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SMSF exposure to residential housing raises concerns

Nicki Bourlioufas  |  28 Mar 2017Text size  Decrease  Increase  |  

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Many SMSF investors may be unaware of their exposure to the residential housing market, whether through home loans, investment property, or holdings of bank shares.


There has been increasing talk about a housing bubble in Australia. Australians are borrowing ever-increasing amounts in the form of housing loans, and at the same time, are piling money into the banks that enable the investment to happen via mortgages.

In response to these fears, regulators are requiring banks to tighten lending criteria, especially for investors, but also for owner-occupiers. But with interest rates remaining at all-time lows, residential property investment is still surging ahead.

The value of outstanding housing loans financed by Authorised Deposit-taking Institutions (ADIs) sat at a record $1.57 trillion at the end of January 2017, up 0.4 per cent from the December 2016 closing balance and up 6.9 per cent year on year, according to data from the Australian Bureau of Statistics.

This number keeps on growing as money pours into residential property. As a result, house prices in Sydney and Melbourne are becoming very overvalued.

Louis Christopher, managing director of SQM Research, says a property correction is only a matter of time, possibly coming in 2018.

"The end of 2017 will see both Sydney and Melbourne markets dangerously overheated and overvalued, paving the way for a possible correction in 2018," he says.

Many self-managed superannuation funds (SMSF) are unaware of their exposure to the residential housing market, whether through their home loan, investment property, or holdings of bank shares, says Paul Resnik, co-founder of FinaMetrica.

"The problem is [many SMSF investors] haven't worked through the consequences of a major market correction on their portfolio and on their lifestyles," he says.

"It is clear the risks need to be spread because the exposure to the housing sector is huge, way more than most people would expect."

Resnik and his colleague Peter Worcester estimated in 2015 that a typical SMSF would, for every one-dollar investment in bank shares, have a $1.60 exposure to home loans.

"The conclusion is that our sample SMSF investor, with a $1 million debt-free home, and a $1-million share portfolio, has a $2.6-million exposure to residential property. That assumes the assets of the SMSF are invested in the top 20 stocks (by market capitalisation) in the Australian stock market," analysis by Resnik and Worcester says.

"In addition, it is assumed that their investment in each stock is proportional to their relative index weights.

"We would presume that most retirees aren't aware of the concentration of their assets leveraged to home and house prices."

Worcester says the S&P/ASX 200 is now at around 5,754 (as at 23 March), down from a peak of about 5,975 on 20 March 2015, representing a fall of 3.8 per cent. The banks are down by much more.

Commonwealth Bank of Australia (ASX: CBA) has fallen to $82.95 from peak of $96.32 in May 2015, a fall of 13.9 per cent. Westpac (ASX: WBC) has dropped 16.1 per cent to $33.44 from a high of $39.88 in April 2017. Australia and New Zealand Banking Group (ASX: ANZ) has fallen to $30.77, down 16.4 per cent from a high of $36.80 in April 2015.

National Australia Bank (ASX: NAB) has dropped more, to $31.76 on 23 March 2017, down from a peak of $44.12 in May 2007, a fall of 28 per cent.

"Has a possible housing correction been fully priced in? Probably not," Worcester says.

"Also, I don't think the big four have realised that Basel III [the regulatory framework] will stop them lending to corporates other than those AAA or AA-rated."

New APRA requirements aimed at "responsible lending" will only add to the big banks' cost of business, says consulting group Grant Thornton. The firm says that as at 30 June 2016, 28 per cent of the ASX 200 was made up of Australian banks.

"On average, Australian banks derive around 40 per cent of their earnings from home loans, and around 60 per cent of their loan books are home loans. Those home loans are, of course, exposed to the same property market as our direct property investments, whether that is for our principal residence or investment properties.

"This exposure is increased further when you consider that many investors hold far greater than 28 per cent of their portfolio in bank shares."

These investors are missing out on better returns elsewhere, says Grant Thorton.

"Over the three years to 30 June 2016, the global share market (MSCI World Index A$) has returned 14.8 per cent, significantly higher than the return of the Australian share market of 8.7 per cent per annum, including dividends and franking credits."

"A large part of that outperformance has been the benefit we've enjoyed from the Australian dollar falling, but even removing the currency benefit, the global share market has still outperformed the Australian market," Thornton says.

"It's easy to stick with what we know and there is a level of comfort obtained from investing in something familiar and tangible.

"However, just because something is unfamiliar, doesn't mean it is necessarily riskier, and certainly doesn't mean we shouldn't take the time to learn more about it. As Australian investors, perhaps we should be looking beyond our own backyard."

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Nicki Bourlioufas is a Morningstar contributor. This is a financial news article to be used for non-commercial purposes and is not intended to provide financial advice of any kind. Opinions expressed herein are subject to change without notice and may differ or be contrary to the opinions or recommendations of Morningstar as a result of using different assumptions and criteria.

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