Why Self-Managed Super Funds May Be At Most Risk of A Housing Crash

Property prices are growing wildly in Sydney. House values are up by 15% in the past year alone. Sounds like good news, right? Not for everyone. There is increasing concern that people with self-managed super funds (SMSFs) risk ruining their retirement through property investments.

In a low interest rate environment, many SMSF investors are seeking high yield investments to boost their portfolio. That’s what makes real estate in Sydney so attractive. But it also means more investors are going ‘all in’ on property. And the signs show that more people are taking a riskier approach to their investments.

The number of SMSF funds that diversified their investments fell to 72% this year. This is 6% lower compared to 2011. Financial regulator ASIC says this is a clear sign that SMSFs aren’t diversifying as much as they used to. They think too many investors are putting all their money in property.

That’s a concern for SMSF investors because more people are being priced out of real estate. Markets and Money Editor Callum Newman wrote last week about Sydney’s housing affordability. He says that the growing prices are making it harder for people to invest in property. Even dual income households are struggling to afford property (read it here).  And it’s a sign that the market may be growing beyond its capacity.

The problem for SMSFs is that they’ve left themselves very exposed to a price correction down the line. That’s especially true for people who have most of their superannuation money in property. In other words, they’re leaving huge chunks of their retirement portfolio exposed to a property crash.

Financial regulator ASIC thinks Sydney already has a property bubble

The typical average disposable income to house price ratio in Australia was below four prior to 2002. That means house prices were worth roughly four times the average household disposable income. Then the iron ore boom came, and investors started spending money in droves. House prices, like other assets, have grown enormously since then.

But that ratio has reached new heights recently. Housing is worth six times the amount of disposable income people have on average. More people are finding that household wages aren’t keeping up with property prices. And that’s making property unaffordable across the board.

And it’s one thing for regulatory bodies like ASIC to caution SMSFs that we’re already in a bubble. But banks also have a word of caution for SMSFs. ANZ chief David Cunnington thinks a bubble could develop if Sydney house prices continue to grow by 15% for another 12 months.

Prudential regulator APRA agree that current market conditions foreshadow an uncertain future. They say that low interest rates, rising house prices and large household debts are a long term worry for SMSFs.

The big fear is what will happen if rates rise in the future. Right now that’s not on the cards. In fact most economists think rates will go lower before they start rising again.

But when rates start going up, it’ll make it harder for investors to meet their payments. And it will also decrease demand for housing. For SMSFs invested heavily in property, it could devastate retirement funds. That’s why ASIC urges investors to think carefully about their investments before things get worse.

As Callum says in his column, that doesn’t mean that market is going to go bust anytime soon. ‘But the seeds of the bust are sown in the boom.’

Mat Spasic,

Contributor, Markets and Money

PS: Most Aussie retirees rely on their superannuation to live out their dream retirement. But with fees and taxes, many lose out on thousands of dollars to super funds every year.

In a special Markets and Money report, Editor Vern Gowdie shows you there’s another way. ASIC’s warning for SMSFs is timely. Vern knows that they aren’t for everyone… but an SMSF could be ideal for your portfolio.

Vern takes you through the A to Z of SMSFs to help you decide if it’s the right option for you. In the report Vern also shows you how SMSFs benefit your super tax position.

To find out how to download his free report, ‘How To Know if a Self-Managed Super Fund is Right For You’, click here.

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