The apartment oversupply and correction is tipped to trigger an Australia-wide recession, is the Australian Superannuation Fund sector at Risk ?
It is well known that many of Australia’s largest super funds have been funding the Australian apartment boom. Despite reaching out to APRA, it is unknown how many Super Funds and SMSF’s have placed Australia’s life savings at risk. This could be two fold. Australian’s love affair with property investment has also created a tsunami of Self Managed Superannuation Funds (SMSF) with individuals tapping into their life savings, leveraging their super funds to acquire large quantities of apartment type property investments. After requesting details from the Australian Prudential Regulation Authority on Super Funds and SMSF’s that have exposure to the apartment glut, APRA responded with: “Unfortunately, APRA does not collect data in its Superannuation data collection to the granularity you require” (a serious failure) !
1. A high percentage of apartment investors with mortgages wouldn't qualify for their current loans under new rules recently implemented by APRA and the individual lending policies of Australian banks.
2. The Australian apartment glut and oversupply is estimated to be in excess of 230,000. A survey by Roy Morgan Research revealed that approximately 311,000 indebted Australians had no equity in their properties (negative home loan equity), with many property owners owing more to the bank than their homes are worth, adding further fuel to the Australian housing bubble risk. "With over 300,000 home borrowers having no real equity in their homes, this represents considerable risk to Australia’s banking stability, particularly if home values fall or households are hit by unemployment," Roy Morgan's director of industry communications, Norman Morris, said.
3. The IMF recently reported the biggest risk facing the Australian financial system is the over supply of apartments and similarly Australia’s house hold debt, the highest in the world.
4. According to the OECD, Australian household debt is 5th highest in the world and has increased in excess of the levels reached by countries where housing bubbles formed and burst, countries such as Ireland, Spain and the United States. Since the GFC of 2008, Australian household debt has doubled and is unparalleled in the world in excess of 130 per cent of GDP. Australian public debt peaked above 170 per cent of GDP during the Great Depression but household debt has never been remotely close to its present to current levels. In 2016, Australians are so highly leveraged with household debt that even a small decline in residential values will have harmful consequences.
5. Three Australian states have a higher than 20% unemployment and under-employment rate (combined), triggering an increase in the number home owners unable to meet their home loan repayments. According to the global credit rating agency Fitch Ratings. Dual-income households is identified as an Australian banking risk should repayments rise or employment conditions sour further based on their ability to service repayments.
6. Australian apartment construction levels are equivalent to 16 per cent of GDP and exceeds the 14 per cent level that Spain reached ahead of the collapse of the Spanish real estate sector and, that Australian house price-to-income ratios stand only behind Hong Kong.
7. The Australian apartment ‘credit crunch’ continues to gather momentum with Chinese off-the-plan apartment buyers unable to secure bank finance for off the plan apartment purchases. In 2016, Australian bank lending was frozen with overseas property investors (in particular Chinese) now unsuccessful in securing finance to complete off the plan apartment contracts of sale, creating settlement risk concerns for apartment developers.
Australian Super Fund and property developer Cbus is discretely offering discounts on apartments and a generous 25-year rental guarantee in a bid to lure Chinese buyers back to the market. The price discounts of up to 7 per cent were offered to Chinese clients.
AUSTRALIANS’ superannuation savings are now sitting just above the $2 trillion mark, thanks to a $1.93 trillion total statistic for December 31 announced yesterday by regulator APRA, plus a likely 4.5 per cent increase enjoyed by the bulk of super funds in the six weeks since the start of the year. That means we are probably sitting on a pile worth $2.02 trillion. Even the official APRA number of $1.93 trillion was an increase of 9.3 per cent on the year to December 31 2014, or a lift in our super of just under $450 million for every day of the year. That is significantly more than Australia’s Gross Domestic Product (around $1.5 trillion) or the total value of all the stocks listed on Australia’s’ exchanges, $1.65 trillion. Australia’s pool is about the fourth biggest in the world after the US, UK and Japan. Superannuation consultants Chant West reported this week that the bulk of super funds enjoyed a 2 per cent lift in January, on top of a healthy 8.5 per cent return in calendar 2014, with a further rise in February.
Australians' love affair with housing and managing their own super is creating a potential powder keg for both the property market and the Federal Government budget. In a low-growth world, self-managed superannuation funds (SMSFs) are struggling to find adequate returns and are increasingly turning to the property market, one of the few markets they remain confident about. Last month, newly minted Reserve Bank governor Philip Lowe explained why he was watching the property market so carefully. "I am struck by the fact that large financial disturbances are repeatedly caused by the same factors," he said. Over 2006 and 2016, self managed superannuation experienced a meteoric rise, from comprising around 20 per cent of the super system to now being about a third. Those funds are taking on more debt, fuelling price rises, funding developments and potentially risking Australia's financial stability.
An unexpected widening of the trade deficit has increased the chances of a recession, economists warn. Imports rose two per cent while exports rose just one per cent in October, blowing the deficit out to $1.54 billion, according to the Australian Bureau of Statistics. The deficit is significantly larger than the $700 million the market had forecast for the month, and comes after weak export volumes contributed to a slump of 0.5 per cent in September quarter gross domestic product (GDP). Capital Economics chief economist Paul Dales said it is now more likely that net exports will be a drag on economic growth in the December quarter as well. "After yesterday's news that GDP contracted in the third quarter, this means the chances of a recession (two consecutive quarters of falling GDP) have just increased," he said in a note. St George senior economist Hans Kunnen said another big contributor to the deficit was a 9.5 per cent increase in imports of capital goods, which are used in the manufacture of other goods. "Given that major resource projects have been or are close to completion, this surge came as a surprise," he said. "A silver lining in this figure is that, over time, the capital goods should lead to increases in output and potentially, exports."
Melbourne developer OpenCorp is looking to tap into self-managed super fund investors' appetite for real estate with the launch of a new fund to provide capital for its residential projects. OpenCorp director and co-founder Matthew Lewison expects to raise about $15 million for its new managed investment fund within the first two months, and as much as $40 million over the next one to two years "given pent-up demand" and returns as high as 20 per cent a year on offer.
Australians' love affair with property shows no sign of abating any time soon. However, with escalating prices, there is a growing number of younger people who simply can't afford a deposit on a property, let alone the ongoing repayments. If buying a property in your personal name is not possible, and you strongly believe that investing in property is the key to "getting ahead", then the option of using superannuation to invest in property might be a viable alternative. As with any investment decision, when it comes to super, there is a range of issues that need to be considered and this is particularly the case when it comes to investing in property. There is an added layer of complexity when it comes to investing in property through super versus investing outside super, and this needs to be factored into your cost/benefit analysis.
Key deals for ISPT included buying a half share in World Square Shopping Centre in Sydney for $285m but the group’s joint bid with British investment house M&G for a stake in the Southern Cross West and Southern Cross East towers in Melbourne was beaten by a $675m play by Blackstone. The Core Fund acquired a number of assets, including a further 25 per cent stake in the Waurn Ponds Shopping Centre in Victoria for a reported $63m. It also took a half-stake in Mirvac’s 12-storey development largely leased to PwC in Southbank in Melbourne for $106m.
Cbus Property is a wholly owned subsidiary of Cbus, and is responsible for the development and management of Cbus’ direct property investments. Cbus Property developments benefit our members through the strong return they provide, and the thousands of jobs created in the construction and allied industries. From 2006 to 30 June 2016, has invested over $2 billion in building projects across Australia.
Super fund developer Cbus Property will begin work in September on its landmark $1.25 billion Collins Street project after confirming top tier legal firm King & Wood Mallesons as its first anchor tenant. The legal eagles, now perched at AMP Capital's 600 Bourke Street, will take up 8300 square metres from levels 23 to 27. That tenancy will account for around 20 per cent of the development's 49,000 square metres of commercial space, which also includes premium apartments and a hotel.
Australian underemployment triggers mortgage stress in a third of Australian households with home loans serviced by dual-incomes, new research has revealed. The Australian mortgage belt is heavily reliant on two incomes to meet bank loan repayments. With the highest household debt in history, a third of owner occupier home loans could face mortgage stress if one of the borrowers becomes unemployed or is forced into underemployment. Australian underemployment has reach a historically high of 8.7 per cent and has triggered an increase in the number home owners unable to meet their home loan repayments, according to the global credit rating agency Fitch Ratings. Dual-income households has now been identified as an Australian banking risk should repayments rise or employment conditions sour further based on their ability to service repayments.
The Pacific nation has one of the world’s highest rates of underemployment—broadly defined as people who are working less than full-time for economic reasons, or are part-time and can’t find more hours. Only Italy, which is at the heart of Europe’s growing pains, had a higher rate among Organisation for Economic Cooperation and Development member countries last year: 11.8% versus Australia’s 8.5% in the three months through November, the government said on Thursday. In the U.S., the rate is 3.9% and in Canada, 4.6%. “Over the past year we have seen a shift towards part-time employment,” said Bruce Hockman of Australia’s statistics bureau.
Those reports say that construction levels equivalent to 16 per cent of GDP exceed the 14 per cent level that Spain reached ahead of the collapse of the Spanish real estate sector, and that Australian house price-to-income ratios stand only behind Hong Kong. Those claims are not easily reconciled with the latest economic data, which paints a more benign picture. Mr Chatin said the sector was vulnerable to falling house prices as transaction volumes slow. All of the banks, he claimed, are reliant upon an overheated property market that is being supported by demand from Chinese buyers. He said key indicators imply the sector is close to stressed levels, according to several accounts of the presentation in Mayfair.