First-home buyers can't compete with SMSFs

Australia's first-home buyers are being forced out of the market by SMSFs, the tax system and Asian investors.

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According to Aussie Home Loans founder John Symond, first-home buyers are being forced out of the property market by self-managed super funds (SMSFs) and Asian investors. However, he has rejected calls of a housing bubble and says the market's growth is making it "healthier."

As reported by The Australian, Mr Symond said, "Sydney, Australia's most bullish market, would grow by about 10 to 12 per cent this year, but followed a decade of sluggish growth of about 2.5 per cent a year."

At the Citi Investment Conference in Sydney Mr Symond gathered with industry leaders to discuss the state of the Australian property market. He identified one key area that needed government intervention, the housing tax system, and said first-home buyer grants needed to be replaced by incentives to save: "First-home buyer grants are counterproductive and I think governments are waking up to that."

He also acknowledged that negative gearing was designed to encourage new dwellings but says it's not what we're seeing happen: "If I've got some expensive apartments I can negative gear them and let the taxman pay half of my million-dollar mortgage."

Despite the incentives to buy property, Mr Symond has played down the possibility of a house price bubble because conservative consumers will keep a lid on it. "I've never seen consumers behave the way they have (conservatively), where we've got the lowest interest rates in history and some areas of real estate coming off the lowest they've been in years."

Also speaking at the conference was Professor Steven Keen, former economics head at the University of Western Sydney, who believes Asian and local investors with SMSFs are taking advantage of negative gearing and other tax incentives to "bet on house prices going up." He believes this is pushing house prices into bubble territory.

"Accelerating mortgage debt is the main thing that is causing house-price growth and this is being supported by non-residents buying so much property… I think we're in a bubble and it will go on for quite some time," Professor Keen said.

Foolish takeaway

The tax advantages achieved through purchasing property in SMSFs coupled with negative gearing make property investments almost irresistible. However, without proper controls in place, property prices could continue to go higher, making them even more unaffordable for potential buyers. In Australia, the big four banks (in order of market share), which control the most mortgages, are the Commonwealth Bank (ASX: CBA), Westpac (ASX: WBC), NAB (ASX: NAB) and ANZ (ASX: ANZ).

Although we may not be experiencing a property bubble just yet, rising unemployment would spell disaster for our market because it would result in more property owners being unable to service their loans. With a bounce back in consumer and business confidence and a revival of the non-mining sectors, however, we are unlikely to experience significantly higher unemployment levels in the near future.

Motley Fool contributor Owen Raszkiewicz does not have a financial interest in any of the mentioned companies.  

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