Australia's housing boom continues apace. It is an extraordinary era of price appreciation, dating back well over a decade. Most independent observers (as opposed to spruikers) believe the market is severely distorted. Negative gearing has encouraged investors in. Investors now are reponsible for about two fifths of applications, and first home buyers are very much sidelined. Chinese investment is reported to be growing fast, especially at the higher end of the market. And low interest rates are not only encouraging more borrowing, they are encouraging investors to look for alternatives to term deposits, whose interest rates are now barely keeping pace with inflation.
One wonders when the reckoning will hit (or if). There is certainly the possibility of a sharp downturn. If investors decide that negative gearing is not a great play (after all, it only happens when you lose money) they will dump massive amounts of property stock on the market. That, in turn, would trigger a crisis in Australia's banks, which heavily depend on mortgage lending for their profits. But there are no signs of that occurring.
The question facing SMSFs is how to treat property? Normally, an overheated market should be considered dangerous. The trouble is that other options, especially cash, are not good.
It is a conundrum. But there is little doubt that the market is hot, as the AFR
"New data shows Australia’s immense investment-backed speculative housing boom, which is now as big as the last investment “bubble” in 2003, has continued at a ferocious pace over the past 3 months even in “seasonally-adjusted” terms."
The market is growing at 15% annualised. Sydney and Melbourne have been hottest:
The Reserve Bank is concerned that it could be a speculative phase similar to what happened in 2002-2003. According the the AFR, investors made up nearly 39 per cent of new housing finance commitments, which is an almost identical level of participation to that recorded at the peak of the early 2000s boom.
Foreign interest and SMSFs are further inflating the market:
"Foreign buyers make up about 40 per cent of all newly developed homes in Sydney and Melbourneand the $560 billion self-managed super fund sector, which can now leverage its cash five times when purchasing properties ... home values across the 8 capital cities are 26 per cent above their peak prior to the global financial crisis and 10.2 above the levels touched in the last cyclical boom in 2010."
Meanwhile, Business Spectator is questioning the commentary on housing from the big banks, which of course are deeply conflicted. It is also a danger signal for SMSFs that are heavily invested in bank shares:
"Australian banks have binged on mortgage lending over the past couple of decades, reaping record profits year-after-year, which has resulted in Australia possessing one of the highest levels of private debt in the developed world.