Australians Ride Housing With Pensions Not So SuperNarayanan Somasundaram
Howard Kindler, 57, dipped into his pension to turn property investor, spending a third of his retirement savings and taking out a mortgage to buy a Melbourne apartment.
Disappointed with the returns of his retirement fund, Kindler is one of the million Australians who go it alone and manage their own pensions, known as self-managed superannuation funds or SMSFs that together hold A$500 billion ($474 billion) in assets. Many are increasingly banking on surging home prices to provide a comfortable retirement, and like Kindler, are leveraging their investment, expecting higher returns.
“I am seven to 10 years away from retirement, and ever since the global financial crisis superannuation hasn’t seen much growth,” said Kindler, a human resources manager at a school in Melbourne, Australia’s second-largest city, who paid A$530,000 for the apartment. “I decided to take up management of my own retirement savings and diversify within that. Part of that strategy, of course, was to look at buying a property.”
The growing number of individuals using their pensions for all-or-nothing bets on home-price appreciation and rising rents -- increasingly encouraged by property developers and consultants -- has helped spur the nation’s home prices to a record and caught the attention of regulators. House prices will gain 11 percent in 2014 after rising 3.2 percent so far this year, according to Sydney-based SQM Research Pty.
The Australian Securities & Investment Commission, which regulates the financial advice that SMSFs receive, is concerned about aggressive marketing of property to the funds.
“We have seen examples of advertising that are going down the lines of spruiking of property to SMSFs,” Greg Tanzer, the ASIC commissioner, said Sept. 18, using an Australian term for noisy promoters, in this case those touting properties to self-managed pension funds. “Our message to spruikers is very clear, we do not want SMSFs to become the target. Superannuation is a long-term investment.”
Investment by SMSFs in residential property has risen 65 percent since mid-2008 and 10 percent in the past 12 months to A$17.5 billion in June, according to data from the Australian Taxation Office, which oversees regulation of the small funds. The ATO’s June 2013 data is extrapolated from the funds’ tax return filings for the year through June 2012.
The rise of SMSFs, which managed a combined A$506 billion as at June 30, could exacerbate the property-price cycle, the Reserve Bank of Australia said in September.
“There are tentative signs that SMSFs are moving some of their assets out of cash and into higher-yielding assets,” the central bank said in its semi-annual financial stability review Sept. 25.
House prices rose to an all-time high in September after the RBA cut its benchmark interest rate by 2.25 percentage points over two years to a record low 2.5 percent, pushing mortgage rates to their lowest since 2009. The country’s average standard variable home-loan rate offered by banks was 5.95 percent in September compared with 7.8 percent two years earlier, RBA data show.
Firstmac Ltd., a non-bank lender with about A$5 billion of mortgages, from Oct. 14 began offering through its online brand loans.com.au home loans to SMSFs at a variable interest rate of 4.99 percent, Michael Corkill, a spokesman for the Brisbane-based company said. That rate undercuts the 6.4 percent offered by Commonwealth Bank of Australia and 5.98 percent rate by Westpac Banking Corp., the country’s largest mortgage lenders.
Property has always been an integral part of Australians’ wealth. Non-financial assets, largely real estate, made up 58.5 percent of household wealth in Australia in mid-2013 compared with a global average of 45 percent, according to a Credit Suisse Group AG global wealth report released Oct. 9.
“Among those interested in establishing an SMSF, a third of them want to gain exposure to property,” said Recep Peker, a senior analyst at Sydney-based research firm Investment Trends Pty, which surveyed 1,927 SMSF trustees in April.
BPM Corp., a Melbourne-based property developer, has sold to SMSFs 20 of 69 apartments in a new development under construction in Essendon, a suburb 9 kilometers (5.6 miles) northwest of the city’s center, the company said in an e-mailed statement.
SMSFs are unique among pensions in developed nations in that they choose their investments, are responsible for custody of the assets and for keeping records. They can invest in assets including stocks, bonds, cash deposits, property, artwork and even wine. They can’t live in any property they purchase nor can they rent the house to a relative.
The individual pension funds are now the largest group of the retirement savings system and are projected to grow to A$2.2 trillion by 2033, according to a report Sept. 23 by the Australian arm of Deloitte Touche Tohmatsu Ltd.
Changes to pension legislation in September 2007 allowed funds to borrow to buy certain assets, including property, using limited recourse loans. The loans give the lender the right to recover any losses only from the collateral in the event of default. The vast majority of Australian mortgages are full-recourse loans, which give lenders the right to recover losses from the house and other assets or income of the defaulter.
In the four years to June 30, 2011, Australia’s large pension funds produced an average annual negative return of 0.7 percent, according to the tax office. SMSFs returned a positive 0.65 percent after fees and expenses over the same period. Data for SMSFs for the two subsequent years hasn’t been released.
Kindler, who set up his SMSF in September 2012 and bought the apartment in May with a mortgage from CBA, has rented it out for A$2,000 a month giving him a rental yield of 4.5 percent before expenses.
Gross rental yields in Melbourne rose to 4.37 percent in September from 4.31 percent a year earlier while yields in Sydney dropped to 4.58 percent from 4.65 percent in the same period, according to researcher Australian Property Monitors.
“I am not too concerned about a price fall on this property because I think I did thorough due diligence,” he said.
Property doesn’t fall into the “safe asset class” category for pensions funds, as investors need liquidity and diversified assets when they enter retirement, said Melbourne-based Robin Bowerman, principal for market strategy at Vanguard Investments Australia Ltd.
“You can’t sell a bathroom or a part of a property when you need to buy a new car. Liquidity is something such people don’t think about enough,” he said.
It isn’t just SMSFs that have taken an interest in Australia’s residential property market. Home loans approved for all investors now account for around 40 percent of the total in New South Wales state, where Sydney, the country’s most populous city, is located, according to the central bank.
Australian home-loan approvals to investors climbed to A$27.8 billion in the three months to June, the highest since March 2008 when the Australian Prudential Regulation Authority started compiling the data. The big four banks have an 85 percent share of mortgages, according to data compiled by APRA.
Outstanding mortgages in the country climbed 4.8 percent in the year to September, the fastest pace since August 2012, as buyers tap the lowest mortgage rates in four years, according to RBA data.
APRA categorizes mortgages to SMSFs as “non standard” eligible mortgages, which means banks in some instances need to set aside almost double the capital they would have otherwise allocated for a traditional mortgage.
“Given that APRA has mandated that banks need to use higher risk weights on their lending to SMSFs, they have less incentive to chase share,” said John Buonaccorsi, a Sydney-based analyst at CIMB Group Holding Bhd. “The most likely source of lending for SMSFs are the smaller lenders who can’t compete in normal mortgages.”
Australia’s so-called four-pillar policy prevents the largest four lenders -- Australia & New Zealand Banking Group Ltd., Commonwealth Bank, National Australia Bank Ltd. and Westpac -- from buying each other.
ANZ hasn’t seen a “marked increase” in SMSF home-loan applications, Stephen Ries, a Melbourne-based spokesman said. Sydney-based Westpac, the second-largest mortgage lender, declined to comment, citing the quiet period ahead of its annual results on Nov. 4.
While there is “strong growth” in SMSF property investment, it’s coming off a low base, David Gall, executive general manager for banking and wealth at Melbourne-based NAB, the country’s largest lender, said in an e-mailed statement.
SMSFs are buying property as Sydney home prices are set to rise as much as 12 percent this year and as much as 20 percent in 2014, SQM Research forecast. An increase in residential real estate investments by the funds raises concerns about consumer protection as they may be exposed to greater financial risks than they had expected, the central bank said in September.
“Australians have a love affair with property,” Vanguard’s Bowerman said. “They have to ask some hard questions when they are borrowing to buy a large illiquid asset for their retirement. What happens when the rental income doesn’t come? As the U.S. demonstrated, property prices when they fall, can go down spectacularly.”