Housing bubble makes mockery of superannuation

Up, down or sideways? Debate has intensified about the future direction of Australia’s property market since the RBA announced a 25 basis point cut to the official cash rate this week. It’s not the first cut we have had. Australia has experienced five downward adjustments in monetary policy since November last year as our economy starts to become increasingly sluggish.

What fuelled the debate this time was a cut when there is signs our housing market is starting to take off again – a problem when you have just one leaver to control and increasingly volatile and fragile economy.

On a global level, economies around the world are starting to slow after years of spending beyond their means and then finally propped up with stimulus. A rapid slowdown in Europe is having a knock on effect to China, who resorted to a fixed asset investment boom to bridge the gap of falling exports when the GFC first hit.

The end of the mining boom has seen super-heated commodity prices come out of the blast furnace and begin to cool causing a blow out in our trade deficit to $2.03 billion in August. But as commodity prices tanked, the perceived safety of Australia and high interest rates relative to the rest of the world caused the dollar to remain elevated. The high Aussie has kept relentless pressure on other sectors such as manufacturing, tourism and education. The rest of the economy is and will still be suffering the effects of Dutch disease for an extended period yet. There are now signs, unemployment has been trending up.

Interest rates were slashed to near GFC levels for a reason. But like sheep being herded through the open gate to the slaughter house, new entrants and speculators in the housing market has no idea what is ahead, and no reason to be cautious. The shepherd says rates are low – it’s never a better time to buy, and when one sheep enters, the herd follows.

This week there was some talk of the mining boom finishing, and the housing boom starting. Reality is, Australia already has a large housing bubble. It didn’t start recently, but a decade or two ago. It has almost single handily sent household debt sky-rocking to about 150 per cent of household disposable income. This has seen growth in housing finance to plunge to 35 year lows and new housing starts to 15 year lows. Construction activity fell last month at the sharpest rate in 12 months.

In Melbourne, what some consider the epicenter of the boom, data from the Department of Sustainability & Environment show housing transfers for the 12 months to September is at the lowest pace in the 10 year history of the series and more mortgages are now being discharged than created.

Unfortunately, the housing market for the past decade has not operated on fundamentals (or affordability), but on confidence. When interest rates are close to record lows, Shepherds announce to the herd, “activity is on the rise” (but avoid mentioning the scary levels of debt being locked in for 30 years) and you have the property lobbyist recipe for short term success.

While Australia is fixated on their housing achievements and strive to make it bigger, other governments and central banks with the knowledge – the bigger the bubble, the bigger the bust, are trying to cushion the blast of an inevitable housing blow up.

Singapore’s new measures

This week, Singapore’s central bank, the Monetary Authority of Singapore (MAS) has taken such action to help prevent its citizens over extending themselves. Effective from the 6th October 2012, Singapore will limit all new residential loans to 35 years. Any loan over 30 years in duration or with a period that will extend beyond the retirement age of 65 will have tighter loan to value ratios. For this group, the maximum LVR will be 60 per cent for a borrower with no other residential property loans or 40 per cent for borrowers with one or more residential property loans.

MAS Chairman and Finance Minister, Mr Tharman Shanmugaratnam said “Monetary conditions worldwide are far from normal. QE3 and low interest rates have made credit easy, but this will eventually change. We are taking this step now to require more prudent lending, and will continue to watch the property market carefully. We will do what it takes to cool the market, and avoid a bubble that will eventually hurt borrowers and destabilise our financial system.”

Boomer to bust

While Singapore was taking action, CPA Australia was releasing an alarming report titled “Household savings and retirement. Where has all my super gone?”

The report shows Australians “approaching 65 have sharply increased their debt levels. Their average mortgage balance and other property debt has more than doubled since 2002 and credit card debt is up 70 per cent.”

In the 8 years to 2010, those approaching retirement in the 50 to 64 age bracket had household super nest eggs grow by 48 per cent and property assets growing by 58 per cent. But over the same period, property debt increased by 123 per cent.

Once retired, this age group is being forced to take lump sum payments to pay down their debts, leaving practically nothing left and then opting to go on a pension.

This speculation by the boomer generation has not only undermined the superannuation system but is set to leave tax payers with a growing hole from burdening pension costs.

Alex Malley, CEO of CPA Australia said “Lump sum superannuation benefits are being treated as a windfall and being used to pay for the lifestyle that’s been lived now instead of being put aside to provide income in retirement.”

This has opened debate on should our superannuation scheme allow lump sum payments in retirement? And with reports off younger generations halting mortgage repayments to trigger access to super under hardship arrangements, addressing the actual problem of property speculation would be fixing the root cause of the problem.

Dead Cat Bounce?

Will lower interest rates fuel a new housing boom? Or is there simply too many head winds?

On many metrics, the Australian economy is in a worst state now than during the GFC and the government has not (yet) come to the party with a new housing boost/grant.

» Household savings and retirement Where has all my super gone? – CPA Australia, October 2012.
» MAS imposes cap on housing loan tenures – Business Times, Singapore, October 6th 2012.


  1. Nothing will happen.
    Labor is staring down the barrel of political oblivion and Wayne ‘Bradbury’ Swan has the poltical backbone of jellyfish.

    So business as usual until the next election.

  2. It’s not just the baby boomers. The banks are quite happy to lend just about anyone loans that run well into their retirement knowing full well they will be paying out (lump sum or weekly) the remainder of their loan from their super. Our “super intelligent” policy makers are allowing the banks to get away with this scam.

    There will be no super for a lot of people and there will be a lot more people expecting a pension than the government has accounted for. Expect lots of future unfunded liabilities.

    I was speaking to RAMS just a few weeks back and they are willing to lend me lots e.g. 7 figures of money until I’m into my 70’s! They figure you will either

    1. Use your super to payout at retirement (lump sum etc)


    2. Downsize/move when you retire

    Why by a house to do #2 when you retire!

    When I questioned this practice they said its “quite normal”.

    The Singaporeans have obviously caught onto this little banking racket

  3. RAM’s parent, Westpac makes loans to 98 year old nursing home residents.

    Super is super. The government needs to legislate against lump sum withdrawals and access under hardship arrangements.

  4. I am surprised by Singapores actions on this one.

    But, then again anyone who has been to Singapore would understand what a fantastic little nation she is.

    That one small island can control so much wealth, finance and oil is amazing. I have often said if things go too belly up in Aus, then I’m off to Singapore.

    It’s mind boggling how properous a nation becomes when the government is fixed on ‘building a nation’, rather than our pathetic selling of everything to keep cashflowing.

    If only our politicians viewed Lee Hsien Loong (the third and current Prime Minister of Singapore, and the eldest son of Singapore’s first Prime Minister, Lee Kuan Yew) as mentors.

  5. @ Tom

    ” …. legislate against lump sum withdrawals and access under hardship arrangements”

    I would like to point out that it depends whether your view on compulsory super is actually a good or a bad thing. People in Singapore has CPF that they can use for medical or education even before their retirement. Forcing people to act certain ways with their (emphasis added) retirement money goes against free will and libertarian value.

    Do you think the government or the mutual fund manager know better than the people that need their money? What is the use of the super if …. they are long …. dead ….. anyway ….

  6. I agree with Yusuf here. I am no fan of having Super diverted to proping up the housing bubble, but I think the main issue here is why compulsary super is the solution to Australia’s savings problem (a world wide problem).

    The emphasis should be on people to save and manage their own money for retirement and the best way to do this is to make it very hard to claim an old age pension.

    The pension was designed to kick in at 65 so many decades ago that it was only ever expected to be used for 5 years of so (people would live to only 70 if they were lucky!).

    Now we have people drawing on their pension for 20+ years and so people like myself (30) will be paying for this with massive taxes etc….all the while trying to save for a house!

    The whole system is broken…taken over by rent seekers, moochers and populists.

    We got economics all mixed up. It was never about earning more and more money. It was about producing better goods and at lower prices…that is how you make people wealthy, not through asset-price and wage inflation.

  7. I suppose it was too convenient and obvious to openly back the young uns baying for access to their super to *get on the property ladder*. I was among them at one frustrated point.

    Far easier to simply allow the banks to adjust their perceived risk by counting super as a back stop to irresponsible mega-mortgage lending. Nevermind that today’s 30-somethings will be working into their 70-somethings. Cat food and baked beans may provide the cornerstone of a healthy septugenarian diet.

    I feel that Super is a concept that we are all greatly ignorant about. I’d certainly like to have a greater understanding and control of it. Reflecting on my situation I was fortunate in one respect to have commenced a career in Higher Education (y2000) where 17% super and a compulsory co-contribution of 8.5% pre-tax was offered. That set me up nicely in a Tortoise v Hare race with my generational peers.

    However, in another respect, if that money was available in salary then I could have more easily beat the boom in the early years (01-04 after that I just gave up). My gross was comparatively higher than my peers however my take-home was less. In this regard the Hares have houses (and huge debt).

    Current employer offers the standard 9%. I’m tipping in an extra $50 per week ($2600/yr) which is roughly equivalent to an additional 3%, taking the total to 12% super. Despite leaving Higher Ed I’m tipping it all back into UniSuper thanks to choice of fund flexibilities. The rationale being that the more I front run those contributions I’m buying more “units” and the compunding effect will be greater.

    While I’d like to tip in more – say another $50/pw (or +15%) – its sunk cash. I can’t later decide to draw down on those discretionary additional contributions should I need that cash. Thus I’m hesitant to do so.

    Given that most Super funds will hold a portion of your account as “cash – fixed interst” then I see no reason why that portion of your account can not be treated as a sequestered cash account for additional “tax-free” contributions. This would have been preferable to the ridiculous “First Home Saver Account” as it would have been a facility available to everybody.

    Considering the planned increases to the Superannuation Guarantee will from next year lift the rate from 9% to a max of 12% in 2019/20 there there should be renewed interest in Super generally and this may provide a platform for additional reforms if sufficient interest can be generated against typical Australian apathy and financial ignornace.

    We will need to be vigilant in the face of reforms which will simply give the F.I.R.E. industries unfettered access to the remainder of our wealth to be transferred in the name of “improving affordability”.

    For the time being, the status quo of high prices fits with GovCo’s preferred outcome. Boomers getting rich from property, through their SMSF’s, and rolling over the cash to dividend/interest bearing assets are not a pension liability. The demographics behind this are the greatest predictor of the outcome.

    Begun, the inter-generational wars have.

  8. @ Matt

    I am sorry to say this …. Your simple comparison shows me that you do not yet know …. Singapore ….. Without prejudice it any further …. please remember … it is a relative comparison not absolute that we are talking about.

    As a token of goodwill, please read “Lee Kuan Yew the Hard Truth” published by SPH in late 2010. It is not that sugar-dandy after all …. In my opinion, your last statement is exactly what they want to hear ….. Selling education of public policy (just like Kennedy school of Government) is also a lucrative business …. like anything else ….

  9. 12% super is just another incentive to offshore jobs. We are becoming more and more uncompetitive on global scale every day! Buts its ok because we will just sell our “gold plated” services to make up the difference – NOT.

  10. AverageBloke I believe your comments are spot on. Labor will ignore anything and everything and hope for the best

  11. Labour. Liberal. What’s the difference? Even if you’ve never voted Greens or Independent before, now is the time to do so. Let’s get those two mainstream parties out!

  12. The problem with most Super funds is that you don’t know what is in them. Take for instance UNI SUPER this was brilliant up to the point they decided to tell people they would have the pensions cut. (because they made bad investments that they only brought to account later on …. yes google it … or more examples the old payments to the unions via extra payments making a complete lie of the “only for the benefit of members” … more like benefits of everyone, unions, tv advertising companies, burnies talent scout ….once again google it, MTAA, Chifley

    and if a bis advertises its cause the owners want more money …. so why do industry super funds bombard our tv sets … the owners (unions ??) want more money….. prove me wrong, happy to stand corrected and will recant this if proven wrong

  13. @ Review your super

    YES! Totally agree, the forces running the super industry are greedy, selfish and totally morally corrupt.

    They want OUR money today, so they can have a great time, and gives us a secure retirement. They will ride the upside for all it’s worth, and still raid the piggy bank when the downside occurs.

    I believe superannuation will be dismantled in the future. It may not be in 2, 5 or 10 years, but the model is broken. It requires better (vs. more!) regulation. But since when has regulation provided a silver bullet?

    Super is nothing more than a thin promise of comfortable retirement, which is really just privatized communism, where the prudent pay the retirement of the lazy.

    My advice? Set up your own SMSF and manage it like a hawk.

  14. @ Matty

    ” …. Set up your own SMSF and manage it like a hawk.”

    I would like to chip in few words on that statement. YES, you can but bare in mind few things:
    1) There are more and more institutional clients that utilize “dark pool” (don’t know what that is … google it … Goldman Sachs and several other investment bankers are the champion of the model. It is not new …. It has been alive for at least 10-15 years …. It just get more and more sophisticated lately …. From my limited understanding, it can even bypass …. the ASX trading system … and trade directly …. with its own “liquid” market)

    One can play around and determine an arbitrary price ….. of any asset ….. if that security is not highly liquid …. Imagine if this power is combined with political-grouping to promote certain agenda …. The power is tremendous ….

    2) Insider trading is quite rampant ….. It is just like gambling business with hidden dealers …. Don’t believe this? If you manage to have a chance … ask few of your close, good and “honest” friends that work in the brokerage business ….. Chinese Wall? Be real … It is so easily by-passed over a cup of coffee ….. The issue is in filtering whether that piece of information is still relevant, its place in queue and whether it will be executed or not in action …..

    3) Do you have the conviction to stay true to your own “knowledge” or will one cave-in to fear …. and doubt …… Even published journals are of questionable intent ….

    Good luck!

  15. BY THE WAY ….. There is always CFA, MBA …. PhD and etc etc …. for those curious mind …… or those poor soul that has been heavily hit …. mentally …. by the “market” ….

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