Catching On to the Real Estate Bubble

Catching On to the Real Estate Bubble

And so, another political thought bubble is consigned to the waste paper bin of history — for now, anyway.

That was the idea of allowing first home buyers to cash-in some of their superannuation, in order to use it for a deposit on a home.

Former Prime Minister, Paul Keating, said it was a terrible idea — among other things.

And not surprisingly, the funds management industry thought it was a bad idea too.

As ABC News reported last week:

Financial Services Council chief executive Sally Loane said tinkering with superannuation would undermine public confidence in the system and be counterproductive.

“Withdrawing superannuation savings to buy a house — especially when house prices appear to be at the high end of the cycle in the major states — will not help first home buyers into the market,” she said in a statement.

“It will only further fuel the increase in house prices.”

Of course, there’s a reason the financial services and funds management industry doesn’t like the idea. And it’s got nothing to do with pushing up house prices.

The real reason is that every dollar taken out of superannuation is a dollar less on which the industry can charge a management fee.

If the government allowed first homebuyers to — say — withdraw up to $20,000 to buy a home, that’s $400 a year (at a 2% management fee) in fees lost to the funds management industry.

Not a lot, until you multiply that across the total first homebuyer market.

The recent changes to first homebuyer subsidies in Victoria suggested it would benefit 25,000 people each year. If each of those people dipped into their super to cash-out a deposit of $20,000, that’s $500 million flowing out of the funds management industry.

Importantly for the industry, that’s a potential $10 million in fees going up in smoke.

And that’s just in Victoria. Replicate that nationwide and, potentially, you’re looking at $20 million-plus in forfeited management fees.

No wonder the industry doesn’t like the idea.

Saying that, as Bloomberg reports, the superannuation industry is hardly short of a bob or two:

An Australian pension fund overseeing A$37 billion in assets is looking to hire investment staff to bolster its credit, infrastructure and property teams as it diversifies away from Australian equities.

Melbourne-based Construction & Building Unions Superannuation, which managed Australia’s second-best performing pension strategy in 2016, aims to bring more of its asset management in-house. It joins the nation’s biggest pension fund, the A$100 billion AustralianSuper Pty, and UniSuper Management Pty, in growing their internal investment businesses.

The story goes on:

CBUS, which primarily manages the retirement assets of construction and building workers, receives A$1.75 billion in new pension contributions each year from more than 741,000 Australians. Its default “growth” investment option was named Australia’s second-best performing pension strategy for the year to Dec. 31 after gaining 9.6 percent in the period, SuperRatings data show.

Finally, and this is the best bit:

The company is considering hiring investment personnel to support Linda Cunningham, who was appointed manager of debt last October, and Diana Callebut, manager of infrastructure at CBUS, Fok said. It is also weighing adding more staff to its property, and investment strategy and innovation teams, he said.

The pension fund is also considering investing in “affordable housing” as it seeks to play a role in easing the nation’s property affordability woes, according to Fok. Callebut says the Australian government needs to “take leadership” on housing affordability issues and CBUS wants to be “part of the solution.”

So, if we’ve got this right, it’s bad for you to take money from your super in order to use it to buy a house for you to live in…

But, it’s perfectly OK for your super fund to use your money, on which it will charge you a handsome management fee, in order for it to help someone else buy a house.

Seems rather bottom about chest area to us.

But aside from that, you’ll excuse our ignorance, but we could have sworn that the purpose of superannuation is to help build a nest-egg for your retirement.

That, as we see it, is the sole purpose of superannuation. In fact, the self-managed superannuation industry drums the concept of the ‘sole purpose test’ into SMSF trustees.

That is, when you have an SMSF, you can’t use it to buy things for personal use, or in fact for any other use than investing for your retirement.

Yet, it appears that it’s fine for CBUS and other big super funds to ease ‘the nation’s property affordability woes’. We can’t quite see how that fulfils the ‘sole purpose’ of helping folks save for retirement.

Anyway, the world of super is a murky one. And the deeper you look, the murkier it gets.

Egg on face

On the subject of housing, this from Monday’s Sydney Morning Herald:

The head of Australia’s corporate watchdog has again sounded the alarm over Sydney and Melbourne’s housing markets, saying they’re in the midst of a price bubble.

Australian Securities and Investments Commission chairman Greg Medcraft issued the warning at the regulator’s annual forum in Sydney where he also revealed the watchdog was still considering taking action against the Commonwealth Bank over the alleged rigging of a key interest rate.

It’s no wonder the Commonwealth Bank of Australia [ASX:CBA] share price had such a rough day of it yesterday:

Commonwealth Bank Chart
Source: Bloomberg

To quote Mr Medcraft,

I’ve been saying for a while I thought it was a bubble, other people are catching up now.

Boom. Mr Medcraft sounds like he’d fit in well here. Perhaps once his gig is up at the regulator, he could find some time to do some freelance work for us.

Of course, we also know that trying to pick the top of the Aussie housing market is a thankless task. We’ve tried off and on for the past nine years.

We have so much egg plastered to our face as a result of being wrong time after time, you’d think we had a chicken strapped to our head.

But we’ll keep saying it: the Aussie housing market is (to use the words of a certain Donald J Trump) a ‘big fat bubble’. And it’s a bubble ready to burst.

For all the talk about how much Aussies love their houses, and how the population is concentrated in just a handful of cities, we don’t see that as a valid reason to argue for ever-rising house prices.

At some point, the fundamentals just won’t stack up. We rather fear for those with a ‘big fat’ mortgage, that time is fast approaching.

Cheers,
Kris Sayce, Publisher, Markets & Money

Kris Sayce

Kris Sayce, dubbed the ‘Jeremy Clarkson of Australian finance’, began as a London finance broker specialising in small-cap stock analysis on London’s Alternative Investment Market (AIM). Kris then spent several years at one of Australia's leading wealth management firms.

A fully accredited advisor in shares, options, warrants and foreign-exchange investments, Kris was instrumental in helping to establish the Australian version of the Markets and Money e-newsletter in 2005.

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Anthony F
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I have been saying this for long time also that we have a housing bubble, but when talking about it to work colleagues it’s amazing how defensive they get. It sounds horrible but all the people that have mortgages up to their eyeballs for investment properties or to own a house that is over valued kind of deserve to be burnt, since these people are to blame for feeding this bubble. It’s amazing how much pressure people have here to own a house, and how much our banks are willing to lend to people who could never afford the repayments… Read more »
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