MS: SMSF property next “economic wreck”

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From the AFR:

Morgan Stanley Australia chief executive Steve Harker has renewed alarm over the vigour with which investors are borrowing money in their self-managed super funds to buy property, saying it’s sowing the seeds of a future economic wreck.

Harker also predicts Australia is “going to be in a low-growth, low interest-rate environment for a sustained period of time, and that will be very challenging for the fiscal position of the federal and the state governments”.

In general, the investment banker says, low interest rates boost the appeal of real assets – such as property. However, he is deeply worried that Australia is sowing the seeds of its next financial crisis by allowing people to borrow money in their SMSFs in order to buy property.

“We have a tax system and culture that drives property investment in a way that can lead to its own strong risks”, he argues. “At present, people can take what amounts to a triple bet on property.

“They own their own home, which is capital gains tax free. They can also negatively gear investment properties to the point where it eliminates all income from other sources and now people can gear their self-managed super funds into property.

“It’s the third aspect of the triple bet that concerns me. I think the single biggest economic wreck – and one that will occur in this country in the next five to 10 years – will be in the SMSF space.”

The losses, he says, won’t be triggered by a collapse in the property prices, but by the proliferation of unviable property schemes that are now being peddled.

“The SMSF space is ripe for property spruikers and promoters, high-yield schemes and fraud. We’re talking about potentially $200 billion in superannuation savings being completely blown up. It will make Storm and Pyramid look like insignificant blips,” he says.

About the author
David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the founding publisher and global economy editor of The Diplomat, the Asia Pacific’s leading geo-politics and economics portal. He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.