Residential property prices and your super
There has been increasing media coverage on the direction of residential property prices in Australia. So, what is actually happening?
Until recently, house prices have grown rapidly over several years, particularly in Melbourne and Sydney. A key driver of this growth has been historically low interest rates allowing higher levels of borrowing. This has resulted in household debt in Australia rising to very high levels. At the same time, wages growth has been quite weak. More recently, house prices have been falling. There has been speculation in the media about the future of Australian residential property values. Most economists expect a fall in national prices of around 5% - 10%, although some expect larger falls.
The decline in house prices is driven by several factors. These include:
- stricter lending conditions from the banks (in part driven by the Royal Commission)
- regulations specifically designed to prevent loans to customers who may struggle to repay them, and
- a large number of loans previously on Interest Only being rolled over to Principal and Interest repayments - which raises monthly repayments.
Cbus does not expect a large fall in house prices. A moderate fall is more likely, followed by a period of limited price growth as households strengthen their finances. However, this is by no means certain and other influences such as rising interest rates or a further change in regulation may see prices fall more than expected or even begin rising again.
How will this impact your super?
While Cbus’ diversified investment options have some property exposure, this does not represent a large part of those portfolios and we have minimal exposure to residential property. Cbus aims to diversify its investment options through investing in a range of asset classes such as global shares, infrastructure, fixed interest and cash. By investing across a range of asset types, the risk of a negative return is reduced. This works because not all asset types perform in the same way. When one investment is performing poorly, another may be performing well. In addition, the Investment Team monitors the Australian and global investment outlook and adjusts the portfolio to manage these risks and identify opportunities.
As super is generally a long-term investment, it is important to not focus on short term rises and falls in markets. In managing investment portfolios, Cbus takes a longer-term focus. This has helped Cbus produce strong long-term returns. The Growth (Cbus MySuper) investment option has delivered an average annual return of 9.29%1 since inception in 1984.
1 Returns are based on the crediting rate, which is the return minus investments fees, the Trustee Operating Cost and taxes. Excludes account keeping administration fees. Past performance is not a reliable indicator of future performance.