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Will SMSFs cause a property market bubble?

In recent headlines, there has been talk of the upturn in property prices in the capital cities as not just a boom but perhaps a bubble. It is still too early in the cycle to say that, but separate from the regular investors and first home buyers, now some concern has been raised about the entry of self-managed super fund (SMSF) investors increasing their residential property purchases.

With changes in SMSF investing regulations over the past five years, SMSF investors can not only buy property through their funds, but they can also borrow money against the fund to buy real estate. The majority of real estate purchased by SMSFs is commercial because of incentives and tax deductions, but they are not restricted to that.

The RBA has come out expressing concern for any trend that could raise demand for property beyond regular levels. In September, it stated, “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.”

Others have rebutted the idea that SMSF residential property purchases will exacerbate a natural rising market. Of the total $1.2 trillion held within all superannuation funds, only about one-third is held by SMSFs, approximately $500 billion. Within that figure, only about 15% of that accounts for direct property investment.

Graeme Colley, director of Technical and Professional Standards at the SMSF Professionals’ Association of Australia said that only $17 billion of SMSF investments are in residential property, which makes up 3.4% of all SMSF assets.

Even if there is an increase in SMSF residential property purchases, the majority of it will stay with commercial property that provides a more stable, long-term return. The head of direct property at Charter Hall (ASX: CHC), Richard Stacker, stated that commercial real estate offers a reliable yield that is uncorrelated to equity markets.

If there was an increase in demand for residential property due to SMSF investment, financial institutions like Commonwealth Bank (ASX: CBA), National Australia Bank (ASX: NAB), Westpac (ASX: WBC) and ANZ (ASX: ANZ) would benefit by having more assets under management, and increases in lending would mean more earnings for them. In addition, fund management companies like AMP (ASX: AMP) and Perpetual (ASX: PPT) would see similar increases in funds under management and subsequent profits.

Foolish takeaway

There should be adequate balances put in place to ensure that the potential abnormal increase of buyer demand does not create bubble-like conditions. If a market rises too high, it usually crashes with the same intensity.

The business cycle can’t be totally controlled, but it is up to the government to make long-term regulations and policy by analysing the possible outcomes of its good intentions. In the meantime, look at companies that would gain from increased demand, and your investments can do just as well or better than your superannuation.

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Motley Fool contributor Darryl Daté-Shappard does not own shares in any company mentioned. 

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