Property for Pensioners

Another day, another ludicrous article about property in a major Australian newspaper.
Today, the Australian's Jackie Hayes tells us how "cash-laden self-managed superannuation fund investors are taking advantage of streamlined borrowing laws and clever gearing strategies to invest in property."

"We have a lot of clients who want to borrow [within super] and specifically borrow to buy real estate," says Bryce Figot, a senior associate at SMSF specialist law firm DBA Lawyers. Figot says demand for the service has grown rapidly since 2007 when laws were first introduced allowing gearing to be used in superannuation to buy standard assets such as property and shares, but also possibly art and collectables.

The latest Australian Taxation Office figures illustrate how quickly property investments within SMSFs have risen, with $58.4 billion invested in domestic real property at June 30 compared with just more than $30bn in the sector only two years ago.

Very interesting. Now, at this point Ms Hayes could perhaps have enlightened us as to what Mr Figot's views are on the appropriateness of investing one's retirement savings in property just as the market appears to be on the verge of a major collapse. Or perhaps she could explore the appropriateness of a government policy that encourages Australians to leverage up their retirement savings in a massive gamble on an overvalued and illiquid asset class. Or, god forbid, she could actually talk to an academic or somebody without a vested interest in selling us property.

But no. Instead, she breathlessly rushes on, quoting Mr Figot further.

Australians have always felt comfortable borrowing to own property, and "that great Australian love of real estate definitely continues in the SMSF environment", Figot says.

The vast majority of his firm's clients - about 95 per cent - are choosing to leverage into property in preference to shares.

"Property has produced great returns over the years while the share market has had mixed results, to say the least," Figot says.

One wonders if Mr Figot has heard of the saying "Past performance does not guarantee future results." This is the classic mistake made by novice investors, who have rushed in to buy at the peak of every bubble in financial history -- from tulip mania to the tech bubble -- based on the idea that XX asset class has "produced great returns over the years" and so will continue to do so for perpetuity. But there's no time to explore this. The Australian's Ms Hayes is wheeling out another expert to enlighten us on the wisdom of highly leveraged property speculation with one's retirement savings.

...we continue to be more comfortable leveraging into bricks and mortar than into shares or other sorts of investment, financial planning advisory group Strategy Steps director Louise Biti says.

"So people will go out and borrow $100,000 to buy an investment property but they won't go out to borrow $100,000 to invest in shares," Biti says.

Finally, in a warning that is about as forceful as being smacked across the head with a dandelion, Ms Hayes concludes the piece with a reminder that gambling your retirement savings on leveraged property is possibly, just maybe, not necessarily always the best idea.

Are you still feeling relaxed and comfortable?

It's even worse than I thought.

Nonsensical Property Shill Quote of the Day

Just when you thought you wouldn't see anything stupider than Robert Gottliebsen's latest column for a while, here's a wonderfully nonsensical quote from Australian Property Monitors chief economist Dr Andrew Wilson in the Australian today.

"What we are seeing in Melbourne is a pause in the market, mostly caused by a fall off in the bottom end of the market, but it's not a bubble," Dr Wilson said.
"The market was unsustainable because it couldn't be sustained by incomes, but now we are starting to see wages growth that will again fire up demand."

So the market was "unsustainable" and couldn't be sustained by incomes, but no, we are not in a bubble. According to the latest data from Demographia, Melbourne is currently the 7th most unaffordable housing market in the world, with a median price/income ratio of 8.0. Let's assume that a ratio of 5 (roughly the level of Toronto) is more reasonable. Now, through the amazing powers of arithmetic, I calculate that we could either get there with a 37.5% fall in prices, or a 60% rise in incomes, or some combination of the two. 

Dr Wilson has categorically stated that we are not in a bubble, but he doesn't seem to expect prices to fall. Instead, he expects affordability to be restored by wages catching up. Now admittedly I have plucked the price/income ratio of 5 out of thin air, but how on earth does he expect wages to rise by 60%, or even half that, any time soon? WTF??

To end this post I would like to dedicate this clip to Dr Wilson.