On hearing stories about property bubbles, I always roll my eyes, have a little sigh, and think “Here we go again”. The only difference this time around about the commentary on a so-called property bubble has been the emergence of a new “villain” – the SMSF trustee.
Well, I happen to disagree on both fronts. Even at the height of the recent increase in the property prices in Sydney (the strongest market), it always looked sustainable, and as for SMSF trustees being primarily responsible for the rise in prices, that argument was always specious, to say the least.
Keeping it real
In my experience talk about property prices in Australia being overvalued is often driven by overseas analysts who simply fail to understand our market. Although their views are often snapped up by the local media, they don’t comprehend the factors at play, especially demographic:
• Steady population growth (especially in Sydney and Melbourne) bolstered by an ongoing immigration program
• The decline in the number of people per dwelling (in the last census it was 2.9, a drop from 4.0) which means more dwellings for the same number of people
• The supply factor – it’s estimated there’s an undersupply of housing of 150,000 nationally
• A favorable tax system – 30 per cent of properties are owned by investors and one in seven Australians own an investment property
• Growing overseas interest in Australian property, driven by a stable political and regulatory environment
• That indefinable element – the ongoing Australian attraction to owning bricks and mortar
All these factors coalesce to underpin a market, so although prices may stagnate (or even decline slightly), we simply won’t have a bust where prices fall 20-30 per cent. And it’s those periods when prices do start to move after the market has been quiet that we suddenly get talk of a bubble when, the reality is, it’s the market correcting itself. This is all that’s happened in recent times as any long-term view of price movements will confirm.
SMSFs: The new property market villain
If there’s no property bubble then it logically follows that SMSF trustees can’t be fuelling it. Indeed, I am sceptical of suggestions that they are even playing a significant role in the recent price increases.
The latest figures show SMSF funds under management at about $600 billion, of which 10 per cent, or $60 billion, is in residential property, according to research by the SMSF Professionals’ Association of Australia and Russell Investments. It’s a healthy number, and certainly trustees are more attracted to residential property, but in terms of the total residential property market that the Reserve Bank estimates to be worth $4.75 trillion, it still only accounts for about 1.3 per cent of market share. As a percentage it’s miniscule, and certainly when compared with all those property investors sitting outside an SMSF structure.
No doubt there are spruikers out there, and no doubt some trustees and, perhaps more importantly, some potential trustees, are being seduced. But all the anecdotal evidence I hear in my dealings with the major lenders is that they are allowing maximum loan-to-value ratios of 80 per cent and want an interest cover of 1.5 times. That’s hardly aggressive lending.
Unfortunately, there’s still no hard data around SMSF gearing and residential property, but it’s my educated guess that when the numbers are crunched, the vast majority of trustees will be shown to have adopted a conservative approach to this asset.
What we do know is that SMSFs have historically outperformed the APRA-regulated funds when markets are underperforming, suggesting trustees are an innately cautious bunch. Adding weight to this supposition is the fact that cash holdings in SMSFs still sit around 30 per cent – six years after the GFC.
The bottom line
As the figures above show, Australians have long been attracted to residential property as an investment, and that longstanding love affair is now simply happening inside an SMSF. If that’s speculative, then it’s no more so than for the one in seven Australians who own an investment property; the fact it’s inside their retirement vehicle doesn’t alter the investment logic.
Bill Nikolouzakis, director, Nyko Property