Housing still a draw, but super savings unbeatable on tax front

4 min read

Robert Gottliebsen, Business columnist.
Published in The Australian 16 March 2017.

Many Australians are rushing into negative gearing dwellings as the way to build their retirement wealth and casting aside superannuation. They fear that there is too much risk in the politics of superannuation. 

Many Australians are rushing into negative gearing dwellings as the way to build their retirement wealth and casting aside superannuation. They fear that there is too much risk in the politics of superannuation.

But at The Australian’s Building Wealth seminar I got the chance to set out my view — that the Canberra-driven changes taking place mask a fundamental pillar of superannuation saving — it remains incredibly tax efficient. For decades, superannuation returns, whether the fund was in pension or savings mode, were taxed at 15 per cent. Then suddenly during the time of Peter Costello as treasurer, super funds in pension mode were given tax-free status.

The latest set of changes partially reverse the pension mode tax-free status, but still, the first $1.6 million of a person’s superannuation is still tax free in pension mode. And where we have a couple who have both been saving via super, the tax-free total becomes $3.2m. That’s a lot better than it was in the pre-Costello era.

And on the negative gearing side, we have the ALP, which is ahead in the opinion polls, with a policy in stone that negative gearing for established houses will not be allowed. It will be confined to new dwellings.

At the seminar my colleague Alan Kohler and I took different views on the likely effect of this. My view is that when negatively geared investors go to sell their “used” house, they will not have either investors or foreign buyers in the market. The dwellings will have to be sold at what the residential occupiers can pay. Alan believes that if the ALP were to win the next election there will be a rush of buying negatively geared existing properties — which would send prices higher.

Not surprisingly, one of the major concerns at the seminar was the outlook for the housing market in Australia. Led by the US, the world is moving into a higher interest rate environment, but Australian rate rises are further away, partly because the Reserve Bank is nervous about putting its official rates much higher because of the high leverage of the Australian society. But major banks borrow in the vicinity of a third of their funds overseas so over time bank borrowing costs will rise and they will pass these costs on to mortgage borrowers — led by investor loans.

However, one of biggest changes in the outlook for Australian dwellings is that whereas six months ago Chinese investors were not buying off-the- plan apartments, they have now returned to the Sydney and Melbourne markets with a vengeance.

In Chinese terms Australian apartments are cheap and settlement is not required for two or three years. That still leaves a large number of Melbourne and, to a lesser extent, Brisbane apartments bought by Chinese off the plan two or three years ago requiring settlement in the next six months.

If a settlement crisis erupts it will infect parts of the Melbourne and Brisbane markets. In Sydney, Chinese off-the-plan purchasers can take a major short-term correction in Sydney off the agenda, although there is weakness in some areas of the market.

The discussion and the seminar on property values led to a debate on the role of bank shares in Australian superannuation portfolios.

Because bank shares have risen so strongly, many self-managed super portfolios find themselves with about 40 per cent of their funds in bank shares. Banks are good businesses, but they are highly leveraged, and if anything goes wrong with the property market or employment, then their shares will be affected. And superannuation portfolios that are overexposed to the bank sector therefore carry more risk than is prudent.

We are moving into an era that is very different to what has been experienced in the last five years where interest rates have been falling, making yield stocks a bonanza. That environment over time will change. In the US, the combination of a tight labour market and the pending Trump tax-driven stimulations will push rates higher and start a process where the world moves into a higher interest rate environment. Inflation could easily break out in the US.

While the Reserve Bank will try to keep a clamp on official rates, our bond markets and other yield driven securities must over time reflect the global trend. That means investing will become much more about growth than it has in recent years. And much of that growth will come in small companies that are usually more agile and growth orientated than Australia’s larger enterprises.

That means investors should put part of their portfolio aside for smaller stocks, but the segment needs to be diversified because of the higher risk. Many will prefer to outsource selection of smaller stock portfolios to professionals, although those with the required time and talent will find selecting small stocks fascinating.

In the self-managed fund area, obviously many investors choose to run their own portfolio, but I have always used managed funds for a substantial part of my equity exposure. Younger self-managed fund trustees are time poor and often leave too much of their money in cash. Many large funds convince gullible journalists to comment that running a self-managed fund is difficult and dangerous given the constant changes in regulation.

I have had a self-managed fund since 1978 and have watched countless rule changes and political gymnastics. While you need to understand the basic thrust of what is happening, there are many people who can help you through the complexities. Once you have the right group alongside you it is not hard. The anti self-managed fund material is simply propaganda although self-managed funds are an expensive way of managing small amounts of money that’s better in the hands of the large funds.

Finally, for those fortunate enough to have $1.6m in pension mode superannuation, while you can select securities to go into the $1.6m fund, you can also make it a mirror image of your total portfolio which is much simpler ends.

Nevertheless you don’t have to do your own stock selection and there is an array of experts available to help you through any complexities that exist in self-managed funds.

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This information current as at 16/03/2017.

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