It’s not often that the RBA issues warnings on housing.
The RBA works incredibly hard to maintain it’s neutral status. Being the Switzerland of Australian government institutions isn’t easy.
I remember back in the 2004 election or something, there was a Liberal flyer that misleadingly implied that it was the RBA making the statement that interest rates would be lower under the Liberal party. The RBA never said, or would say, anything like it.
The RBA complained to Liberal HQ, but waited until the election was neatly out the way (and no one cared anymore) before making those complaints public.
The ‘credibility’ of monetary policy rests on the belief that the RBA is operating independently of political cycles. If that trust is broken, then the whole system (which has given us low inflation and low interest rates) would be in trouble.
So the RBA goes out of it’s way to be bland, uncontroversial, mostly boring.
And that applies to housing too.
And lot of the property doom-sayers have been pressuring the RBA to come out and say that there’s a property bubble and we’re in dire economic danger. They’ve been doing that for 15 years.
But the RBA never did. Partly because the RBA was never that worried. Hidden in pages and pages of public reports are softly-spoken statements that the RBA is actually not that uncomfortable with the level of house prices.
But the RBA also knows that markets hang on their every word. Every time Glenn speaks journos go through his words with a fine tooth comb, trying to find any hint of a change in his mood or his weathers.
So, could you imagine if Glenn said, ‘housing is over-valued’? It would create a self-fulfilling panic and property shake-down that would rattle the whole financial system.
… with just four words.
No, Glenn chooses his words very, very carefully.
That’s why I sat up and took notice last week when the RBA said they were a tad concerned about all the money from self-managed super funds that’s flowing into property.
Not that he said he’s going to do anything about it. Glenn the gunslinger is just letting us know he’s got his eye on it.
This got me wondering, what’s he seeing that we’re not. So I did a little digging in the data.
Turns out self-managed super funds (SMSFs) have grown up in the past few years. No longer the snotty nosed kid in short pants, they’re now a 500-pound gorilla. In June, SMSFs were worth an estimated $507 billion.
… that’s bigger than Westpac.
So now our mums and dads, running their own little nest egg machines, command a total pool of wealth bigger than one of our big four banks. Suddenly, what they do matters… in a big way.
Ok, so looks like Glenn’s on to something. So what about the property story?
Well, so far, SMSFs haven’t been big players in the property market. At the moment, residential property only accounts for around 3.5 percent of the total portfolio.
Well, that’s not massive. That’s about $18 billion. That’s makes them a sizeable player, but nothing over the top.
But hang on. That’s where they’re at now. But where are they going? Well, surveys suggest that SMSFs would like on average to have a much larger exposure to property – like something in the order of 30 percent.
Ok, now we’re talking serious cheese. If SMSFs followed through on that promise, they’d be throwing another $160 billion towards property. Drop a rock in the pond that big and you’re going to have some serious waves.
But wait, there’s more! Under current rules, SMSFs are allowed to leverage off other assets, and into property. So if we took a typical 70:30 gearing, we’re looking at something in the order of $350 billion.
Bam.
This is big bucks.
According to the latest RP Data report, average house prices in Australia are just short of $500,000.
So if SMSFs went fully invested and fully geared, we’re looking at extra demand for about 700,000 houses.
How big is that?
Well, remember that we only build about 70,000 homes a year at the moment. So we’re potentially looking at a sudden surge in demand that’s equivalent to about 10 years worth of current supply!
No wonder Glenn’s a little nervous.
In central banking, timing is everything. It’s like the dollar. The RBA doesn’t care what level it goes to. They’ll only intervene if it chops and changes to quickly – if it dives or if it spikes.
And so what’s worrying Glenn is not that SMSFs might become big holders of Aussie property. There’s no real problem with that. He’s worried about how quickly they’ll do it.
If they suddenly all jump in (which with rates as low as they are and stocks still dragging the chain, they could) you would see such a monumental surge in demand that it would tear the market apart.
And forget through the roof, it would send prices out somewhere north of Jupiter!
You could easily see prices double in less than a year I reckon…
But of course this is the extreme, fully invested, fully geared scenario. I don’t think we’ll see a price explosion quite on that scale.
But it’s going to give a big bump to prices, that’s for sure. And it’s got Glenn worried enough to send off a few warning shots.
But who’s going to stop it? Where does a 500-pound gorilla sit?
Where ever it wants to!
This is going to be something to watch!
Michelle says
Very interesting. I’m actually looking at setting up a SMSF for my partner and I and was going to look at investing in property. So there you have it, I’m going to be looking out for one of those 700,000 homes.
June Jones says
This is the most interesting information that I have heard in years. Thank you for giving us this valuable information. June
Jerry K says
I don’t understand if there is a glut of property on the market wouldn’t that make prices go down, especially when its slow in selling them. what is the current level of people looking to rent???
People who buy investment property’s in that scenario would be having a hard time to rent it as there would be so many property’s to choose from.
Please enlighten me.
Don greenman says
Don Greenman
I agree demand runs the cost of housing ( rent ) in the end. You don’t build a house to have it vacant. To fill those houses you would have a bidding rent war with prices going down. Don’t forget Australia’s demographics. We are on ageing population who will fall of our perch soon. Current birth rate is not replacing this so massive immigration is the only way. Not many would like that and it would be political suicide for any political party at the moment. I think the reserve bank is saying SMSFs need to be controlled more by government legislation .
Greg M. says
> SMSFs are allowed to leverage off other assets
No, they aren’t! A SMSF can borrow to buy a new asset, but it cannot place an existing asset at risk. It can’t even borrow to build on a vacant block of land.
I’ve been running a SMSF since ’95. Currently about 30% property 60% shares 10% cash and no debt. I’m happy with those ratios.
Greg.
adam says
Thats correct Greg.
A super fund CAN borrow to invest in one asset. this asset cannot be improved in any way (only repaired) until the loan is extinguished. A super fund CANNOT leverage off other assets in the fund. the property must be held by a BARE TRUST. This is so the bank cannot touch other super fund assets if the loan is not repaid. You CANNOT borrow to build a house, only to buy an existing house. The bank’s will only loan you 60-70% of the asset and will charge you a higher interest rate. there are other fees and charges to get here as well in terms of setting up the bare trust etc etc.
Mel Smith says
Yes agreed Greg & Adam, maybe that’s not worded very well in John’s article – in this context I would only think of “leveraging off other assets” in terms of what CASH you have to use towards a property deposit, to keep the banks happy, as you are leveraging & borrowing their thin-air… Oops, sorry, I mean – “money”!… 😉
Although the banks prefer 70% LVR limit, they will lend SMSF’s up to 80% on property, provided you have a corporate trustee for the bare trust. The costs involved can be large & the paperwork involved WILL decimate a small forest & be a major pain in the arse! However, when put into perspective over the life of a typical loan, with the benefits derived from the asset growth & positive cashflow within the fund, I see no contest, would highly recommend it to others & we only have a small ($150k) four member fund.
You can also shop around for loan rates & while the SMSF loan lenders are smaller in number (many financiers won’t do SMSF lending) you can still get decent rates! Most lenders were advertising around 6.5% for SMSF’s a couple of months ago before last RBA drop, we secured our finance at 5.3% in Sept, thru a Saintly lender!.. 🙂
There can be big differences in the loan application fee charges though..
Raj says
May I know who the lender is with 5.3% interest rate?
Mel Smith says
Hi Raj, the reference I made above to the “Saintly” lender means St George! 😉
Because many SMSF loans are hit with higher rates & borrowing costs, we looked around for the best deal we could get. Their standard rate was around 6.45% at the time (now around 5.95%) so we chose their fixed rate for just two years at 5.34%, knowing we couldn’t see a better deal at the time from other lenders. The RBA would have to drop rates again considerably in the next 12-24 months to surpass that from current SMSF lending rates – which may well happen & is always the gamble with fixing. In the meantime we save over $100p/m with the lower interest rate & is better left in our fund than the Bank’s pocket!…
The only other complex way to save that money each month, was to keep at least $50k tied up in an offset account with St G, which would mean having to change our full SMSF account over to them from another institution… No thanks!! 😀
Tom says
Thanks Jon. That’s the SMSF side of my earlier question. How about Asian money? That also is set to grow.
We are exiting the realm of the “Great Australian Dream” and following the European urban model of being life-long renters. Home ownership will be out of reach for all but the lucky, but unlike the UK, we remain an egalitarian, almost classless community and anybody with the drive can do well – be “lucky”.
Marion Whiteside says
Yes you bet, let us truly alert to the correct facts.
Amanda says
Supply vs demand…. yes prices could sky-rocket with initial demand for housing but …. they have to fill those houses with tenants to see a return on investment …. if those houses sit empty (700,000 or so more tenants need to be found in a very short amount of time), their investment is going backwards and instead of house prices rocketing, I fear we’ll see them plummeting not too long after.
Marat says
I don,t think there are that many people that can afford 700K houses especially with so many baby boomers retiring now and will be in next few years , with not that many of working population. Boom, boom, how far is your boom if no one wants or can buy overpriced property. Maybe someone just trying to create that boom so hyped up people will rush to buy what they can not afford?! Question is how far will prices drop after that short lived pricehike.
Paul Davies says
So what’s the problem? Hasn’t the government wanted investors to build housing – NRAS etc. Now just choosing to invest via the SMSF.
Gunter Lang says
House prices doubling in one year? That is just about impossible.
Since 1901 (that is in the last 112 years) house prices in Australia have increased by an average 7.2 % per annum, sometimes a bit more, sometimes a bit less. Applying the old and trusted Rule of 72, this means that on average house prices in Australia have doubled every 10 years. I know some property spruikers say “7 to 10 years” (but that is just to make it look a bit better, but the true figure is a doubling of house prices every 10 years.
It is a historical fact that in 1901 the average price of a house was 125 pounds (250 dollars). Double this every 10 years and you arrive at today’s average price. Try it, and you’ll see that it really works that way.
Ken says
Gunter, you are pretty much spot on. I’m for 7-10 years because of my adult life span. 1972-2013. Same thing. But can anyone tell me why people always look through their butts when they read Jons blogs. I thought Jon spoke of a people glut, not a houses glut. This will raise house prices. If I made a mistake, I apologize most sincerely. Back to Gunter, you seem to be like me and learn from the past. Something that morons like Hitler didn’t do. Cheers, Ken.
Mel Smith says
I am another cheerleader for property investing in SMSF’s!! 😉
I’m in the 40’s age group now, with my siblings in mid to late thirty’s. We set up our 4-member SMSF last year & will be settling on our first positive-cashflow duplex property purchase in two weeks time.
There does seem to be a growing concern, particularly from Government ranks, that they & the money-markets won’t have access to OUR retirement funds, as they have in the past! It won’t surprise me if there isn’t a lot of crackdowns & rule changes to stifle HOW MUCH property you will be allowed to invest in within a SMSF…
People are becoming wise to the fact that you can probably kiss your financial arse goodbye IF (when…) there is another market shake down in future. Manipulated “business cycles”?? NEVER!!…
We would like to have more tangible assets in the future & are focussing heavily on property.
We only had an average of $40k each in our respective commercial Super funds, with limited growth prospects in the investment markets for the rest of our working lives, given the “two steps forward, one step back” routine (or worse) that we have all been through.
Allowing for average growth of only 3-4% per year, it’s not much better than leaving our retirement as cash in a term deposit!.. By gearing into property we know we are far more likely to at least quadruple the returns that any of us would have achieved on our own in a commercial fund. Coupled with depreciation & deductions within the fund for our annual tax audit, under OUR control – all of a sudden the Govt & Super Funds are missing out on a large chunk of dosh each year, that they are used to sticking their noses into the trough for!…
With the amount of SMSF’s opening up predicted to double in the next 4 years, to well over a million new funds looking for better investment alternatives, you can bet your butt there is nods of concern from the powers-that-be… In the meantime, we will be gunning for our next property purchase within 12 months time, before too many changes take place! 😉
vik says
This would stop if every one would stop being greedy and just let the super money sit in their account until retirement. that was the original idea of super. Why do we need an investment property if we have a house of our own and we have the super for our future. This is just greed and it will lead to every one’s downfall.
Mel Smith says
Sadly Vik, if most of us left our money in an account to be “looked after” by the professionals in the markets, we would die very, very poor in future… 🙁
This is not about greed, it is about trying to establish some financial sustainability & security for the future, when there will be no ‘pensions’ as we know it now.
SMSF’s are no different – people buy investment properties all the time outside Super, to provide an alternate income & grow wealth for the future, as well as filling a gap in the market by providing housing for those who cannot afford, or choose not to buy, a house themselves. I have friends that prefer renting because they don’t want to feel tied down in one place, or tied to a mortgage, but they still need a place to live, which just happens to be an investors house. These different points of view will always exist, at least it’s a win-win when both parties get what they want, no greed involved! 🙂
Michelle says
Its not greed, its smart investing. People who have done the research and believe that investing their super money in the housing market offers the greater return (instead of shares or the so-called portfolios that the super funds offer). Its taking control of your money instead of leaving it for someone else to look after, someone you have never met, someone who you have no idea of their credentials or expertise. As a parent with young children, I want to have the money and assets available to my kids when they reach my age. As we all know, housing affordability is diminishing. I want my kids to be able to own and live in something close to the cities one day and not be forced to move miles from any job prospects just so they can have their own piece of Australia.
Ken. says
Hi Michelle, Well said sweetie. A few years ago you may have noticed that our super went down because we trusted our superannuation funds. This is money gone and lost forever, period, never to be seen again. If we had the opportunity to put our super into our own home loans, or even a block of land, we would have all been better off. This is something I’ve always dreamed about. As I’ve always said, you can live in a house but you can’t eat shares. You only loose money on a house if you sell at a loss. A house is something you have got some control on, but you have no control on the way shares go. Cheers, Ken.