Since the RBA released its Financial Stability Review for September 2013, concerns have been raised that outflows from SMSFs into property are fuelling a residential property bubble.
“Property holdings by SMSFs have increased and this type of investment strategy is being heavily promoted. The sector therefore represents a vehicle for potentially speculative demand for property that did not exist in the past,” the report stated.
Assistant governor Malcolm Edey told the federal government’s Inquiry into Affordable Housing yesterday that there was growing concern about riskier lending practices, increasing speculative activity and growing investor borrowing.
“When we’ve talked about the nature of the problem what we have said is we think there is an imbalance in the form of excessive activity by investors in the market that is out of proportion of their normal share in the housing market,” he said.
David Bryant, chief executive officer of Australian Unity Investments, said that action is long overdue to address the current “distortion” in the system regarding investment housing and negative gearing.
“It is time to look at adjusting concessions on negative gearing as a means to address the RBA’s concerns with the housing market, rather than resorting to blunt instruments such as capital controls,” he said.
“The very nature of negative gearing means that investors are betting that negative income will be outweighed by a larger increase in property value. So as a sensible superannuation investment strategy, it is problematic in its own right – regardless of any other issues in our property market
“The contribution from SMSFs to any market distortion is increasing as this area grows, and at a minimum needs to come under the same constraints that would apply to other negatively-geared investors.”
Mr Bryant said negative gearing is heavily used by investors, and that is likely having a significant impact on demand.
“1.8 million Australians own investment properties and two thirds of these record a loss against their rental income each year. And with 45 percent of home loans now going to investors – which is two and a half times the level of the early 1990s – that number is only going to increase.”
Elaine and Kca, unfortunately rental yields have become lower (certainly in Melbourne)and are often in the range of 3% to 4% net. If LVR is 70% and interest rate is 6% then the result will be a negatively geared property. Does this make good investment sense should be a question for investors. As always any investment should be well researched and aligned with the aims/goals of the investor.
[quote name=”Kca”]I don’t know where either Peter or Steve lives but where I live $9k rent in a year on a $300k property is astonishingly low. I live in WA. maybe yields are that pathetically low in the East?[/quote]
$9K does seem low. For a real life example – our $275K property earns over $14K in rent before expenses. It’s in Brisbane. It’s negatively geared but only because of depreciation. Cash flow is break even. LVR is approx 70%.
I don’t know where either Peter or Steve lives but where I live $9k rent in a year on a $300k property is astonishingly low. I live in WA. maybe yields are that pathetically low in the East?
[quote name=”Peter Medwin”]
How can a SMSF negative gear when the equity required to borrow is 30 to 40% depending on the lending institution and type of property involved. So there is already capital controls with SMSF LRMBs. People love property, get over it. [/quote]
While I agree with your overall argument, I’m concerned by what looks like a lack of understanding of the concept of gearing.
A loan of $200,000 at 5% = annual interest of $10,000. A property worth $300,000 with rental income at 3% = $9,000. This is negatively geared – even before any other deductions are taken into account.
Conservative LVR’s have been set up by the lenders themselves to stop them from getting into trouble on these non-recourse loans – not by regulation and not to prevent negative gearing.
Perhaps the concern should be with people who are advising investors to undertake these transactions and yet apparently don’t understand gearing.
Glenn Stevens is always too slow to raise interest rates when needed and too slow to reduce them when needed. Australia needs a new head of the Reserve Bank. A simple raising of the rates by 1/2 a percent over two consecutive months (0.25% per month) would go a long way to solving the problem. The Dollar is his excuse, but that is no excuse as other countries are now raising rates, and other factors are impacting on the dollar. Glenn, get your act together. It should have been done months ago.
What rubbish! Another player with a vested interest who hate the fact that SMSF have the ability to directly invest in sectors they chose.
How can a SMSF negative gear when the equity required to borrow is 30 to 40% depending on the lending institution and type of property involved. So there is already capital controls with SMSF LRMBs. People love property, get over it!
The real problem is what every economist in the country keeps telling government -an undersupply of new homes that is caused by poor planning for land releases. There must be a system of orderly land development approvals that can respond quickly to supply & demand of the market.