Australia gained 400,000 new millionaires and it has a lot to do with property

"A factor contributing to the growth in Australian millionaires is stock market gains, which, when added to those of property and other investments, see Australia's average wealth (total wealth divided by the adult population) ranked 4th in the world at around $834,200 per person behind Switzerland, USA and Hong Kong". 

For the many of us who feel like that’s no longer the case now or that it wasn’t even back a year ago, with headlines announcing the ‘great Aussie housing bust gets worse’ and that or we are ‘looking down the barrel of increased mortgage stress’, it does little to help us feel better.

So, let’s take a look at why the residential property is almost universally a topic of conversation for Australians and why its fortunes can make us feel good or not so good and importantly, how we may be able to put those discussions and our feelings into context, being a little more pragmatic about our love affair with our homes or investment properties.

The wealth effect – may have something to do with it.

The wealth effect is the notion that when households become wealthier as a result of a rise in asset values, they feel more confident about the future and may spend more freely. This behaviour is what governments and central banks see contributing to the growth and is what we may have recently seen following the pandemic and up to the start of this year.

While some may say that the fall in property prices and stock market values has cost them money, for many these are ‘paper losses’, unless they have to sell the asset to realise its value. Irrespective, confidence can be diminished and spending behaviours changed.

he extension of the central management and control test “safe harbour” from two to five years, and The removal of the “active member” test – which would allow members who are temporarily absent from Australia to continue contributing to their SMSF.

Mortgage stress – for some will be real.

I’m sure that many will be concerned about the serviceability of their home mortgages and some of the key reasons that are being put forward as to why this will not be a factor in a real property crash will be tested. These include:

• Home owners make sure mortgage repayments continue to be made at times of stress.
• APRA, the banks regulator, requires home loan repayments to be assessed with a ‘buffer’ above the current home loan rate for each bank. Since October 2021, the buffer has been 3.0% on top of the bank’s home lending rate.
• Household savings are at an all-time high and can be called upon in times of stress

Cycles – are real, be they economic, stock market, or property values.

Residential property is one asset class that is particularly subject to the influences of cycles. At present, we are seeing an upward cycle in interest rates, creating downward pressure on residential property prices.

Interest rates – are a real driver of property price cycles.

While there is continuing speculation on how many more rate rises the RBA will implement and how far they may go, the downward pressure on residential property prices will continue as rates rise toward their long-term normal levels in an effort by the RBA to bring inflation back to acceptable levels. 

In talking of rate rises last month we suggested that when the rate of increase slows or is on hold, the RBA may believe it has reached an appropriate point. 

Interestingly, the October rate rise was 0.25%, following 4 at 0.50% each. It will be interesting also to see what may happen on the annual Melbourne Cup rate announcement; another 0.25%, back to 0.50%, or on hold?

Investment properties – may experience a different set of circumstances

With investment properties, while the value of the property itself may have fallen, some investors may be seeing demand for rental accommodation as former home seekers now return to or remain in the rental market. 

Additionally, with the Federal Government lifting migration numbers for 2022-23 and tertiary education facilities expecting 2023 enrolments from overseas students to be back to normal levels if not at the record, it’s reasonable to expect growing demand for rental accommodation.

Summary 

Unless there is a real risk of not being able to make home loan repayments or a need to sell a property in a down market, many Australians should be able to feel comfortable that they will navigate the current cycle and convince themselves that a paper loss is not a real loss.

For those that do have to sell and buy another property, if they are selling and buying in the same market at a similar time, they may sell for less than hoped, but also buy for less than expected.

From the larger viewpoint, there are many variables, however, here are some that can have a real impact on markets generally, be they property or others:

• inflation becomes endemic; accepted as the norm and governments and central banks cannot control it
• the return to normal is not managed steadily; interest rate rises to overshoot inflation and potentially cause a recession and we see rates begin to fall again.

It will be interesting to hear the RBA rate announcement on the first Tuesday of November, it may provide a clearer guide to the direction for rates and property.

If you are concerned about any aspect of your investment portfolio please talk with an accredited SMSF Specialist in your area.

Source: https://smsfconnect.com/

Ian Irvine - Guest Contributor