The AFR is reporting today that Australian self-managed superannuation funds (SMSFs) are piling into Australian property, with investment up by 11% in the past year and by nearly 60% since 2011:
The big increase in property investment by SMSFs is highlighted by the Australian Securities and Investments Commission in its submission to a parliamentary inquiry on home ownership.
Since the law changed in 2003 to allow SMSFs to borrow money, concern has grown about the influence of the cashed-up funds on the housing market.
“As at March 2015, the value of residential real property investments through SMSFs was $21.78 billion … up from $19.49 billion … in March 2014,” the ASIC submission said.
In my view, allowing super funds to leverage into property and other investments was one of the bigger blunders of the Howard Government. In permitting leveraged investment, the Coalition effectively turned super from being a retirement savings system into a speculative vehicle, in turn dramatically increasing the riskiness of Australia’s retirement savings and financial system, and further inflating Australian house prices.
Indeed, the final report of the Murray Inquiry into Australia’s financial system warned of the embryonic growth of SMSF property leverage, and explicitly recommended banning their ability to borrow:
Recommendation 8
Remove the exception to the general prohibition on direct borrowing for limited recourse borrowing arrangements by superannuation funds…Further growth in superannuation funds’ direct borrowing would, over time, increase risk in the financial system… In addition, borrowing by superannuation funds implicitly transfers some of the downside risk to taxpayers, who underwrite adverse outcomes in the superannuation system through the provision of the Age Pension…
As discussed in the Interim Report, the Inquiry notes an emerging trend of superannuation funds using LRBAs to purchase assets. Over the past five years, the amount of funds borrowed using LRBAs increased almost 18 times, from $497 million in June 2009 to $8.7 billion in June 2014…
The GFC highlighted the benefits of Australia’s largely unleveraged superannuation system. The absence of leverage in superannuation funds meant that rapid falls in asset prices and losses in funds were neither amplified nor forced to be realised. The absence of borrowing benefited superannuation fund members and enabled the superannuation system to have a stabilising influence on the broader financial system and the economy during the GFC. Although the level of borrowing is currently relatively small, if direct borrowing by funds continues to grow at high rates, it could, over time, pose a risk to the financial system…
Borrowing by superannuation funds also allows members to circumvent contribution caps and accrue larger assets in the superannuation system in the long run…
It is also inconsistent with the objectives of superannuation to be a savings vehicle for retirement income. Restoring the original prohibition on direct borrowing by superannuation funds would preserve the strengths and benefits the superannuation system has delivered to individuals, the financial system and the economy, and limit the risks to taxpayers.
The RBA raised similar concerns in its submission to the House of Representative’s Inquiry into Home Ownership:
Another change in the landscape since 2003 is that superannuation funds are now able to borrow. Some self-‐managed superannuation funds have taken advantage of this by adding geared property into the fund portfolio, both residential and, in particular, commercial property. At the margin, this has increased the population of potential investors. Although the share of the housing stock owned by these funds is small, it has grown quickly (RBA 2013). The Bank has previously observed that leverage in superannuation funds may increase vulnerabilities in the financial system and therefore supports limiting the scope for leverage in these funds (RBA 2014c).
The architect of Australia’s superannuation system, former Treasurer and Prime Minister Paul Keating, has also called for curbs on SMSFs using leverage to invest in Australian residential property, arguing that it “is making it nearly impossible for younger people, owner-occupiers, to afford to house themselves” and arguing that “we can’t persist with the position where our children cannot afford to house themselves and that is where we are now”.
