The chief economist of an Australian challenger bank has warned SMSFs about investing too heavily in residential property.
Speaking to Mortgage Business’s sister publication SMSF Adviser, AMP Capital Shane Oliver said Australians are “loaded to gunwales” with property.
“About 60 per cent of household wealth is in property,” Mr Oliver said. “50 per cent is in residential which I think is an argument against loading it into your superannuation fund.
“You could make a case for commercial property but residential property is overvalued and overowned by Australians so it would make more sense to me for SMSFs to be diversifying to where they’re not heavily exposed to and that’s probably not residential property.”
Mr Oliver said that, on balance, Australia still has a shortage of property, but highlighted that there will be certain suburbs in Sydney and Melbourne that could potentially see an oversupply.
“For example, the inner-city parts of Melbourne and also the Western suburbs of Sydney. The supply of units is starting to have a dampening impact on prices,” he said.
Mr Oliver said off-the-plan residential property is particularly worrisome since investors who have bought off-the-plan may have difficulty getting finance from the banks further down the track.
“There could be a period of short-term indigestion and some of the recent surge in unit construction or apartment construction coming into the market could be a dampener on prices in some areas,” he said.
David McMillan, director of acquisitions at Performance Property Advisory, said an oversupply of off-the-plan apartments, falling property values and recent regulatory changes by APRA will begin to affect purchasers in the months ahead, and believes Melbourne is particularly at risk.
“For a start, it has too many off-the-plan apartments and not the available rental population to make this type of investment worthwhile,” he said.
“In addition the value of generic off-the-plan, high-rise, fringe house and land packages has fallen by 10 per cent to 15 per cent in some pockets of the city, and now with APRA changes beginning to take effect and the big four banks requiring a 20 per cent deposit, those with off-the-plan contracts will have to stump up additional cash to settle.”
Mr McMillan said the problem with off-the-plan property is that there is a significant time lag between purchasers making the initial deposit and settlement – sometimes up to three years.
“What this means for investors, who say, put down a 10 per cent deposit on a $1 million apartment, they will now need an additional $100,000 to settle,” he said.
While Mr McMillan welcomes the changes made by APRA, saying they will moderate an overheated market, he noted that there will be collateral damage.
“Those most affected will be people who can least afford it – often those close to retirement who have used their life savings to purchase property via their SMSFs.”
Mr McMillian noted that the finger should be pointed at unscrupulous advisers, accountants and financial planners for herding their clients into risky investments because they stand to pocket commissions of up to nine per cent on the purchase price of the property.