Chinese Buyers & SMSFs AREN’T Driving The Current Property Boom… YET. When You See The Numbers, You’ll Be Amazed
SMSFs are playing a ‘slow and steady’ race. Despite all the hype, they’re still relatively small players in residential property. But they have the potential to be huge, and totally reshape the market.
The two big stories in Aussie property right now are Chinese buyers and Self Managed Super Funds (SMSFs).
It’s headline news because both a relatively new phenomena. 10 years ago they were barely blips on the property radar.
But with all the hoo-ha in the papers it’s easy to overstate how important they are to the current cycle. The impression you get is that the only people buying houses in Sydney are the Chinese. The only investors making plays at the moment are SMSFs.
But the truth of it is, that right now, both players are still relatively small fish in the property pond.
And the stories about hordes of Chinese buyers cruising the streets of Sydney distract us from what’s actually going on – and that’s a broad-based cyclical recovery in property. You don’t get double digit growth in a market as big as Sydney just because one buyer segment goes on heat.
What we’re seeing in property right now is in a way, exactly what you’d expect. We had a number of soft years, while thanks to massive global money flows coming out of the US, Japan and Europe, interest rates fell to record lows.
It’s a perfect recipe for a bounce in prices.
And the cyclical recovery (predictable, bland and unnews-worthy as it is) is the real story here.
I think this is what Tony Cahill, general manager of wealth management at Bank of Queensland (BoQ), was getting at during the week. He was keen to make the point that SMSFs aren’t to blame for the surge in prices we’ve seen over the past year.
In fact, SMSFs have typically been more drawn to commercial rather than residential property.
“Many DIY fund trustees are small business owners and current rules allow them to invest in a property where their businesses operate.
Yields – or investment income – from commercial properties are also usually higher than those netted from residential assets.
…residential property has [actually] declined as a proportion of SMSF assets in the three years to June…
SMSF borrowing to invest in property contributed to only a fractional 3 per cent of system growth in residential lending.”
SMSFs are still small fish in the property pond.
And this is exactly the point I’d make.
The real impact of SMSFs (and Chinese buyers) isn’t going to show up in short-term cyclical dynamics. What we’re talking about are long-run game changers.
It’s not their current appetite, but the potential demand that they could end up bringing to the table over the next decade or so that’s the real story.
Because while SMSFs aren’t big property buyers now, they are sitting on a mountain of cash. At last count, they were worth $507 billion.
That’s bigger than Westpac.
And at the moment, residential property only accounts for around 3.5 percent of the total portfolio.
As I said, that’s not massive. That’s about $18 billion. Still a sizeable player, but nothing over the top.
Because I’ve seen surveys that suggest that SMSFs would actually like to have much larger exposures to property – like something in the order of 30 percent.
Now we’re talking serious cheese. If SMSFs followed through on that promise, they’d be throwing another $160 billion towards property. Drop a rock in the pond that big and you’re going to have some serious waves.
But wait, there’s more! Under current rules, SMSFs could leverage that $160 billion towards something around $350 billion and some steak knives.
This is serious coin.
So it suggests that current SMSFs spending of $18 billion could well become $350 billion in a matter of years. How quickly? Well that’s anybody’s guess.
To get a sense of what kind of impact that could have, remember that average house in Australia are worth around half a mil.
So we’re potentially looking at demand for an extra 700,000 houses.
How big is that? Well, remember that we only build about 70,000 homes a year at the moment. So we’re potentially looking at a sudden surge in demand that’s equivalent to about 10 years worth of current supply!
Or imagine that SMSFs gradually roll out the desired increase in property exposure over a full decade. That will still see them potentially buying every new house on the market, every year, for the next ten years!
This is the potential SMSFs have to be a total game-changer.
They’re not there yet, and there’s no point blaming them for the rocket under prices in Sydney. It’s got almost nothing to do with them.
But what we’re looking at is a long run level-shift in Australian property prices. In economics they distinguish between cyclical ups and downs, and structural ‘level’ shifts.
And so in ten years, we’ll still have a property cycle. The property market will still be hotter some years than others. But the surge in SMSF demand will have created a level shift in prices. And in the process, they’ll prop up the cycle. Down years won’t be as down. Up years will be spectacular.
All we’ve got to do is get in on this side of the level shift. And as the data shows, that’s where we’re at. SMSFs don’t have the exposure they’re looking for yet. But they’re on the way.
And if the Chinese buyers reach their potential too… well, we’re looking at a very crowded pond indeed.