Beyond the hype

AMP Capital’s Shane Oliver sets the record straight on property bubble speculation and outlines key economic considerations on the horizon for SMSF investors.

Do you believe SMSFs are involved in fuelling a residential property bubble? Why or why not?

I don’t think [SMSFs] are playing a major role in it. It could change in the future but in terms of the bubble, bubbles normally have a number of characteristics.

There is a lot of talk about SMSFs and I think it is easier to try and blame someone or something for rising house prices. The problem with blaming SMSF buyers is it is still a relatively small portion of the market, probably less than five per cent. I mean it could become bigger over time and the Reserve Bank a while back indicated that it is something that should be looked at. I just don’t see it as a major problem at the moment.

I think the real issue in Australia is that we cut interest rates, we have a shortage of property on the market and lo and behold, house prices rise. We then look around for someone to blame: the Chinese, the SMSFs or whatever. The reality is we don’t have enough property out there.

Is the risk of a property bubble rising? What could be the cause?

I guess it is [if] house prices keep rising. There does tend to be some signs of slowing in house prices, I mean lately you look at data private providers provide on house prices [and it] does show it is slowing down a little bit.

The weekend auction clearance rate, which in Sydney [was] running at 84 per cent if you go back to September last year, [is] now running around 73/74 per cent and dipping below 70 per cent. There are some tentative signs that the heat is coming out of the property market, at least in the two cities that have led charge. So the risk is certainly there, it can become a bubble, but I think if the RBA keeps interest rates at this level for too long that risk will grow. A lot of people get emotional over this topic.

I said once that slapping capital gains tax on the family home would be un-Australian, and of course it all got wrapped up and it was ‘Shane Oliver says reforming property tax is un-Australian’. People are crazy about it. The thing is with the bubble issue, some people think ‘prices are so expensive, there must be a bubble’ that I think the reality is they haven’t crashed like in other countries. The fact that we are not seeing a lot of characteristics of a bubble tells me there is not a bubble. There is a risk of one though.

What are your thoughts on the RBA’s “period of stability” in light of the cash rate being still unchanged at 2.5 per cent?

I think they are doing the right thing, I thought they had it all wrong a couple years ago because they had interest rates too high and they were too slow to cut them, but I find it hard to fault them at the moment. The rate cuts they have put through over the last couple of years have got traction in the economy that is evident in the housing sector. Retail sales have picked up as well, business confidence and consumer confidence are all a little higher than they use to be, or off their lows anyway, and the fall in the interest rates helped lower the Australian dollar. So I think the RBA has rightfully cut, but it is too early to raise interest rates. They probably don’t need to cut again because there is enough evidence that the rates cuts are doing their job, so by the same token, the evidence of a pick-up in the economy is still tentative so therefore it is still too early to raise interest rates and therefore proves stability is the right thing.

SMSF trustees are often criticised for being risk averse when it comes to investments, and quite often their portfolios are heavily weighted towards cash. What are your thoughts on this?

I think it’s not necessarily the case that they are risk averse; it’s that they have been affected by recent events. The SMSF space has grown dramatically in recent times, partly out of response to the GFC and the damage that caused [to] portfolios. Individual investors have used their SMSFs towards cash as a relatively safe investment, and they were encouraged in that because the rate of interest on cash or bank deposits was relatively high.

So I tend to think what we see today is a function of what went on in the last five years. Going forward, I would hope SMSF investors realise they need a more diversified portfolio over the longer term because you now have a situation where cash rates are firmly low. A few years ago, you could have got 3-5-year term deposits on 7/8 per cent, whereas today there are 3-year [term deposits] at about 4 per cent and others are lower. So the rates of interest available on term deposits have fallen to very low levels. SMSF investors that want to grow their funds to reasonable levels are going to have to look more broadly.

Is there anything happening in international economies and markets that could affect the share market or the Australian economy?

There is always something happening. I think the trick for SMSF investors is to realise there is always something to worry about most of the time. These worries come to nothing. Last year was full of them: there was Syria, Cyprus was going to bring down the whole of Europe, America was going to go off a fiscal cliff. All these things come along, and this year it is worries about China, Japan, so there are always things going on internationally that can cause volatility in the market. Most of the time these things come to naught, and have a short-term impact and not a lasting impact, but obviously they are worth keeping an eye on.

I think the biggest issue on the horizon for investors is when the Fed eventually starts raising interest rates. That is probably the big one for investors to keep an eye on. Things like Ukraine ... in terms of their global impact, that might cause short-term upset but will probably not bring the whole investor world crumbling down. Obviously we have got very used to very low interest rates over the last few years globally.

The US economy is waking up again. Like a patient coming out of a coma, it can start to withdraw the medicine it was applying which includes money printing and pretty low interest rates. They are already withdrawing their quantitative easing programme and sometime next year they will probably start raising interest rates and when that occurs it could cause some volatility. I don’t think they will raise rates to levels to cause a recession, but investors should be aware that the cycle will start to turn.

What are some common mistakes SMSF trustees could make when investing?

[One] is to invest only on the basis of what is familiar. If you think about many SMSF portfolios, they have exposure to high profile Australian companies or cash or residential property and the common denominator with all of those things is that they’re investments people are familiar with. Whereas a lot of the opportunities are in other areas – stocks which aren’t as well known. [This is the] danger of ‘following the crowd’ and only investing in what you are familiar with or in what has done well recently. People are happy to go into term deposits because it has been relatively safe post-GFC, but that doesn’t mean it is always going to be the best investment. The other danger with that approach is that investors can often end up with very narrow portfolios and you end up with one property and a few bank stocks and you are not very diversified. If anything goes wrong with the property market and you are left with a few bank stocks you are exposed.

Another thing is paying too much attention to the ‘noise’. There is a lot of noise around investing, you turn on the TV or the radio and you hear a lot of noise, most of which is irrelevant. People can get pretty distracted by that noise and it can often be quite unhelpful. Often investment professionals say when things become well known or popular or obvious; it is often a time when it is already packed in. You know when everybody is talking about Europe and how bad Europe is you start thinking to yourself, well maybe this is the time to invest in Europe. 

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