mortgage.
4. Kids grow up - After paying for housing, you save for retirement: As you pay off your mortgage, you start to save for retirement through gradual increases in compulsory superannuation
5. Retire - Retire with home you own and a superannuation balance: The home is to live in indefinitely and the superannuation balance + pension is to meet retirement expenses

Also note that the following long run trends:

• Increasing incomes over time: eases some of the savings crunch in the later years.
• Compulsory superannuation: Starts relatively late. Starts out small and increases over time.
• Mortgage interest rates declining over time: Both through lower cash rates and lower net interest margin

The modern, frustrated Aussie Life Script

The key savings behaviour for frustrated Aussies is that you can no longer move through these stages in the same sequence. Instead you have to:

1. Start work - Save for retirement: As soon as you start working, even as a teenager, you save a relatively large share of your income for retirement (compulsory super now at now at 11.5% of base pay!)
2. Meet someone - Save for retirement first, and then with what's left, attempt to save through housing (via a deposit): This process takes a period of years because of house price appreciation. Often you are forced to borrow/receive a gift from bank of mum and dad.
3. Get married - Save for retirement first, and with what's left save through housing (via paying down the mortgage): Your net asset position is a bit crazy because you simultaneously have a large superannuation balance and a large mortgage debt. You are simultaneously forced to be a saver and a borrower, which is quite inefficient.
4. Kids grow up - Save for retirement first, and with what's left you keep saving in housing: Your net asset position is a bit crazy because you simultaneously have a large superannuation balance and a large mortgage debt. You are simultaneously forced to be a saver and a borrower, which is quite inefficient.
5. [Predicted] Retire - Dissaving for retirement and saving in housing (by withdrawing super to pay off the mortgage): You withdraw your superannuation and use it to pay off your mortgage, because you hit retirement age with a massive super balance, and it makes sense to use it to pay off your debt. Hopefully you have enough so that you have a home to live in indefinitely and a superannuation balance + pension is to meet retirement expenses

Also note that the following long run trends:

• Stagnant incomes over time: Wage growth has been subdued over the time period
• Compulsory superannuation: Starts early. Starts high and continues to increase over time.
• Mortgage interest rates hitting a lower bound: Cash rates hit a zero lower bound, with interest rates unlikely to fall at historical rates

How this relates to super for housing

The key problem is that people aim to retire with both a house and retirement savings, and want to start by buying a house with debt. From a financial perspective, it makes sense to save for a deposit first (to get access to credit), buy the house, and then after buying the house, pay off the debt before setting aside money for retirement savings.

However, compulsory superannuation reverses the order of saving, requiring people to set aside retirement savings first, and then save for a deposit and pay down debt with what remains.

This also means that a lot of people have inefficient portfolios through their working life, where they simultaneously have a large mortgage debt and significant retirements savings.

The obvious move would be for a person to use their super to pay off their debt, closing out their position with financial markets. This has two benefits^[3]:

• It reduces fees on both the saving and borrowing side: Particularly as fees are often proportional to balances on both savings and debt. For the sake of clarity this means reducing the fees associated with the mortgage and fees associated with investing through super
• It generates positive risk-adjusted returns for the individual: This works as long as risk-adjusted returns on super are lower than mortgage interest rates, which seems very likely. If this weren't true, then we should encourage people to cash out money from their mortgages and contribute it to superannuation.

Why this super for housing conversation will never die

• On the one hand, the presence of large super balances and an inability to save for a deposit/pay down a mortgage is going to suggest that there is a glaringly obvious trade to do here: This makes Super for housing seem obviously good ^[4]

• On the other hand, letting people spend their super money on housing, with no corresponding increase in housing supply will just increase house prices: This makes super for housing seem obviously bad

And so nothing will get done.

It's not clear if the conversation matters that much though. Superannuation money is going to flow into housing in the end, it's just a matter of when.

• Super money can always flow into housing upon retirement: People are going to hit retirement age with sizable mortgage balances, and are going to do the logical thing of withdrawing super to pay off their mortgage.
• If people anticipate this process, then super money flows into housing even earlier: If we normalise using superannuation to pay off a mortgage, then we should expect to see more people leverage up on their mortgage as they approach retirement age.

Other consequences

Some interesting possible consequences:

• Rising incomes as measured by something like the wage rates don't tell you about capacity to save for a housing deposit: Compulsory superannuation eats a larger share of incomes and therefore reduces take home pay, and capacity to save for a deposit. This bites even harder if you're looking at people at an early, lower-earning stage of their careers
• If your lifetime income is high and your savings rate is high, none of this matters: If you're rich and you save a lot, then none of this matters since compulsory superannuation isn't really a binding constraint on your savings rate
• Allowing people to do something with super addresses the concern about the lack of engagement with super: Super is a compulsory product, and part of its dysfunction (high fees, dodgy investments etc.) comes from the fact that people don't engage with their super.^[5] There's always been a dream that allowing people to access super for other things will drive engagement and improve governance.
• Other countries allow people to use their super for housing: See Singapore, which allows people to use their super equivalent (CPF) to buy a house (via HDB)
• Super and banking are two industries that grow massively from this: Super balances grow mechanically every year, and if you believe housing unaffordability will continue, consumers are going to increasingly finance their lifestyles by not paying down mortgage debt as quickly.

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1. This has been argued for recently by Andrew Bragg, Tim Wilson and Jason Falinksi. ↩︎

2. The point is to understand is that changes in overall prices might mean there is greater abundance, but an inability to purchase a house has psychic costs. To frame the conversation, if we ended up in a world with significant real income growth but wedding rings suddenly cost 10x the median annual income, people would be super mad about it. Even if you could buy lots of other stuff for much lower prices, it wouldn't quite compensate for the fact that the price of completing a major life milestone ("getting married") has gone up. ↩︎

3. These two benefits actually flow directly from two features of real financial markets, transaction costs and financial frictions (which lead to asymmetric lending/borrowing rates). ↩︎

4. A financial innovation I'm waiting for is for a bank to figure out how to allow your Super to act as your mortgagor. This is less ridiculous than it sounds when you realise that professionals often use their Super to act as their landlord (e.g. Barristers using their SMSF to buy into Chambers and then renting from their Super). ↩︎

5. Paul Keating in 1992: "It's not so much for welfare housing, I think it is for housing. There is a view that benefits preserved could be used by some people in a way which preserves, largely keeps the preservation about it, that is if it were used for housing being returned to the pool of preserved benefits at some stage. It's something we are prepared to have a look at. One of the difficulties with superannuation is encouraging very young people in the workforce to be as enthusiastic about it as older members of the workforce and I think the view may be that if younger members of the workforce could draw down preserved benefits or at least use them in some-way for housing it gives them more immediate rationale for superannuation rather than simply the benefit which comes at age 55. That's rational and that's why we will have a look it". PJK never subsequently pursued the idea. ↩︎