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.
On the way home tonight, I innocently stopped for some chocolate before I got on the train. Instead of going into the Coles, which had long queues, I went into the asian grocery next door. Little did I know that they had a range of chocolate imported from Japan.
Well, Melbourne Central has a lot to answer for because, I brought home one of these KitKat bars. Have you ever seen a 61% chocolate KitKat? Yum. They are very fine. And the Meiji chocolates that I bought there have mostly been eaten now too. They might not survive the evening.
I won’t draw any conclusions here, but I will draw your attention to the following points:
- There are 7.9 million households in Australia, and on average each household owns $298,000 in residential property, e.g. their own house and other rental properties (from ABS Household Wealth and Wealth Distribution, Australia, 2005-06).
- This puts a total value on all residential property in Australia of something like $2,400 billion. However, the market cap for the entire Australian stock market is currently about $1,600 billion (from ASX Historical market statistics).
- Australia is the “fourth-largest retirement savings market in the world” (from the Eureka Report) while superannuation funds are prevented from borrowing any money to buy assets, which is the main way that residential property is bought in Australia.
- When it comes to shares though, the ATO has softened its stance on some types of gearing. Contracts for Difference (CFDs), when bought with cash, are apparently alright (in Interpretive Decision 2007/56), even though CFDs behave very much like borrowing to purchase a share.
- Westpac has bought 441 houses from Defence Housing Australia (according to The Australian and a DHA media release) with the intent of launching Australia’s first residential real-estate investment trust.
- House prices are driven by supply and demand. The superannuation industry has the potential to add a little bit of demand…