SMSFs are right to be cautious on investing in property: AMP’s Shane Oliver

The cautious approach adopted by self-managed super funds (SMSFs) considering investing in residential property is the right one, according to Shane Oliver, head of investment strategy and chief economist at AMP Capital Investors.

Oliver, one of the more cautious economists commenting on the housing market, says most investors have sensed that the property market’s has already done its 20-year dash of solid growth.

Oliver says the last time property was a smart investment was in the early to mid-1990s, when investors would have probably seen a three- to four-fold increases in the value of their property investments.

He says it is possible for SMSFs to find an investment property worth buying, but it requires them doing a lot of homework and research.

In a recent investment report looking at which investments offered a decent yield in the current market of declining interest rates, Oliver was not upbeat about returns from residential property investments.

He says the boom over the last 20 years has resulted in yields of just 3.7% on houses and 4.7% on apartments, before taking into account the costs of investing.

Net yields, once costs have been taken into account, are just 1% for houses and 2.3% for apartments, says Oliver.

Oliver's gloomy outlook comes as figures from SMSF advisory firm Dixon Advisory show that only about 5% the firm’s 4,500 DIY super clients have used limited recourse borrowing rules to include property in their portfolio, reported the Australian Financial Review.

However, Oliver has toned down his sentiments about the degree to which residential property in Australia is overvalued.

In a video update on the housing market in July, Oliver said that a few years back AMP was saying that houses were overvalued by as much as 30% but “the degree of overvaluation has come down, particularly over the last couple of years”.

Now he says they are 10% to 15% overvalued.

“We have very expensive housing in Australia relative to the US and UK, which have seen sharp adjustments in recent years."

However, Oliver says a key difference between Australia and the US is that the US had a housing boom at the same time as a supply boom so as prices started to fall it was made worse by the new supply stream.

“Australia has not seen that – for the last decade we have been under-building, which shows up in our very low rental vacancy rates and the upward pressure on rents."

This, he says, will put a floor under prices.

Oliver says that over the very long term property and shares have offered similar returns to investors – around 11% per annum – which suggests investors should hold both in their portfolios.

According to Tim Coates,  property investment adviser with Dixon Advisory, in addition to requiring special borrowing arrangements, SMSFs need a  plan to pay off their investment property.

Coates says such decisions to invest in property could be affected by the government reducing the tax concessional contribution limits from $50,000 to $25,000.