In the above segment aired last night on ABC’s The Business, Self Managed Super Funds (SMSFs) hit back at the suggestion that they are behind the recent run-up in Australian house prices and may be causing a bubble.
According to the segment, only around $80 billion has been invested into real estate (both residential and commercial) since rule changes in 2007, which is far too little to have a material impact on prices. Moreover, the percentage of funds allocated to real estate has barely shifted over the past four years (see next chart).
Instead, the SMSF industry argues that record low interest rates are the primary driver of rising prices.
The industry does, however, acknowledge that there is an issue with spruikers pushing SMSF schemes onto naive investors, particularly baby boomers seeking to build their retirement nest eggs quickly. As such, the SMSF issue is not about pushing-up prices, but concerns around the quality of advice.
Overall, I agree that SMSFs (and foreign investment for that matter) are not a key cause of the recent run-up in house prices, although they do obviously add to demand and price pressures at the margin. Rather, the key cause is increased investor participation (see next chart), driven by Australia’s favourable tax rules (e.g. negative gearing) combined with a search for yield caused by low interest rates.
Concerns around increased property speculation and prices should, therefore, be addressed via a combination of: changes to taxation rules (e.g. quarantining negative gearing rental losses against rental income); supply-side reforms aimed at freeing-up land supply and planning rules, lowering taxation on new homes, and improving the financing and provision of housing-related infrastructure; as well as macro-prudential curbs on higher risk mortgage lending.
Attacking the SMSF industry, whilst ignoring these higher order issues, seems like a classic case of scapegoating.