Yesterday, my mate Terence left you with the thought that the weight of money in the market is bullish on Australian property.
Here’s a taste of some of the excitement.
The Australian Financial Review reported last week1 that ASX small-cap stock, DomaCom Australia Ltd [ASX:DCL] seem to have found a way for Self Managed Super Funds (SMSF) to buy residential property and have their relations, such as their children, rent it without contravening the sole purpose test.
The Australian Tax Office appears to have confirmed this. I’m not being definite about this because it’s outside my area of expertise.
Such a change, if the uptake is wide, could funnel billions more into Australian property. SMSFs, last time I checked, were still the biggest component of the superannuation pie.
It may be that the government is turning a blind eye to the implications of this in the hope of propping up the Australian property market…
Considering that the Australian banking system, and therefore the economy, is hostage to major developments in property because 70–80% of bank loans from the Big Four are for mortgages. These four stocks are key holdings for the majority of SMSFs.
The government would do well to encourage investors away from concentrating their funds further into Aussie housing and the related credit, broking and construction industries.
That’s because they’re all tied together in the same mad cycle.
Instead, the government is fostering a situation where that concentration could become worse.
It’s no exaggeration to suggest a lot of SMSFs could end up owning a massive weighting to bank stocks and an ‘investment’ property for their kids or grandchildren.
This makes the political urgency of propping up the entire thing even more urgent than it is now.
Anything that substantially brought down the market could fry the retirements of thousands, if not millions.
A seed of destruction
There is little reason to suggest substantial problems like this in Aussie property right now.
But a close reading of history shows that the seeds of any crisis were usually sown years before. I think we’re seeing a seed bedded down now.
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No doubt the banks will be pleased at such a development in the short term. They do need something to give a kicker to credit growth. Westpac’s latest results show that plainly.
Generally, the little road map we’ve inked recently in Profit Watch is providing a handy guide.
The latest Big Four bank results are suppressing the wider market from lifting much, even with positive signals from the US stock market.
Note that Westpac made specific mention of the remaining uncertainty around its capital obligations from the Reserve Bank of New Zealand’s upcoming decision for financial firms that operate over there.
That’s due in December according to the latest estimate.
It puts another little worry over the stock while analysts wrestle whether the dividend yield is worth going for with the dull outlook for revenue and earnings growth.
I wouldn’t be surprised to see some move to get the reverse mortgage market going again from the banks.
They’re currently not playing here…but the decline in interest rates and fixed income is going to pressure Australia’s retirees even more. There’s definitely a market to be won here.
Stock market boost from no choice
Of course, it’s possible the average retiree has no choice but to go higher up the risk scale…and that means more exposure to stocks, perhaps many outside the top 20.
This could conceivably push the market up in the short term as the search for yield becomes ever more pressing. Deposit rates aren’t going up anytime soon.
However, the volatility can be very hard to navigate in the stock market.
Developing Australia’s corporate bond market to a much bigger degree would help here.
Americans, for example, have a huge selection of bonds they can buy for yields from companies with an iron balance sheet like Apple.
By comparison, we Aussies have a very limited spread. That means your average retirement portfolio has a massive weighting to equities that ramps up the risk exposure.
Which doesn’t make for easy sleeping or planning. But there’s not much we can do about it now, other than accept it for what it is.
Suffice to say, the search for quality investment ideas is becoming paramount. Relying on the index alone over the long term seems a tricky proposition right now.