A- A A+

More warnings on property

15 September 2014  |  Investing

Another regulatory body has claimed that Australia's housing market is dangerously over heated. The Bank for International Settlements has agreed with the International Monetary Fund that the local housing market is a problem.

It has great significance for SMSF investors. Interest rates are low, meaning that term despoists are unattractive. The stock market is probably overheated, as this graph suggests:


Next darlings of the super army

 

That leaves property as the remaining conventional asset class. But if the BIS is to be believed, residential property is also in very dangerous territory. It suggests that the more obvious local options facing DIY investors have potential problems. Diversification, including offshore options, would seem to be crucial.

It should be remembered that SMSFs heavily buy bank shares. Australian banks are heavily exposed to the local property market, so if there is a large correction it will affect share investments as well:

 

"The international body that represents central banks has released data that puts Australia near the top of all measures of overvalued housing.

In its latest quarterly update, the Swiss-based Bank for International Settlements (BIS) has published extensive historical analysis on historical home prices in a large number of countries for which reliable data is available.

Confirming a recent analysis by the International Monetary Fund, the BIS has found that Australian home prices are higher than they typically have been when compared to rents and incomes.

Despite having had no real (inflation adjusted) property price growth over the three years up to when the BIS figures were taken at the start of 2014, Australian homes had the equal fourth highest price-to-rent ratio and second highest price-to-income ratio.

Australian home prices were 50 per cent higher than usual relative to rents, and around 40 per cent higher than usual when compared to incomes.

"A priori, this could be a reason to expect a price correction in the future," the report's authors cautioned, referring to countries where prices were more than 20 per cent higher than these historical averages suggest they should be.

In the months since the figures were taken, Australian home prices have increased much faster than both rents and general consumer price inflation, meaning that they would have deviated further above these historical norms.

The BIS analysts warn that these types of price rises in already overvalued markets increase the risk of future declines, especially where wages are not growing strongly - Australia has recently had wage growth that has failed to match inflation.

"This might lead to a reversal or moderation of recent growth or a further sliding of prices," the BIS warned.

"This argument would be more compelling for markets where prices have grown rapidly in the recent past, and where income growth is projected to be rather moderate."

The BIS has also compiled data that look at house prices back to 1970, with Australia's current index reading of 200 second only to Norway's growth over the past 44 years.

Out of the 14 advanced economies examined by the BIS, only the UK has house prices that come close to matching Australia and Norway for inflation adjusted growth over that period.

Recent Reserve Bank research showed that it was likely that most Australians would be just as well off, or perhaps better off, renting than buying at current home prices."

 

 

 

 

 

 

 



Similar articles from Investing

If you can't beat SMSFs, join them

 | 9/30/2014

JoinIndustry funds are offering superannuants greater choice over their investments in an effort to stem the flood of money into DIY super. It is an intelligent strategy.


A different property perspective

 | 9/24/2014

New ideaIn investment it is a case for many of "often wrong, never in doubt". It is valuable to get different views to make mature judgements. Here is one.


The fault line under the stock market

 | 9/23/2014

Fault lineA report says that about a third of Australia's listed companies are close to the edge. It is a sober reminder to SMSF investors who put their savings into the shares.


Are we heading for a banking crisis?

 | 9/22/2014

BanksAustralian banks are not holding as much equity as they did 10 years ago, and their leverage is high. Everything depends on a healthy housing market. Difficulties may be on the horizon.


What the gold price is telling us

 | 9/21/2014

GoldThe gold price is down by a third from its peak and by 10 per cent this year. What does it mean?


 

Subscribe

Subscribe to the Personal Super Investor weekly email to keep abreast of developments in SMSF law and investment markets. SMSF investors looking to improve investment returns from shares, property, cash or other specialised investments, will find the PSI weekly newsletter an invaluable resource.

Subscribe now »

Disclaimer

The contents of this website are of a general nature only and have not been prepared to take into account any particular investor's objectives, financial situation or particular needs. Our content is not intended to be advice and must not be relied upon as such. You should seek independent advice tailored to your specific circumstances prior to making any decisions. Personal Super Investor does not provide financial product advice or recommend any financial products: Where this website or it derived newsletter/electronic publication refers to a particular financial product, whether it be within our editorial or a 3rd party advertising, advertising promotion or advertorial, then you should obtain a Product Disclosure Statement (PDS) relating to that product and consider the PDS before making any decision about whether to acquire the product. We also recommend that you should seek professional advice from a financial adviser before making any decision to purchase any financial product referred to on this website. We do not make any representation or warranty that any material on the Personal Super Investor website will be reliable, accurate or complete, nor do we accept any responsibility arising in any way from errors or omissions of our content or any content provided by any advertiser appearing the Personal Super Investor website. We will not be liable for loss resulting from any action or decision by you in reliance on the Material (whether editorial or advertising) on the Personal Super Investor website, nor any interruption, delay in operation or transmission, virus, communications failure, Internet access difficulties, or malfunction in your equipment or software. By using the site you acknowledge that we are not responsible for, and accept no liability in relation to any content contained on the site that you may use, including any other users’ use of the Personal Super Investor website in any circumstance. You use the Personal Super Investor website at your sole risk.