Dan Miles
Millennials are firmly locked out of the Australian property market and with average dwelling prices in NSW sitting above $1.2 million, now is time for younger Australians to consider other investment options, including devoting more to superannuation and allowing superannuation funds to use leverage to boost their returns, according to Dan Miles, Managing Director and Co-Chief Investment Officer of Innova Asset Management.
Australian Bureau of Statistics Total Value of Dwellings[1] data reveal that the average residential dwelling price in NSW rose 1% in the March quarter to $1,212,000 from $1,200,300 in December 2023, to be the highest in the country. Nationwide, the average price of residential dwellings rose by $14,300 or 1.5% to $959,300, during the quarter. The second most expensive state or territory in which to buy a home was the ACT, where the average dwelling price was $950,500, then Victoria at $914,300. The average dwelling price in Brisbane was $853,900.
Rising residential property prices have created unprecedented wealth for Baby Boomers thanks to the power of leverage, lucrative tax breaks, constrained supply, and strong population growth, according to Mr Miles.
“Unfortunately, a generation of younger Australians have become the collateral damage to rising property prices. Many younger people who can’t rely on parental wealth or an inheritance have been effectively locked out of the property market, without the funds to be able to afford a deposit for a home or maintain a mortgage,” he said.
“This has deep implications across society. Younger Australians are in desperate need of solutions, but there are no politically simple ways to tilt housing back towards being a human right rather than a speculative asset class. There will always be sound reasons to own a home that stretch far beyond the financial realm, but many younger investors will also need to consider new ways to accumulate wealth, including through superannuation.”
According to Mr Miles, several factors have driven up residential property prices but one that is rarely given its due is leverage, or the use of debt to buy residential property.
“Loan-to-valuation ratios regularly stretch beyond 80 per cent while some governments have backed schemes allowing up to 98 per cent of a property’s value to be borrowed. That amount of debt can turbocharge even nominal price gains given the median house in Sydney is now valued at almost $1.4 million,” Mr Miles said. “It’s no surprise then that the next generation is turning to more accessible investments such as shares and even cryptocurrencies.”
According to Mr Miles, allowing superannuation funds to take advantage of leverage would potentially offer more attractive returns for savers. “While there are strict rules that prevent super funds from using leverage, perhaps it’s time to reconsider those rules given the superannuation system has been established for decades. Superannuation is a 40-plus year investment where volatility, which can be amplified by moderate leverage, can be managed.
“Most superannuation funds have met their long-term return goals: leverage could power up that wealth creation. The average super fund has posted a 7.3 per cent annual return (or a real return of 4.5 per cent) over the 30 years ended June 30, 2023, according to ASFA.
“The scale of super funds means they could borrow at very low cost. Applying a moderate amount of leverage combined with a greater allocation to equities or a more aggressive investment profile should generate similar or greater return than a leveraged property investment,” Mr Miles said.
“It may not be enough to solve the housing crisis on its own, but it deserves further consideration as a generation of young Australians face a long wait for political solutions to the current housing crisis. The common saying that ‘your home will be your largest investment’ may need a recalibration, with superannuation potentially being the biggest asset future generations will have,” he said.