This article is a continuation of my previous article on the use of the self-managed superannuation funds (SMSFs) to purchase real estate in Australia, and how it poses a dilemma on the Federal Government and the country’s central bank, Reserve Bank of Australia (RBA) to act promptly before the housing bubble gets out of hand.
Readers might be aware that the RBA has maintained its cash reserve rate at 2.50 percent unchanged, following the latest monetary policy meetings which took place on November 05, 2013. Glen Stevens, Governor of RBA, and his central bank colleagues are facing an issue of unemployment rate slowing creeping upwards, the end of the so-called commodity ‘supercycle’, and the more pressing issue regarding the rising real estate prices due to the relatively low interest rate environment, which resulted in million dollar suburbs popping up in some cities such as Sydney. Bloomberg News Online reported on November 06, 2013 that the city now has approximately 122 suburbs, or one-in-five, with a median home price above Australian (Aussie) Dollars 1.0 million. This represents a 31.0 percent increase from a year ago. This statistic was obtained from one of the country’s leading housing market researcher, APM.
According to Bloomberg News, housing in Australia accounts for approximately 60.0 percent of the household wealth, as compared to the global average of 45.0 percent. In Sydney, which is one of the nation’s most populous cities, home price appreciation (HPA) surged 13.0 percent in 10 months to October 31 to a record of A$718,122. This statistic is based on information obtained from RP Data-Rismark home value index. The median home price figure is comparable to New York where average home prices are approximately USD 806,000, and 331,338 pounds (USD 536,237) in London. Average household debt as a proportion to annual income is at a record, nearing approximately 150.0 percent since 2006. This is compared to average household debt to annual income of approximately 135.0 percent in the United States. These figures coming out of Australia are quite troubling as housing affordability will drive many households towards other low-cost housing accomdation, and it poses a threat to the long-term stability of the economy, as the country tries to struggle with a global slowdown, which has also impacted domestic demand.
As mentioned in my previous article on the massive allocation of SMSFs into the real estate market and the potential risks that might arise, it appeared that prudence, and calm have taken a backseat when making any property purchase decisions. The previous rounds of rate reductions by the RBA have pushed the average variable home loan rate to 5.95 percent, which was one of the lowest levels since September 2009. According to Bloomberg News, many investors shifted their SMSF holdings (quite closely structured to the defined contribution plan system, known as 401-K plan in the United States where individuals get to decide where and how they will like to invest their money, rather than to place it with a money manager to manage) into the property sector in droves, resulting in an increase of 65.0 percent since mid-2008, and 10.0 percent in 12 months to June to A$17.5 billion. This is based on data obtained by Bloomberg News from the Australian Taxation Office (ATO), which oversees the regulation of the small funds. The ATO’s June 2013 data was extrapolated from the funds’ tax return filings through June 2012.
Given the sizeable, and disproportionate amount of SMSFs being allocated into the property sector, it does bring about tremendous risks that are commonly seen in asset ‘bubble’ environments. Readers might have recalled the housing boom-to-bust issues which took during the 2008-2009 Global Financial Crisis (GFC) and left millions of American households with massive debt burdens, especially those from the middle-income families who continued to hold the belief that home price increases will continue to be a lasting feature in the economy, and they can still rely on the relative high price of their homes should there be a so-called ‘end of the world’ scenarios. However, such hopes never happened, and nearly brought down the entire economy. Till today, many Americans are still trying to cope with the ongoing slowdown, structural unemployment in the economy, and the massive fiscal deficits that is still mounting.
I believe that investors might be questioning whether there are remedies in curbing the rapid home price appreciation in Australia, and what are the policies that the Australian government could put in place in curb the speculative behaviour of many Australian households? This question and many others are valid, and the Australian government should address fast in order to guide the country towards a more stabilised economic environment. As a student of free markets, I could suggest having the private sector, and industry associations, together with real estate investors join hands and work towards coming up with sustainable solutions with limited government involvement. This could be achieved through organising various education seminars that provide awareness of the importance of investment portfolio diversification; adopting prudent savings habits such as starting the saving habits while at a young age; banks and finance companies adopting prudent approaches of not using aggressive marketing campaigns and sales brochures during their discussion with potential homeowners in the loan application processes; adopting stringent loan approval criteria; maintaining strict loan-to-value ratios; imposing high payment-to-income criteria; adopting international standards in relation to banking rules such as adopting Basel III, which is a comprehensive set of rules that govern the amount of capital and loan provisions to be set aside in the banks’ financial statements, among others. These measures which have limited government intervention will likely bring about investor confidence, and less red-tape bureaucracy. It also provides some credibility on the efforts and strengthens the community-based roles which most of these banking industry and consumer advocacy groups will be willing to take on to hold off any tight regulations, which are costly and time-consuming. Ideally, self-regulation should be used first.
Overall, I believe that there are no one-size fits all solutions to approach the unprecedented amount of speculation happening in the Australian property sector. The situation facing Australia is quite unique in the sense that it is a resource-rich country, and has largely depend on Asian nations such as China, South-East Asia, and the rest for trade and investments. China, being a leading importer of commodities, is currently facing a slowdown in its economy, coupled with slow recoveries coming from the United States and the European Union (EU), the country is facing structural changes that need some time, and adjustments Lawmakers and monetary policy officials from the RBA are facing tough challenges in implementing prudent policies so as to ensure that Australia does not end up in a so-called ‘hard landing’ scenarios. Going forward, I believe that Australia is a country to watch for within the Asia-Pacific region on how it will work out such challenges, and overcome the various economic issues happening, which are sometimes beyond their control.