Michael Hutton

The flow of money from self-managed superannuation funds (SMSFs) into residential property suggests many trustees have forgotten that the role of a SMSF is to fund retirement, says Michael Hutton, wealth management partner at HLB Mann Judd Sydney.

“People in retirement should be focussing on income over the medium term with enough capital growth to maintain income levels in the longer term.

“The basic fact is that residential property investment, particularly when the market is close to a peak as it must be now, has to be a long term strategy to get the capital gains sought.  The rental yield on such properties, particularly after expenses, is often very low

“Where gearing is involved, major cashflow problems can occur – particularly for those drawing a pension from their fund or expecting to draw a pension within the next several years.

Mr Hutton said that even younger trustees should consider very carefully whether holding residential property in a SMSF, rather than in their own name, is best for them.

“One of the attractions of property investments is the negative gearing tax provisions which are most beneficial to people on a high rate of tax.  SMSFs are either a low tax or “no tax” environment.

“Anyone still intent on investing in residential property as a way of accumulating wealth through capital gain (which should be the main reason for property investments) must recognise it is a long term investment and consider their own circumstances.

“They should also seek impartial advice and not rely only on the pitch of those interested in making a sale.

“As we’ve said many times before, SMSF trustees must recognise there are weaknesses in placing a large portion of their retirement savings in one asset.

“Property is usually an illiquid asset, which should be a key consideration for retirees funding their own retirement.

“If a significant amount of money is needed at some time in retirement – for instance to pay for a holiday, or to buy a car – people usually need access to cash in their superannuation.

“If they don’t have a mix that includes fairly liquid assets, they may need to sell the residential property owned by their fund, even though they only need a small percentage of its value.

“This can take several months, might not fit in with the trustee’s needs, and it may not be the right market to be selling in.”

Mr Hutton says there are other problems with the trend to gear up within an SMSF to buy residential property.

“Ideally retirees should be debt-free and have assets generating plenty of income to fund their lifestyle.

“Trustees of SMSFs also need to be mindful that upon the death of the last member, the fund must be wound up.  Illiquid assets such as property take time to sell, while transferring a property to beneficiaries in-specie will incur stamp duty and conveyancing costs,” he said. 

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Residential property on the move

The Bendigo Bank/REIA Real Estate Market Facts Report for the December Quarter records an increase in the Australian weighted average median house price of 3.8% compared to the September quarter 2012.

Other dwellings recorded an increase of 2.4%.
 
“Melbourne and Hobart in particular have seen strong growth in the past quarter and buyers are beginning to emerge around the country, encouraged by a continuing increase in housing affordability and a lower interest rate environment”, said Dennis Bice, Executive Retail, Bendigo and Adelaide Bank.
 
“We’re seeing some interesting trends around Australia that can assist in identifying properties that represent both value and the potential for growth.  There is solid growth in some parts of regional Queensland, South Australia and Central Victoria in particular.
 
“This stage in the property cycle is presenting some good opportunities in several Australian cities, particularly for those seeking to upgrade the family home. In other areas, buying may still be almost as affordable as renting.
 
“Home ownership, along with superannuation, is important in terms of helping to provide people with a secure retirement. 
 
‘’These results are promising for communities right across Australia, and we look forward to playing our part in helping people to achieve their financial goals”, concluded Mr Bice.

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Median weekly family income is now $1,560, compared to $1,493 in the June Quarter 2011. The average monthly loan repayment is $2,155 compared to $2,290 in the June Quarter 2011.   

Compared with the June quarter 2011 all Australian states and territories recorded improvements in housing affordability. The number of loans to first home buyers increased by 5.9% to 25,101 for the June quarter 2012 and by 11.8% compared to the June quarter of the previous year. 

The number of loans to first home buyers increased in all states and territories with the exception of New South Wales and the Northern Territory. 

Victoria was the standout, recording the largest increase in the number of first home buyers for the quarter, up by 23.5%.   Victoria also recorded the largest increase in the total number of loans, up by 16.0%.   The total number of loans Australia-wide (excluding refinancing) increased 8.9% over the June quarter to 91,982. 

General Manager of Adelaide Bank, Damian Percy said: “The figures seem to indicate that many people are now deciding to get on with their lives and are again making decisions about their housing choices – regardless of continuing volatility in global financial markets.” 

“I think simple timing is a factor.  Age waits for no-one. Older people in bigger houses make lifestyle choices to ‘downsize’, younger people have growing families and need to upsize.  The imperative to ‘right-size’ your dwelling at a particular life stage can drive decision-making to an extent. 

“Many people have been delaying these important choices and housing decisions for nearly five years.   

“In June 2011, 35.4% of family income was required to meet home loan repayments. In the June Quarter 2012, the figure had come down to 31.9%, a 3.5 percentage point drop. 

“This is still a significant chunk of family income, but moving nonetheless to relieve some of the pressure on household budgets. Appropriate and affordable housing underpins stable and successful communities and we forget this at our peril.  

“In terms of rental costs across the nation, we are seeing stability in most cases and mounting evidence to suggest that in some areas, it can now be more affordable to meet the cost of mortgage repayments over renting,” Mr Percy concluded.

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