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:
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."