Don't expect price growth like previous booms: RBA

The Reserve Bank of Australia is warning property investors not to expect the sort of price growth that happened in previous booms.

It says people are exposing themselves to more risk in property investing, particularly within the self-managed super fund sector.

“It is important that those purchasing property maintain realistic expectations of future dwelling price growth; in contrast to the decades leading up to the crisis – when dwelling prices grew rapidly in response to disinflation and financial deregulation – long-run future growth in dwelling prices might be expected to be more in line with income growth,” the RBA writes in its Financial Stability Review.

It highlights New South Wales as a market particularly dominated by investors with 40% of home loans going to investors.

“The increase in investor activity has been associated with a recent pick-up in Sydney housing price growth and reports of sale prices exceeding price guidance and valuations by wide margins,” the report says.

It says increased speculation and borrowing by self-managed super funds for property investment presents risks not previously seen in Australia.

“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. It also raises consumer protection concerns in the event SMSF members are exposed to greater financial risks than they envisage,” it says.

“There is also evidence that SMSFs have been a large part of the recent demand by retail investors for the non-common equity capital being issued by banks, as well as hybrid securities more generally.

These instruments attract a high yield as they combine features of debt and equity, and are also quite complex products that carry higher risk than more traditional debt securities.

It is therefore important that these risks are adequately communicated to, and understood by, the purchasers of these products”

There has been a rise in lending to SMSF by smaller lenders and mid-tier banks which is exposing the lenders to higher risks.

“The potential for a further increase in property gearing in SMSFs is a development that will be monitored closely by authorities for its implications both for risks to financial stability and consumer protection.”