Australians are using retirement pensions to ‘bank’ on a continuing housing boom – Is this sustainable?

Bloomberg News Online reported on November 01, 2013 that an increasing number of Australian retirees are using the so-called self-managed superannuation funds or ‘SMSF’ to switch out of their low-yielding government sponsored retirement funds, and into the property market in ‘Down Under’, thus fueling up the continued property boom. According to the Nov. 01 Bloomberg News article, the total net asset value (NAV) amount of SMSFs is approximately Australian Dollars (A$) 500.0 billion (USD 474.0 billion). It is quite a sizable amount considering that the majority of the proportion of SMSFs in Down Under is currently being allocated to the property markets in anticipation of greater returns.

The retirement scheme in Australia is divided to either government managed or self-managed. Due to the overall slowdown of the global economy, coupled with the continued easing in monetary policies taking place across most of the developed economies, many Australian retirees have chosen to self-manage their retirement funds, rather than to rely on the Federal Government’s fund offerings. The SMSF is one of the alternatives cited by many retirees as the one of the flexible process of managing their retirement savings, rather than to watch the low returns generated through the government-run investment scheme.

With the Reserve Bank of Australia (RBA) set to announce its interest rate decision next week, there are questions whether RBA governor, Glenn Stevens and his central bank colleagues will announce any major interest rate policy changes. The current interest rate is 2.75 percent, and the spot Australian (Aussie) dollar as of early Asian Pacific trading on November 01, 2013 is sitting at a level of approximately A$0.9459 – A$0.9460 to a US Dollar and change. Several market forecasters have predicted a slight rise in the Aussie Dollar in view of the recent positive economic data coming out from China, which could fuel demand for some of the vast commodity resources that Australia is embodied with. However, over the course of this week, and previous commentaries made by RBA Governor Stevens, he was showing much concern, and has repeatedly warned against the return of a rapid rise in the Aussie Dollar despite the weak employment outlook, and the general slowdown in global economic conditions. The issue of home price appreciation (HPA) is also one of the many issues RBA is closely monitoring for any emerging signs of a ‘bubble’, which could be a risk factor if there is a prolonged slowdown in the global economy, and mortgage rates start to creep up, which could make things difficult for policy makers if there are to be massive employment losses and business closures.

Despite the various talks about a much subdued economic outlook in Down Under, retirees are increasingly turning to high-yield investment vehicles that could be invested through the use of SMSFs. The Nov. 01 Bloomberg News article has also given details on some of the attractive high-yielding investment products offered through the use of SMSFs, with yields going from a low of 5.0 percent to a high of 6.0 percent being offered. These rates are quite attractive considering that nowadays, money placed in savings accounts has relatively low yielding real returns.

Readers might be interested to know that SMSFs is a retirement scheme that is somewhat equivalent to the United States version of the corporate 401K pension system, or defined contribution plan where individual employees are allowed to manage their own investments, and be responsible on each individual’s respective risks/return outcomes. However, with such a large allocation of the SMSFs towards the local real estate markets, there are questions over the level of diversification needed for any investment portfolios. As the saying goes, “Don’t pull all eggs into one basket”, the existing high percentage allocations to SMSF are creating some issues, as one might not know when the next down cycle will begin, and with most of the real estate bought is through credit, a significant rise in interest rates could result in major financial shortfalls. In fact, according to the Nov. 01 Bloomberg News report, the Australian Securities & Investment Commission (ASIC), which regulates the financial advisory sector, was expressing major concerns about the marketing promotions put out by financial companies which are not explicit on the level of disclosure, and the amount of financial education retirees are currently receiving before making any investment decision-making moves.

Bloomberg News Online has also shared some of the major statistics on the amount and investment performance of the SMSF market, noting that property prices that have the SMSF financing component amounted to approximately 65.0 percent growth versus 2008, and in the past one year, a 10.0 percent rise versus last year to approximately A$17.5 billion. This is according to data obtained by Bloomberg News through the Australian Taxation Office (ATO), which oversees the regulation of funds. The June 2013 data is extrapolated from the funds’ tax returns for the past year through June 2012.

Based on the various illustrations of the amount of SMSFs being allocated to local real estate is quite significant, I believe that there has not been much financial education courses made, or talks run by these SMSF experts that are made available to retirees or anyone planning to understand the product/service in greater details. I believe that more financial education is needed to allow retirees to understand additional options besides SMSFs that they could look into, and any other topics relating to the knowledge and understanding of the local property markets. There is also a need on the part of financial firms and wealth managers to provide other investment portfolios that are low cost, and ability to generate sustainable forward returns based on the amount of SMSF funds being allocated. As it is right now, a huge disproportionate amount of the retiree savings is being placed in real estate, and it could be recipe for more volatilities and negative returns in the event of a severe downturn of the Australian economy.

About Hock Meng Tay - Chief Editor, Asia-Pacific Region

Hock Meng Tay, CAIA has written 181 post in this blog.

Chief Editor, Asia-Pacific Region Hock Meng Tay is a CAIA holder and is currently taking CFA qualification. He has over 10 years of experience working as research associate in several investment companies.He is an expert in financial analysis and has published research reports in his current role. He obtained his Masters of Business Administration in Integrated Management and Masters of Arts in Economics while serving his internship in Starsource Inc