Are SMSFs driving up property prices?

Are SMSFs driving up property prices?

Property has long been a popular investment strategy for Australians. However, increased investment activity in residential property by self-managed superannuation funds (SMSFs) is worrying regulators amid concerns it may be pushing up house prices.

In its just released Financial Stability Review, the Reserve Bank of Australia noted that SMSFs have become more active in the property investment market following changes in legislation since 2007 that have allowed the funds to borrow money to invest in property.

The RBA warned in the report: “One risk of the increase in property investment by SMSFs is that at least some of it is a new source of demand that could potentially exacerbate property price cycles.”

Who’s to blame?

If you are in the market to buy your first home, the prospect of rising property prices would be worrying. But are SMSFs to blame?

Helen Hodgson, senior lecturer at the University of NSW’s School of Tax and Business Law, said SMSFs are just one factor contributing to increased activity in the property market, which in turn drives up property prices.

For starters, historically low interest rates are encouraging more individuals – not just self-managed superannuation funds – to buy investment properties, she said. Another factor at play is the increase in foreign investors buying property in Australia – in the three months to the end of September, foreign investors snapped up 12 percent of property sales across Australia, while SMSFs account for about 10 percent of sales.

“Yes, we’re having a lot of activity in the property market. The question is what’s driving that activity,” Hodgson. “I’d be reluctant to say it’s driven by one group or another, but certainly the combination is heating up the market.”

SMSF remains a small player

The SMSF Professional Association of Australia has downplayed the role of SMSFs in heating up the market, saying that residential property is a minor element of the SMSF investment market.

Dr Andrew Wilson, senior economist with Australian Property Monitors, agreed. “There are significant obstacles to investment by SMSF in residential property and as such I believe it remains a niche segment of the current investment market,” he said. “However, there is no doubt that it’s a growing influence although currently minor.”

One third of all Australian superannuation assets are held in SMSFs. If you are a member of a self-managed super fund and would like to research SMSF loans to invest in property, you can do so on RateCity.com.au.

Where are prices rising?

According to Dr Wilson, house price growth due to increased investor activity is largely in Sydney’s western suburbs and some regional areas such as Toowoomba in Queensland. “Price rises in Perth, another recently popular investor market, appear to be flattening,” he said.

“The latest ABS [Australian Bureau of Statistics] investment loan data reports a drop in national investment activity over August to $8.9 billion, with only NSW recording a very small rise over the month,” Dr Wilson added.

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While many lenders consider casual employees as high-risk borrowers because of their fluctuating incomes, there are a few specialist lenders, such as NAB, which may provide home loans to individuals employed on a casual basis. A NAB home loan for casual employment is essentially a low doc home loan specifically designed to help casually employed individuals who may be unable to provide standard financial documents. However, since such loans are deemed high risk compared to regular home loans, you could be charged higher rates and receive lower maximum LVRs (Loan to Value Ratio, which is the loan amount you can borrow against the value of the property).

While applying for a home loan as a casual employee, you will likely be asked to demonstrate that you've been working steadily and might need to provide group certificates for the last two years. It is at the lender’s discretion to pick either of the two group certificates and consider that to be your income. If you’ve not had the same job for several years, providing proof of income could be a bit of a challenge for you. In this scenario, some lenders may rely on your year to date (YTD) income, and instead calculate your yearly income from that.

Why should I get an ING home loan pre-approval?

When you apply for an ING home loan pre-approval, you might be required to provide proof of employment and income, savings, as well as details on any on-going debts. The lender could also make a credit enquiry against your name. If you’re pre-approved, you will know how much money ING is willing to lend you. 

Please note, however, that a pre-approval is nothing more than an idea of your ability to borrow funds and is not the final approval. You should receive the home loan approval  only after finalising the property and submitting a formal loan application to the lender, ING. Additionally, a pre-approval does not stay valid indefinitely, since your financial circumstances and the home loan market could change overnight.

 

 

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Full approval for a home loan usually involves a property valuation, which, Bankwest suggests, can take “a week or two”. As a result, getting your home loan approved may take longer. However, you may get full approval within this time if you applied for and received conditional approval, sometimes called a pre-approval, from Bankwest before finalising the home you want to buy.  

Another way of speeding up approvals can be by completing, signing, and submitting your home loan application digitally. Essentially, you give the bank or your mortgage broker a copy of your home’s sale contract and then complete the rest of the steps online. Bankwest has claimed this cuts the approval time to less than four days, although this may only happen if your income and credit history can be verified easily, or if your home’s valuation doesn’t take time.

How can I get ANZ home loan pre-approval?

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At the time of applying for the ANZ Bank home loan pre-approval, you will be required to provide proof of employment and income, along with records of your savings and debts.

An ANZ home loan pre-approval time frame is usually up to three months. However, being pre-approved doesn’t necessarily mean you will get your home loan. Other factors could lead to your home loan application being rejected, even with a prior pre-approval. Some factors include the property evaluation not meeting the bank’s criteria or a change in your financial circumstances.

You can make an application for ANZ home loan pre-approval online or call on 1800100641 Mon-Fri 8.00 am to 8.00 pm (AEST).

Can I apply for an ANZ non-resident home loan? 

You may be eligible to apply for an ANZ non-resident home loan only if you meet the following two conditions:

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Usually, these loans have higher interest rates and a shorter repayment duration.

What is a line of credit?

A line of credit, also known as a home equity loan, is a type of mortgage that allows you to borrow money using the equity in your property.

Equity is the value of your property, less any outstanding debt against it. For example, if you have a $500,000 property and a $300,000 mortgage against the property, then you have $200,000 equity. This is the portion of the property that you actually own.

This type of loan is a flexible mortgage that allows you to draw on funds when you need them, similar to a credit card.

What is equity and home equity?

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What is stamp duty?

Stamp duty is the tax that must be paid when purchasing a property in Australia.

It is calculated by the state government based on the selling price of the property. These charges may differ for first homebuyers. You can calculate the stamp duty for your property using our stamp duty calculator.

What is appreciation or depreciation of property?

The increase or decrease in the value of a property due to factors including inflation, demand and political stability.

What does pre-approval' mean?

Pre-approval for a home loan is an agreement between you and your lender that, subject to certain conditions, you will be able to borrow a set amount when you find the property you want to buy. This approach is useful if you are in the early stages of surveying the property market and need to know how much money you can spend to help guide your search.

It is also useful when you are heading into an auction and want to be able to bid with confidence. Once you have found the property you want to buy you will need to receive formal approval from your bank.

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