The AFR is reporting today that self managed superannuation funds (SMSFs) are gearing into property at an increasing rate, with the amount of debt held in limited-recourse mortgages more than tripling from “$2.5 billion at the end of June 2012 to $8.7 billion at the end of June 2014”.
A few weeks back, former Treasurer, Prime Minister, and architect of Australia’s compulsory superannuation system, Paul Keating, 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”.
Keating’s call for curbs echoed those of the draft report of the Murray Inquiry into Australia’s financial system, which in July warned of the embryonic growth of SMSF property leverage:
The use of leverage in superannuation funds to finance asset purchases is embryonic but growing. The proportion of SMSFs with borrowings increased from 1.1 per cent in 2008 to 3.7 per cent in 2012. The average amount borrowed increased over this period from $122,000 to $357,000. Total borrowings in 2012 were over $6.2 billion. More recently, Investment Trends research found that, over the year to April 2014, the number of SMSFs using geared products increased by more than 11 per cent to 38,000…
If allowed to continue, growth in direct leverage by superannuation funds, although embryonic, may create vulnerabilities for the superannuation and financial systems.
The Murray draft report also recommended removing the ability of super funds to leverage into investments:
The general prohibition on borrowing in superannuation was introduced for sound reasons. Although levels of direct leverage in the superannuation sector are low, they are increasing. Removing direct leverage in superannuation is consistent with the concept that superannuation tax concessions should apply to funds that have been saved and not borrowed. There are ample opportunities — and tax benefits — for individuals to borrow outside superannuation.
As argued previously, allowing super funds to leverage into property and other investments was one of the biggest 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.
As a consequence, cases have already emerged whereby SMSFs have collapsed due to leveraged property deals that have gone wrong. In July, The AFR reported several cases of collapses of over-leveraged SMSF schemes that invested in off-the-plan apartments, fueled by generous incentives offered on apartment sales by developers to unauthorised and unqualified financial and property advisers that recommend their projects. Similar reports have emerged showing that some SMSF investors had lost up to three quarters of their investment in dodgy property deals over the past two years, again fueled by “offers of up to 20 per cent commissions, top-up bonuses and other special cash incentives to encourage the super investors to buy off-the-plan apartments”.
Given some SMSFs have already lost large sums during a period of strong property price growth, it stands to reason that investors could face heavy losses once price appreciation slows or values fall.
It is a disaster waiting to happen and highlights the need for leveraged investment in superannuation to once again be banned.
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