Don’t look now but Australian housing is attracting a whole lot of attention. Prices are on the up. Is the RBA rate cuts stoking the heat, or is property bull Phil Anderson right that there’s an even larger cycle at work?
From a conventional viewpoint, you have to finger the RBA. The Wall Street Journal pointed out on Monday that the central bank has cut the cash rate eight times since November 2011. The cash rate now sits at a record low.
If you read Money Morning regularly, you’ll know Kris Sayce thinks low interest rates will keep driving investors into the stock market, especially dividend paying shares. So far, that’s proved a winning call.
But there’s pretty good evidence it’s juicing the property market too. That might be the first danger…
Take this from the Wall Street Journal:
‘Monday’s loan data fueled concern that gains are being driven by speculative investors rather than signaling underlying strength in the housing market, after new loans to investors surged almost 26% in July from a year earlier, the steepest gain since 2007. The value of loans to owner occupiers rose by a much smaller 13%.’
It’s interesting to note that one of the reasons real estate guru Phil Anderson is bullish on property is his central belief that regardless of what legislation is thrown at it, the banking industry will keep finding ways to shovel credit out for people to buy houses.
The folks at the Australian Prudential Regulation Authority (APRA) seem to have something like that on their mind, too. They came out this week and warned the banks off dropping their standards and increasing their risky lending in the hunt for more mortgage business.
This chart might have something to do with it.
As you can see in the chart above from The Australian,’despite refinancing and investors driving the market, credit growth is historically low.‘
In other words, slow credit growth is a threat to earnings the banks make from lending. They’re not going to like that.
APRA is worried that the lure of low interest rates will bring in borrowers who can’t cope if rates rise. Add to that the worry banks might only be too happy to take their business now.
APRA’s latest report already notes a weakness in the system. The number of loans being issued with a loan-to-value ratio above 90% has been rising over the last three years. The Australian Financial Review pointed out some countries don’t even allow loans above 80%.
Loans to poor old first home buyers are currently on the slide, down from 15.1% to 14.7% of market share. But who cares about them when there’s Australia’s juicy superannuation funds to target?
The Australian Financial Review reported on the latest ruse to attract investors to the property market: ‘luxury international holidays are being offered to investors who take out a mortgage and buy a house using a self managed superannuation funds…many financial advisors are being offered incentives to put their clients in SMSF property investments.‘
An overseas holiday sounds great, but there’s a few problems with this idea…
So we asked our family wealth expert Vern Gowdie, who has nearly thirty years in the industry, to give us his take for you:
‘Seriously how dumb are people?
‘With this type of blatant abuse of the system it is little wonder the SMSF sector comes under such intense scrutiny by the ATO. A few bad apples spoil it for those who use SMSFs for the right reasons, i.e. a tax effective savings vehicle invested prudently to eventually provide a retirement income.
‘Before dealing with what really irks me, let’s put to one side the following issues:
1. Should you even be establishing a SMSF to buy a single asset?
2. Are investors (who are naïve enough to believe you can have the best of both worlds) even remotely aware of the do’s and don’ts with non-recourse loans in a SMSF?
3. The annual costs of establishing and running the SMSF‘And I could go on and on.
‘No, what really makes my blood boil is the fact the promoters actually have the temerity to promote a “too good to be true” offer. Have a “free” international holiday and at the same time get one up on the taxman.
‘There is no such thing as a “free” anything in the financial world. Do you really think the promoters, out of the kindness of their hearts and the depths of their pockets, will pay for you to swan around overseas? If you do please contact me as I have a bridge in Sydney and possibly an Opera House to sell you.
‘What sort of kickback from the property sale is in it for them? Are their SMSF establishment and annual fees competitive? What brokerage is built into the non-recourse mortgage?
‘As always ‘caveat emptor’ should be your guiding principle. Failing that remember,
if it smells like s…, looks like s…, tastes like s… then there is a really good chance it is s….‘I sincerely hope ASIC and the ATO come down like a ton of bricks on the promoters of these ‘edge of the envelope’ abuses.‘
If you wanted to avoid traps like these, it might pay to check out Vern’s service. All you need to do is click here.
Callum Newman+
Editor, Money Weekend
From the Port Phillip Publishing Library
Special Report: Are You Waiting for a Real Estate Crash That Isn’t Going to Come?
