OPINION: THIS is one of those questions that tends to move rapidly backwards. The debate still swirls about whether a housing bubble exists in Australia. Only thereafter does the question of the role played by self-managed superannuation funds arise. But the question everyone actually wants the answer to iswhether and when to back away from risk.
Is there a housing bubble?
Maybe not…
Housing prices are certainly high in Sydney, Brisbane and Melbourne, having risen by as much as double digits in the past year. Many insist, however, thatthere is no bubble because the increase is simply driven by demand that has outstripped supply. They cite population growth fueled by immigration on one sideand a sluggish construction industryhampered by restrictive planning laws and high land prices on the other.
Critics see little evidence of the kind of short-term buying and selling by investors that could burst if there were an unanticipated increase in the housing supply, if interest rates were to increase, or banks were to suddenly freeze lending in response to some external shock, such as financial meltdown in China. Treasurer Joe Hockey, a leading voice in this camp, has dismissed talk of a housing bubble as “lazy analysis.”
Perhaps so…
On the other hand, the Reserve Bank of Australia has worried publicly about risks associated with the jump in house prices, as have the Bank for International Settlements and the International Monetary Fund.
This camp sees the jump in home prices as the result of a tax structure that favoursinvestors at the expense of younger first-time home buyers. The culprit, as they see it is “negative gearing,” or the ability to deduct any losses on investments, including mortgage interest, from overall income when calculating tax liability. Investors who take advantage of this feature typically tend to existing rather than new housing, which further depresses supply.
The challenge, under this analysis, is to let the air out of the bubble slowly, restoring affordability for young families without throwing the market into a tailspin.
But back to the SMSF question…
Under the second scenario, SMSFs may, in fact, be playing a role in the increase in home prices, bubble or no. SMSFs have unquestionably become more active investors since 2007, when rules restricting borrowing were relaxed. In 2010, the Superannuation Industry (Supervision) Act of 1993 was further amended to limit the risk to investors who borrow to the value of the specific asset acquired with the borrowed funds, so called “limited recourse” borrowing.
The changes in law, coupled with low interest rates, rising property prices and the aggressive marketing of property to SMSF owners has combined to move more SMSF money into both commercial and residential property. Whether SMSF investment is a leading cause of the skyrocketing home prices in Australia’s capital cities is almost beside the point from the perspective of those looking to retire on those funds.
Has housing investment become too risky?
This is the real concern of investors, and the answer is that it depends on the age and retirement ambitions of the investor and the current allocation of his or her investment portfolio. Generic advice is of very little use.
It is worth remembering, however, that the first rule of superannuation, known as the sole purpose test, is that superannuation funds, whether self-managed or not, should be conserved to provide benefits to members in retirement. Risky investments are discouraged as a threat to this goal. The GFC gave all investors pause, and although it may be too simplistic an analysis to look for repeating history, it is worth a periodic review with your investment advisor to ensure that your SMSF portfolio is properly balanced. Housing may have a place, but no single investment, regardless of current return, should predominate.
By Rolf Howard, managing partner, Owen Hodge Lawyers.*
Rolf is managing partner of Owen Hodge Lawyers. He has been in the legal practice since 1986 and a partner of Owen Hodge Lawyers since 1992. Rolf focuses on assisting clients to proactively manage legal responsibilities and opportunities to achieve competitive advantage. Rolf concentrates on business planning and formation, directors’ duties, corporate governance, fund raising and business succession. His major interest is to assist business owners and their financial advisers plan and implement strategies to build and exit from successful businesses. www.owenhodge.com.au
Property Reviewer on Australian Property Journal
