SMSFs Enter the Great Australian Property Debate

Australia’s property debate is turning into an all-out war. The property spruikers are taking a beating from all sides these days. How times have changed.

The Reserve Bank is the only one on their side. It says Australia doesn’t yet have a property bubble, but safeguards to avoid one should be in place. That led to one of the funniest headlines we’ve ever read:

RBA discourages property bubble speculation,‘said the Australian Financial Review last week. The irony is surreal. You see, the Reserve Bank of Australia created the housing bubble that it denies exists and claims it is trying to discourage. Low interest rates spur borrowing and speculation, which bids up the price of housing.

If the RBA wanted to stop a housing bubble, or stop creating one, all it has to do is increase the price of credit – the interest rate. That’s not going to happen say analysts from UBS and Citigroup, because it would cause the Australian dollar to surge and that would squeeze our exporters again. With low and possibly lower rates on the horizon, former RBA official Bob Gregory says a housing bubble seems ‘inevitable’.

Instead of increasing rates, the RBA is going to ‘jawbone’ borrowers and lenders away from risky loans according to the same bank analysts. We shudder to guess what ‘jawboning’ means. Especially since it turns out that the RBA was involved in a scandal trying to supply Saddam Hussein with money. As in they wanted the contract to print Iraq’s currency. Look out for drones if you’re hanging out at Martin Place.

The new angle on the property debate that everyone seems to be running with is Self Managed Super Funds (SMSFs), which have supposedly been piling into property. To be clear, investing in property is a requirement for patriotic Australians. But doing so via a tax efficient structure that robs the government and super fund managers of their cut is very, very dangerous.

The RBA’s version of the argument points out that SMSFs are overweight cash and commercial property, but underweight fixed income and international equities. Of course, SMSFs have vastly different incentives, capabilities and aims than professionally managed funds. So their allocation makes perfect sense. Having a large allocation to cash is professional suicide if you’re running a big fund for members, no matter how smart or prudent it may be. And small business owners own their business’ premises through their SMSF for tax reasons.

It all makes perfect sense to us. If it weren’t for the amount of debt that goes with investing in property, that is. Leverage has the potential to leave you with losses above what you initially invested. That’s a very dangerous retirement strategy. But it’s unlikely to phase the property enthusiasts.

Property commentator Chris Joye reckons SMSFs have pent up property investment demand of $150 to $450 billion dollars. There are a lot of conclusions you can reach from that calculation. Especially given the range…

Not that we can do a better job of calculating the figure of pent up demand. Largely because demand is a fickle thing. One minute everyone wants a $30 million house on the Gold Coast like LM Investments Director Peter Drake. The next minute he is offloading it for $7.35 million.

What’s just as interesting as the demand for houses is the supply. Remember, housing construction is supposed to replace the mining boom. And with up to $450 billion dollars of pent up demand, you’d think a bunch of houses could be built. But an increase in supply means lower prices, so actually building houses spells disaster for all those investing in them. Instead, it pays to chase a slowly growing supply of houses with more and more money, bidding up prices and investment returns.

So really, the RBA, super funds and everyone else should be encouraging the SMSFs to pile into housing. After all, what would Australia be with neither a mining boom nor a housing bubble? Dan Denning has a simple answer to that question.

We think the economic empire of Australian houses is ending. Eventually, interest rates will have to rise, mortgage standards tighten and house prices fall. Probably all at the same time. Soon, children will no longer want to be real estate agents, just like they no longer want to be investment bankers.


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From the Archives…

The Fed Does the Reverse Volcker and Targets the US Unemployment Rate
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26-09-2013 – Greg Canavan

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25-09-2013 – Chris Mayer

The Unintended Consequences Brewing Thanks to the Federal Reserve
24-09-2013 – Greg Canavan

The Market’s Declining Response To ‘Open Mouth’ Operations
23-09-2013 – Dan Denning

Nick Hubble

Nick Hubble

Having gained degrees in Finance, Economics and Law from the prestigious Bond University, Nick completed an internship at probably the most famous investment bank in the world, where he discovered what the financial world was really like.

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5 Comments on "SMSFs Enter the Great Australian Property Debate"

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Mick Barry

Increasing interest rates only supplies a living for those investing in the currency carry trade (Mrs Watanabe et al).
Take a leaf out of the Chinese government’s ideas.
Increase minimum deposits to 60%.
When people have to put that much skin in the game they tend to see a property bubble for what it really is – the words ponzi & pyramid soon come to mind.


“Genworth float delayed”. The North Americans thought they could sell their mispriced mortgage insurance risk back to us? They’ll have to talk to their bond market buddies to put the screws on CBA…. but that was the same CBA that got plenty away just a couple of weeks ago as the carry/risk trade switched back on. Bad news for Genworth shareholders.

Talk about no one having their eye on the ball with some explanations for our high prices. Take out the untrammeled buying from so-called Chinese investors, and housing prices will return to an affordable zone. Mostly it’s top down phenomenon – Buy in the best suburbs, and the nearby suburbs go along for a ride. Given that locals now have to move sideways to find value. Surely the names going on the new titles would provide some insight for these supposed experts who claim to know something, yet who obviously never bother with real time property happenings. Added to this,… Read more »

I note that there seems to be a lot of press about “they” (“they” being reserved for rich foriegn investors who are not European or American) buying property in Australia.

Apart from capital returns from this housing not-bubble, would any of this investment be due to the measly 4 % odd rental yeild being so much higher than in “they’s” country?

A question, not a thought.

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