Australia's looming generation war: SMSF investors v first home buyers

17 Dec 2013 90 month(s) ago

“smsfwar”The ATO has cleared up some issues around SMSF investors borrowing to buy property. But should DIY fund managers go into the hot property market? A Senate enquiry will be looking at issues of affordability and the availability of land.

The Australian Taxation Office has cleared up an area of confusion for the trustees of self-managed superannuation funds who plan to borrow. Trustees have been unsure whether trusts set up as part of SMSF borrowing arrangements might breach the rule that prohibits investments in “in-house assets."

A partner at Gadens Lawyers, Amber Warren, said in a note to clients:

“Under the [ATO's] instrument, an investment by an SMSF in a related trust in compliance with [the borrowing provisions of the act] will be exempt from being an in-house asset.”

“smsfwar”Meanwhile, analyst Catherine Cashmore comments that in the final hourts of the 2013 parliament an enquiry by the Economics Reference Committee was established to address affordability issues in Australian housing. This should be a caution for DIY investors who are attracted to housing. If the returns are dependent on capital gains, it is very much a financial asset play, not a yield play. Rental yields are low and prices are high. For prices to rise further in the long term -- and most SMSF investors are long term investors -- that bullish sentiment needs to be sustained. It is not based on the fundamentals of rental yield.

Cashmore comments that the enquiry will look into policies designed to increase the supply of housing. If there is a sharp increase it should lead to an easing of prices. That is good news for first home buyers, but bad news for SMSF investors who have bought property.

In effect, the current situation is creating a generational war: SMSF investors want prices to stay up and first home buyers want them to come down. If one wins, the other loses.

Cashmore observes that the same kind of enquiry was conducted in 2008 which addressed Australia’s tax policies, such as capital gains tax and negative gearing, which are the main reasons for the high investor interest:

"The report correctly stated “the need for greater responsiveness of land release and housing supply to market demand.” Stressing, “efforts to this end should occur in a variety of contexts.”

Some of the highlights included;

• Recognition that state and local governments’ planning processes are too complex and often involve long delays and high costs.

• Housing supply not adequately facilitated with community infrastructure.

• Developer infrastructure charges being too excessive and further restricting supply and inflating purchasing costs.

• The negative impacts of the ‘urban growth boundaries’ implemented by the Victorian and South Australian governments, resulting in land banking and increased prices.

• The type and quality of housing being constructed – i.e. not appealing to elderly downsizers or single parent buyers.

• And notably – a critical assessment of New South Wales, with the suggestion it had ‘probably’ done more than any other state in Australia to restrict the opportunities for urban growth on fringe land.

Cashmore highlights a lack of action since 2008. There is really no reason to think there will be much action now. Australia's economy seems to be resting semi-permanently on a foundation of persistently high property prices. But for SMSF that does represent risk:

"The government used to invest in it—20 years ago you would go out to a release like Blacktown and the main sewer carriers were in and the sewage treatment plant was built. You would go out there and you could develop this five-acre parcel or that five-acre parcel. You might do a little bit of a lead-in, connecting infrastructure, but it was affordable.”

Whilst I wouldn’t advocate all the recommendations concluded in the paper, it’s five years later and we seem to be no further forward.

Prices continue to rise from a bull run on established property in our most populated states – and first homebuyers are barely treading water against a speculative investment sector.

Urban boundaries and a propensity towards land banking, hefty tax overlays and poor infrastructure development, ensure land on the outskirts, continues to be priced at a level that doesn’t incentivise buyers to correctly evaluate the trade-off between price and time, and therefore demand remains marginal, with a downward slide in the number of new dwellings completed per annum.

There is no forward thinking on infrastructure financing, or a full understanding that people don’t purchase houses as much as they buy into communities.

Additionally, there is little diversity on the type of housing built in greenfield developments to enable newly created suburbs to market to a broad socioeconomic mix of residents, who do not just want McMansions built to the edges of a 400-500sqm blocks of land.

Rents continue to rise, with vacancy rates in areas such as Sydney, close to 1%.

Crowded houses – with three or more families sharing accommodation, has increased nationally by 64% to 48,499 (ABS.)"

Cashmore argues that the Annual Demographia International Housing Affordability Survey demonstrates that in cities where supply is not "artificially constrained by poor policy and planning, which fails to cater for community needs, house prices remain affordable and relatively stable" prices are lower. That may be the best place for SMSF investors to look"

"Realistically, a well developed city, which has policies flexible enough to meet the demands of its home buying demographic, should see price rises track only the rate of inflation, with growth in household incomes somewhat influential in those areas in which there is greater demand.

Not the well spruiked figures of 7 per cent + median growth per annum we experienced in some suburbs prior to the GFC, – or figures outpacing both wage growth and inflation.

It’s very important we correctly understand where our policy makers have let us down in the delivery of affordable housing stock, because a worrying trend is starting to emerge which was highlighted in a recent news report, showing footage of Julia Gillard’s Altona house auction.

In the post auction interview, the sales agent said that the Chinese purchaser wanted her to express to everyone that ‘she is an Australian citizen…’

The comment speaks volumes – emphasising how important it is to stop blaming current high prices solely on ‘foreign buyers’ whilst at the same time, singling out a unique demographic – a large proportion of which are Australian citizens, work and pay their taxes, and have a right to purchase residential real estate.

One of the most powerful tools for the regulation of any market is transparency. Without it, speculation ensues and leads to undesirable assumptions – such as the belief that every Asian face seen at an auction is ‘foreign’ – and clearly this Chinese lady has noted the negativity.

The reason real estate prices are high in Australia, is due to years of poor government policy and planning – and this is where the blame should be placed and this is where the pressure should be directed."