My previous post on the possibility of superannuation funds taking out loans to buy property (“That’s not a Housing Affordability Crisis”) has now been shown to be more than the ravings of a complete loony. A mere 6 days after my post, Robin Bowerman, no less than Head of Retail for Vanguard in Australia started talking a similar line. I’m going to quote from his article on “Super changes open the gearing door” from November 16:
… by investing through an instalment warrant structure it means super funds may be able to gear any of the usual investments a super fund can buy … perhaps a residential property for example. The super fund receives all the rental income and gains.
He has based this on a tax office ruling from September 24 on whether and how installment warrants could be bought by SMSF (self-managed super funds), which are regulated by the ATO. This wasn’t something I included in my grab-bag of references, so it adds to the weight that there’s a-change a-foot.
The implications are interesting to speculate about (other than significant price rises for residential property). For example, will we get a whole heap of funds appearing that buy up houses in a particular suburb, e.g. Toorak. Then, instead of parking their money in a bank account after selling their home and before buying a new one, a vendor could put it in such a fund so that it tracks the rise in house prices to help them avoid a movement in the property market in the mean-time.
4 thoughts on “I am not a nutter”
The true measure of demand in the housing industry is not the number of landlords or property trusts, but end users i.e. people requiring accommodation. If listed residential property trusts went on a buying frenzy, then yes, there would be short term upwards pressure on house prices. In turn enterprising developers wanting to get rich will try to feed the demand by building more houses. More houses means that renters have more choice, putting downwards pressure on rents, or more houses means greater affordability for owner occupiers which reduces the number of renters, putting downward pressure on rents. Since listed trusts are enticed by rental yield as a measure of ROI then lower rents will lead to fewer residential property trusts. You have to hand it to Adam Smith, he had something with that whole invisible hand bit about free markets!
You make some excellent points!
I haven’t run the numbers (should do that soon, I guess), but let me ramble a bit.
At the moment something like 70% of dwellings are owner-occupied, and 30% are rented. We may be looking at a shift where demand to own rental properties moves the ratio somewhat in favour of the rentals side. Instead of the usual two types of people competing to buy a particular house (someone looking to live in it, and someone looking to use it as a negatively-geared investment), we may get a third type show up (someone looking to put it in the super trust they run). Probably the key question here is whether a super trust (with its tax rate at 15%) is willing to pay more for property than a typical investor (who can, at least in the short term, tax deduct against a rate of 41.5% or 46.5%).
If we’ve got a new class of buyer turning up at auctions etc. who is willing to pay more than the current buyers, then property prices will go up.
Most funds have an exit strategy. A house as an asset for a residential property trust must necessarily have a fixed life as an investment. Hopefully the trust will be able to sell the house for a capital gain. If the trust does not sell, then the house will have a declining yield as the trust will run out of depreciable fittings, maintenance costs will increase, and rents will be lower than for a new property. Without running any numbers, I would think that the trust’s best option would be to buy the house new, depreciate it for say, 5 to 10 years before churning to a new property.
If the trusts churn properties, then while you may have a step change in the number of market participants, the actual number of properties coming up for sale on a regular basis should not be overly affected, and could in fact increase, offsetting the rise in prices. Maybe..
Despite the lower tax rate for negative gearing, the super fund, having greater access to capital would not have to leverage itself to buy the property in the first place. Let’s face it, the only reason that we negatively gear in the first place is because the rental yield usually won’t cover the interest payments on the mortgage. Eliminate the interest requirement and the yields will look far superior to the super trust than they would to you or I, so yes, the super trust will be able to pay more for the property.