Australia is thinking of ideas to use super to buy houses, and there are some lessons from New Zealand’s experience.
It’s a short-term and politically convenient salve, allowing some people to buy. But without fixing the longstanding, underlying problems of the housing market, it just adds more demand and makes houses even more unaffordable.
Allowing people to access their retirement savings to buy a house is a political no-brainer.
It helps first home buyers put together a deposit. Even better, emptying out the KiwiSaver account doesn’t affect government finances. They are both political wins.
But the long-term impact is sadly predictable: extra demand drives prices higher and many people will have less of a savings pot to retire on.
The scheme is popular in New Zealand. Around 25,000 people used their KiwiSaver savings to buy a house over the past year.
Realistically, many home buyers will need other savings and perhaps their partner’s KiwiSaver too.
For these buyers, they risk having a much smaller retirement nest egg, but they will have a house. The main risk for them is a housing crash, which would mean possibly losing equity in the house and not having long term retirement savings.
But most people would not sell their house in a housing crash. Rather, the tangible risks are from rising interest rates or lost income – which could make their mortgages unaffordable.
Interest rates are starting to increase from record lows. The Reserve Bank will probably not raise the official cash rate, which influences the floating mortgage rate, for at least another year.
But rising global interest rates, which influence fixed mortgage rates, look set to rise by around 2 per cent over the next three to five years.
It doesn’t sound like much, but with recent borrowers stretched to their budget limits, even small increases could cause financial strife.
There is little hint of a worsening labour market. Jobs are growing at a reasonable pace and wages are rising in industries where vacancies are hard to fill.
For now, using KiwiSaver to buy a house has been a happy scheme for those who have used it. But this has added to the demand to buy houses. Some of these people would not otherwise be able to buy a home. Additional demand, in an already hot market, increases prices. This makes it harder for the next crop of buyers to access the market.
KiwiSaver withdrawal to buy houses was equivalent to 25 per cent of house sales, up from less than 10 per cent five years ago. The scheme has boosted demand for house buying. In that way, the scheme has been very successful.
But at a wider level it has failed. Home ownership has continued to fall despite this policy, which is now at the lowest level since 1946 (my estimate using partial data). Helping some people into the market has not changed the fundamental underlying problem – that houses are unaffordable.
To improve home ownership, we need to make houses affordable.
Whether in Australia or New Zealand, the fixes are similar.
But it is a long list of difficult things to fix: poor rental conditions, slow land supply, broken local government infrastructure funding, not building enough social housing, tax incentives for property investment, cultural obsession with property investment, banking rules that encourage mortgage lending, and a construction sector that is not big enough and not efficient enough.