Residential housing has appeal to SMSF trustees

January 2021

Written by Per Amundsen, Head of Research, Thinktank

Residential housing is an asset class that has growing appeal to self-managed super fund (SMSF) trustees. At 30 June 2015, they held $23.1 billion in this asset class, a number that had increased 69 per cent to $39.1 billion at 30 June 2020, though with the latter figure still only representing 5.3 per cent of total SMSF assets.

This interest in residential property is hardly surprising. Many SMSF trustees would own their own home, so it’s an investment they are familiar with. Data shows that over the past 25 years, the median house value across Australia has more than quadrupled, equating to an annual growth rate of 6.8% for houses and 5.9% for units. For trustees, that statistical evidence would be reinforced by their personal experiences.

Even COVID-19 has had little impact on their appetite for residential property if Thinktank’s experience is any indication. In the past nine months, our SMSF portfolio witnessed a 40% gain in the number of loans and 35% jump in dollar value – all in a period of great uncertainty.

For these investors, residential property means security and stability; they seem immune to “expert” commentary about housing bubbles. And perhaps they are right. Certainly, we are seeing a tremendous recovery in hardship cases with the start of the New Year likely to see a return to normal conditions. SMSFs have been a stand-out in terms of their performance with significantly less, as a proportion of their make-up of the total portfolio, requiring assistance through deferral or reduction of regular monthly payments.

So, if COVID-19 could not shake their confidence, an Australia hopefully returning to a degree of social and economic normalcy after a COVID-ravaged 2020 is quite likely to see more trustees having residential property on their investment radars. But what will this market look like in the wake of COVID? After all, COVID was another reason property bears used to predict the imminent demise of the market.

Well, that’s not how the property analyst CoreLogic sees it. In its latest report, it notes that its national index recorded its second successive monthly rise in November with housing up 0.8 per cent for the month. By contrast, when the economy was in the grip of COVID (particularly Victoria), housing prices fell 2.1 per cent between April and September.

According to CoreLogic’s Head of Research, Tim Lawless, “The national home value index is still 0.7 per cent below the level in March, but if housing values continue to rise at the current pace then we could see a recovery from the COVID downturn as early as January or February next year (2021). The recovery in Melbourne, where home values remain five per cent below their recent peak, will take longer.”

As to be expected, the story differs from state to state, region to region, city to city and housing to units. In this recovery, Sydney and Melbourne are the laggards, with their values similar to those seen in 2017. By contrast, Brisbane, Canberra, Hobart and Adelaide all set record highs in November. The two laggards are Perth and Darwin, with the former at 2006 levels and the latter at 2007 levels.

But the big success story is in the regions with the CoreLogic combined regionals index recording a monthly growth rate double that of the combined capitals. Regional home values were up 1.4 per cent in November compared with a 0.7 per cent rise in the capital cities. Regional Queensland led the pack over the past three months, posting a 3.2 per cent gain, followed by regional NSW that enjoyed a 3.1 per cent gain.

The unit market, not surprisingly, has been harder hit by COVID. Over the past three months, capital city house prices have risen, on average, 1.1 per cent, while unit prices have fallen 0.6 per cent, with CoreLogic attributing the latter’s decline to low investment activity, higher supply levels and weaker rental markets in key inner-city areas. In this scenario, there is an interesting exception – Melbourne.

Considering the city was effectively locked down for much of the year, unit prices in the southern capital have held up remarkably well with a smaller-than-expected decline throughout COVID and a more substantial recovery trend in recent months.

Lawless says: “The resilience of Melbourne unit values are surprising given the high supply levels across inner-city areas and the sharp decline in rental levels. We suspect the stronger trends in Melbourne unit values could be short-lived unless overseas migration turns around sooner than expected to help shore up rental tenancy demand.”

There are other indicators pointing to a stronger housing market in 2021. Inventory levels remain low, favouring sellers over buyers, the number of settled sales since July has been “reasonably firm” and auction markets have strengthened.

“In addition, low advertised stock levels, together with a rising number of active buyers, is creating a renewed sense of urgency in the market. Buyer demand is mostly being fuelled by a surge in owner occupiers rather than investors, looking to take advantage of historically low interest rates, generous government incentives and an increased state of normality.”

It all signals an interesting market for SMSF trustees in 2021; there will be opportunities to acquire properties offering yield and capital. But like all asset classes, doing your homework first and seeking specialist advice are imperative.

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