One of the more controversial housing announcements to emerge from the government’s recent reforms is the proposal to ban self-managed super funds from borrowing to purchase residential property.

The reaction was immediate. Some commentators suggested it would crash property prices. Others argued it would finally improve affordability by removing a significant source of investor demand from the market. Within the property industry, the response was equally dramatic, with many viewing the proposal as the removal of an entire buyer cohort.

Maybe they’re right.

But before predicting what happens next, I think it’s worth asking a much simpler question.

How much housing demand are we actually removing?

Like many policy debates, the discussion appears to have jumped straight to the outcome before properly examining the mechanism. So let’s slow down and think it through from first principles.

What Actually Changes?

At a mechanical level, the policy removes one pathway for investors to purchase residential property.

Under the current rules, a self-managed super fund can use a Limited Recourse Borrowing Arrangement (LRBA) to acquire property using leverage. Under the proposed changes, that option disappears. Investors can still purchase property through an SMSF, but they must do so without borrowing.

There is no question that this reduces purchasing power.

Leverage exists because it allows investors to control larger assets than they could otherwise afford. Remove leverage and some future purchases that would have occurred under the old rules no longer proceed.

The important question isn’t whether demand falls.

I think it almost certainly does.

The important question is how much.

Because there is a very large difference between removing a segment of demand and removing enough demand to fundamentally alter the balance of a $12 trillion housing market. Those are not the same thing.

Before Predicting A Crash, How Large Is The Buyer Group?

One of the things that surprised me while looking into this issue is how difficult it is to find a precise estimate of the buyer cohort being affected.

The latest SMSF statistics suggest approximately 17.5% of SMSF assets are held in property. Based on total SMSF assets of around $1.1 trillion, that equates to roughly $190 billion of property exposure across both residential and commercial assets.

The exact split between residential and commercial property is difficult to determine. For illustrative purposes, if residential property represented around 70% of that exposure, it would imply residential holdings in the order of $130 billion.

That sounds like a large number until it is viewed in context.

Australia’s residential housing market is worth approximately $12 trillion. If around 5% of that stock changes hands each year, we are talking about roughly $600 billion worth of residential transactions annually.

Against a market of that scale, the relevant question becomes: how much of that annual transaction activity is actually being driven by leveraged SMSF purchases?

The answer matters enormously.

If the affected buyer group represents 1% of annual transactions, the outcome looks very different to a scenario where it represents 20%. Yet much of the current commentary seems to assume the outcome before quantifying the size of the shock.

This doesn’t mean the policy is irrelevant. It simply means that before predicting a housing collapse, it is worth understanding how much demand is actually being removed.

Investors And Structures Are Not The Same Thing

There is another assumption embedded in much of the current discussion that deserves scrutiny.

It assumes that when an SMSF borrower disappears, the investor disappears as well.

I’m not convinced that’s how the real world works.

The policy removes a structure. It doesn’t remove the desire to build wealth. An investor who intended to buy property through their SMSF still exists after the rule change. The only thing that has changed is the pathway they intended to use.

Some investors may decide not to proceed. Others may purchase outside super. Some may utilise trust structures, company structures or redirect capital into other asset classes altogether. The point is that the gross reduction in SMSF demand is unlikely to equal the net reduction in housing demand because some of that demand will almost certainly reappear elsewhere in the system.

This is one of the reasons I think the current debate is missing an important layer.

The question is not how many SMSF purchases disappear.

The more important question is how many disappear without being replaced by an alternative pathway.

The Most Immediate Impact May Be Rents

Interestingly, I don’t think the most immediate effect of the policy is likely to show up in property prices at all.

I think it is more likely to show up in the rental market.

Most SMSF property purchases ultimately become rental properties. If fewer investors are able or willing to purchase residential property, fewer rental dwellings are likely to be added to the market over time. At the same time, the demand side of the rental equation remains largely unchanged. Population growth continues, household formation continues and vacancy rates across many parts of the country remain historically tight.

This creates an interesting contradiction.

A policy designed to improve housing affordability by reducing investor demand may simultaneously place additional pressure on rental affordability if it reduces the flow of new rental stock entering the market.

The reason is simple.

Tenants don’t compete for houses that are sold.

They compete for houses that are available to rent.

If investor participation falls before supply constraints are resolved, the most immediate and visible impact may be higher rents rather than materially lower house prices.

That doesn’t mean prices won’t be affected. They almost certainly will be to some degree. But the rental market may respond much faster because the transmission mechanism is more direct and the causal chain is much clearer.

Housing Markets Don’t Operate In Isolation

Even if we assume the policy creates a meaningful reduction in investor demand, there is still another side of the equation that needs to be considered.

Australia continues to face a structural housing shortage. Population growth remains strong, vacancy rates remain low across many markets and the industry continues to struggle with construction costs, labour shortages and planning constraints. None of those issues disappear simply because borrowing rules change.

The housing market is ultimately determined by demand relative to supply. Focusing on one side of that equation while ignoring the other rarely produces accurate forecasts.

If demand falls by 2% while supply remains constrained by 10%, the market still has a supply problem.

If demand falls by 15% while supply remains constrained by 5%, the outcome looks very different.

The answer ultimately depends on the relative size of both forces rather than the existence of one in isolation.

Opportunity Doesn’t Disappear

One of the assumptions embedded in many downturn narratives is that opportunities disappear alongside demand.

History suggests otherwise.

Every property cycle creates winners and losers. Even during periods of weak national growth, some markets continue to perform well because the underlying drivers remain favourable. Population growth, infrastructure investment, rental shortages, affordability advantages and supply constraints do not suddenly disappear because sentiment deteriorates.

In fact, periods of uncertainty often create some of the best entry opportunities.

Markets rarely move in a straight line. Capital flows away from areas where the investment equation no longer works and towards areas where it still does. The current policy changes may reduce the number of opportunities available, but they do not eliminate them entirely. What they tend to do is increase the importance of research, market selection and timing.

Some markets may experience meaningful reductions in investor demand. Others may barely notice the change. Some may already be positioning for the next phase of the cycle while others continue to struggle with affordability constraints, oversupply or weak fundamentals.

The broad beta phase of property investing may be fading, but selective opportunities still exist.

In many ways, that is what property investing has always been about. Not buying everything. Buying the right asset, in the right market, at the right point in the cycle.

The Bigger Lesson

The more I think about these changes, the less I think the key question is whether SMSF demand falls.

I think that’s largely a given.

The more important question is how much of that demand disappears permanently and how much simply relocates elsewhere within the system.

Markets adapt. Investors adapt. Capital adapts.

The proposed SMSF lending changes clearly remove one source of demand from the housing market. What remains uncertain is whether that source of demand is large enough to materially alter the balance of a $12 trillion housing system once substitution effects, investor adaptation and ongoing supply constraints are taken into account.

For investors, that may be the more important takeaway.

The opportunity set may become smaller. The easy gains may become harder to find. But property cycles have never rewarded investors for buying everything. They reward investors for identifying where demand is likely to remain, where supply remains constrained and where capital is likely to flow next.

That has always been the real game.