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Australian property has transformed from a roof over one’s head to a speculative activity to make money.

Since the majority of homeowners who sell a property eventually buy back in (they have to live somewhere), the only winners out of this speculative race to make money are the banks and property speculators – including DIY super funds.

Banks win because property owners have to shell out more interest on colossal-sized loans and property speculators win when they flip an expensive property to pocket the profit. Those pursuing the great Australian dream are the single biggest losers in this merry game.

Regardless of the doomsdayers, Australian property hasn’t fallen through the floor. Although the number of properties saying ‘motivated seller’ or ‘change of circumstances forces sale’ seems to be on the rise, Aussie property is still the most unaffordable in the English-speaking world, according to The Demographia International Housing Affordability Survey.

Courtesy of Australia’s extraordinary property prices, we’re now second only to Switzerland as the richest nation in the world – with an average wealth per adult of $396,745, as reported in the Credit Suisse Global Wealth report. The proportion of Australian adults who are worth over $100,000 is eight times the global average – the highest in the world. Most astounding is that the average net wealth of the richest 20 per cent of Australians is an extraordinary $2.2 million.

Australia was singled out alongside China, New Zealand, Poland and Romania as featuring the most significant rise in household wealth over the precious decade, represented by a quadrupling of wealth per adult in US dollar terms.

Source: Global Wealth Report, The Credit Suisse Research Institute

With some 65% of Australian’s wealth tied up in property, higher property prices are the primary reason for Australia’s rise to the top of the global wealth pile. Our strong Aussie dollar is also making us richer on paper.

Despite numerous setbacks such as the global financial crisis, relative high interest rates (4.75% compared to 0.5% in the UK and 0.25% in the US), and a volatile stockmarket – property prices in Australia have held relatively firm.

According to the ATO, there are about 850,000 members of DIY super funds in Australia with some $14 billion invested in residential property, and $44 billion in non-residential property at the March quarter 2010. This figure swamps the amount invested in overseas shares, international managed funds, and collectibles. Some $500 million extra funds were pumped into direct real estate over the March quarter.

The boom in SMSFs could go some way to explaining the strength and resilience of Australia’s residential and non-residential property market – especially compared to international markets such as the US and Europe where prices have fallen some 20 to 40% over the past few years.

The following rulings over the past few years have possibly contributed to placing a floor under Australia’s property market:

–    In 2007, an ATO ruling enabled SMSFs to borrow money using a limited recourse borrowing arrangement (LRBA) to buy an investment property (before that, property had to be purchased outright with cash). After this ruling came about, even SMSFs with relatively small balances could gear up and buy pricey homes and apartments, bidding up the prices of all properties in the market.

–    In September 2011, an ATO draft ruling enabled SMSFs to borrow money to repair and maintain (but not improve) an older investment property (before that, borrowed money could only be used to maintain the property). Developers and real estate agents have applauded the move, saying that it will renew interest in property investing.

The latest ATO ruling means that SMSFs can buy a geared investment property, repaint it, replace the fence and guttering; it doesn’t mean that they can add in a pool, and build an extra story on top. There is a distinction between repairing and improving, where improving ultimately results in increasing the value of the property. Repairing may include updating decaying kitchens and bathrooms, however, provided that it does not change the nature of the dwelling.

The above rulings serve to increase the attractiveness of property for SMSF investors – a sector worth a hefty $430 billion in assets, representing a third of all super money held by Australians. As at March 2011, SMSFs held over 15% in direct property, or $65 billion.

Are SMSFs becoming a power base that is directly affecting the state of Australia’s property market?

One way to illustrate the power of SMSFs was an event that transpired last year following a comprehensive review of the super system, called the Cooper Review. The review recommended the banning of SMSF investors from adding collectibles – such as art, coins, stamps and personal use assets – to their super funds. The recommendation produced a flurry of protest across the arts industry.

As reported in The Australian, arts accountant Tom Lowenstein said that the move would have “tremendous downward pressure” on the arts market. Lowenstein noted: “Since the flagging of these recommendations, there’s been a tremendous drop within the art market already.”

Collectible dealers too stressed the importance of the SMSF market on keeping prices buoyant. Bob Climpson, the manager of Noble Numismatics, an auction house that specialises in coins, medals, stamps and banknotes, mentioned that prices had been rising in recent months, with much of the demand driven by private super funds. “This could potentially be a major problem and a major dampener on the market,” he was quoted in The Australian. “People are definitely buying at the moment to put into super funds, and if that’s cut out they won’t be buying any more.”

The art market takes less than 0.1% of SMSF money. The property market in comparison takes a much bigger chunk of SMSF money.

Moves to bolster the activity of SMSFs in the property market will keep prices higher for longer, accentuating Australia’s affordability crisis. It may also result in a disproportionate number of investment properties versus family homes, possibly leading to falls in rents over time as supply outstrips demand.

The number of high-priced rental properties in Brisbane currently on offer seems high compared to say five years ago. Today, there are over 159 properties renting for more than $1,000 a week on realestate.com.au, with the most expensive properties renting for some 100% more than just three years ago. How many of these are owned by SMSF investors trying to maximise yield in their investment properties?

Considering the stellar performance of property investments over the past 15 years, it’s understandable that SMSFs are turning to geared property as a store of wealth; but the illiquid nature of property is something that needs to be taken into consideration particularly upon retirement.

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This article is of a general nature only and does not take into account your individual circumstances. For advice, TheBull recommends that you employ the services of a qualified financial adviser.