Australians have always loved property. For generations, bricks and mortar have been seen as one of the safest places to put your money, but right now property is giving us a useful reminder that no asset simply goes up forever.
CommBank is forecasting a 9% to 10% fall in major capital city home prices from peak to trough, with Sydney and Melbourne potentially falling 12% to 13%. These are forecasts, not results, but prices are already falling across much of the country and some parts of Sydney and Melbourne are already down more than 10% from their peaks.
So perhaps the more interesting question isn’t what property will do next. It’s what we actually mean when we call an asset “safe”.
Safe for how long?
That’s an important question when we’re talking about super, because super is not a short-term game. Money going into super at 30, 40 or 50 may remain invested for decades, including through retirement.
Over that kind of timeframe, there will almost certainly be good years and bad years. Property can fall, shares can fall, gold can fall and cash can quietly lose purchasing power through inflation.
Gold is an interesting example, not because we’re suggesting anyone should buy it, but because it shows why timeframe matters. Gold can rise or fall substantially over shorter periods, yet over very long periods it has survived currencies, governments, wars and changing monetary systems while retaining its role as a store of value.
Property has its own long history of building wealth in Australia, but it isn’t immune either. Interest rates change, tax rules change, borrowing conditions change and, as we’re seeing now, prices change too.
Property is changing
There is a lot happening in Australian property at the moment. Higher interest rates have reduced borrowing capacity, buyers have become more cautious and tax and policy changes are also altering the environment for residential property investors.
For SMSFs, the landscape has changed even further. From 10 August, SMSFs can no longer enter into new limited recourse borrowing arrangements to acquire residential property, although an SMSF can still acquire residential property without borrowing where the usual super rules are met.
None of that means these changes alone caused the property downturn. There are a number of forces at work, but it does make this an interesting time to look beyond the assumption that property, or any other asset, is automatically “safe”.
Maybe “safe” is the wrong question
If super is going to be invested for 20, 30 or even 40 years, what an asset does this year is only one part of the picture. An asset falling today doesn’t tell us where it will be in 20 years, just as an asset rising strongly for the past ten years doesn’t tell us what it will do for the next ten.
Perhaps better questions are: How has this asset behaved over long periods? Has it maintained purchasing power through inflation? What could cause its value to rise or fall? How liquid is it when money is needed? How exposed would we be if too much of our retirement savings depended on one asset or one market?
These are the sorts of questions that matter when thinking about an SMSF investment strategy. Risk, return, diversification, liquidity and timeframe all matter, particularly when the money we’re talking about is intended to fund retirement.
There is no asset without risk, and there is no asset that wins every year. The real question is whether we understand the risks we’re taking, and whether we’re looking at them over the right timeframe.
This information is general in nature and does not take into account your personal objectives, financial situation or needs. Freedom Financial Solutions is not licensed to provide financial product advice under the Corporations Act. You should consider obtaining advice from an appropriately licensed financial adviser before making a decision about a financial product.
Sources: ABC News; Cotality; Commonwealth Bank; Australian Taxation Office.
