Keating backs macroprudential, SMSF curbs

ScreenHunter_4571 Oct. 20 08.11

By Leith van Onselen

Former Treasurer, Prime Minister, and architect of Australia’s compulsory superannuation system, Paul Keating, over the weekend called for curbs on self-managed superannuation funds (SMSFs) using leverage to invest in Australian residential property. From The AFR:

[There has] been “a dramatic acceleration” in investor financing, said Mr Keating…

“This is associated with the growth of self-managed super funds and their ability to borrow,” he said. “If I was treasurer today, I would be looking very hard at the whole entitlement or availability of debt to SMSFs. They have gearing ­available to them and, of course, many of them are taking the option of buying residential property”…

“This is making it nearly impossible for younger people, owner-occupiers, to afford to house themselves”…

“We can’t persist with the position where our children cannot afford to house themselves and that is where we are now”…

…Weighing into the debate about whether macro-prudential controls were needed on banks to curb property investing, Mr Keating said this would be better than raising interest rates.

…“If banks tell you lending standards are not suffering at all, don’t believe them.

Keating’s warning echoes those of the draft report of the Murray Inquiry into Australia’s financial system, which in July took direct aim at 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.

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 the process dramatically increasing the riskiness of Australia’s retirement savings and financial system, and placing further upwards pressure on Australian house prices.

Already, cases have emerged whereby SMSFs face collapse 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 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 appreciation, 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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Unconventional Economist

Leith van Onselen is Chief Economist at the MB Fund and MB Super. Leith has previously worked at the Australian Treasury, Victorian Treasury and Goldman Sachs.

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Comments

  1. GunnamattaMEMBER

    Has anyone ever spotted PJK saying anything about house prices in Australia?

    like is he seeing something buuble like with them? Is he laying the blame at constricted supply, speculators, foreign investors nimbyism, babyboomer? etc……

    I dont think I have ever spotted him saying anything about the subject apart from this the other day

    • It is interesting that he is making these comments because generally he has not said a great deal about the downsides of some of the reforms introduced in the 1980’s.

      Possibly, he is not keen generally on the growth of SMSF as they provide competition to the industry funds. The rise of SMSF has reduced the flows of funds to the retail and industry funds and those industry funds are like a retirement home for the hack-ocracy

      Worth keeping in mind that one of his key mentors was Jack Lang so it is always possibly that Keating is starting to shift his position on some aspects of the deregulation of the FIRE sector. I doubt Jack Lang would have much nice to say about our FIRE fixated economy.

      Would be good if he did as the ALP seem completely devoid of thinkers who question the current debt/bank centric focus of economic policy.

      • GunnamattaMEMBER

        Well I would think he could be of service to the ALParatchiks in at least plausibly mapping out a narrative on how RE prices have risen and what needs to be done about them and relating this to the outlook for the national economy.

        Nobody either side of politics seems to want to touch that. Yet it does seem, in essence, the one thing a generation of Australians would most want to know about.

      • notsofastMEMBER

        NG only became a significant problem when the big banks were given carte blanche to borrow as much money from offshore as they liked and pump the housing bubble. Before that it wasn’t really a problem.

    • Strange Economics

      4 % invested and only 6 billion into property.
      Must get the other 25*6 = 150 billion into property quick.
      And then get all the other super into SMSFs, or let them take it out for their own houses.
      Another trilllion to keep the engine of Australia, the FIRE industry going.
      Then if Oz could just get all those SIV investors that the US and Canada are now shutting entry to…
      Getting harder to keep the bubble pumped…

  2. ” it stands to reason that investors could face heavy losses once price appreciation slows or values fall.”>

    Prices fall? Rubbish. As our own HnH tells us, the RBA will step in to support prices when needed.

    Lift the offer peeps!

    • notsofastMEMBER

      If the RBA has to step into support prices you can bet your bottom dollar that housing prices would have already dropped a long way and massive losses would already be faced by housing investors and home owners. Let there be no mistake, the RBA will not step in to save housing investors and home owners, the RBA will only step in to save the banks and save the Australian financial system from collapse.

  3. What the lizard is saying is completely true so nothing will be done and it’s carry on aussie housing ponzi.

    Bob and Paul were the only ones with the balls to tackle Negative Gearing.

  4. This all has a little way to run yet. The whole PHC (the only game in town) will not change until every last person is draged into the ‘Save the Titanic’. Change only occurs in a world of pain & the majority get bankrupted… Any doubts ask Spain or Iceland

    • Love the Titanic bit Peter.
      Yeah Gunna if it wasn’t for the dirt to China I reckon we would be exact same as Spain, cos we are totally corrupt from top to bottom here too.
      It just happened that I was in Ireland in Jan 09 visiting family and saw and heard first hand the doom and gloom. Then in 2011 I was in Cape Coral Florida staying with a Vietnam vet friend and saw and heard it all there, he had purchased a house for about 100k that would have cost him 300k pre 2007, building was at a stand still. Then in 2012 I was in Ireland and Spain and saw the mess and talked to people who knew others that had attempted suicide and who’s lives were utterly stuffed by the housing bust. It made me very conservative here in Aus but that was a waste of time here….thus far…I know we are far away from USA ,Europe but how the hell our governments and RBA could not pay a little bit heed to what happened and is still happening in Florida, Iceland, Ireland, Spain etc is totally beyond me, and most of you guys here.

    • Strange Economics

      The whole purpose of asset price inflation bubbles is to suck all the middle class punters in, till the last one is in,
      then pull the rug out,
      leaving the high wealth earners even better off.
      The best way known to redistribute wealth upwards to the deserving entitled.
      Rinse and repeat every 10 years.

  5. Leverage and running a loss/negative gearing on an IP in a SMSF has some other sort of tax benefits. Does it mean you can increase your capital contibution with reduced tax?

    • There is very little basis for it other than speculative investment. As a tax shelter it doesn’t do much and you can’t use the great rort that is Neg G to shelter salary income. All you do is shelter super income, a bit, meh.

      It is more a product of people’s desperation to use any collateral they can get their hands on to speculate in property. And more importantly, a product of the ‘investment’ industry’s persistence to dig up any capital they can as a basis for leverage, whereupon then can get a risk-free commission.

      • So you can use negative gearing to help offset any tax on the fund’s other income now, then possibly benefit from any tax free c apital gains on the property in the future?

      • my understanding is that it is interest expense being used to shelter other super fund income but i’m not an expert in this space – happy to defer to others?

      • innocent bystander

        don’t think it is the NG attraction so much, as if the fund is in accumulation mode it is only paying 15% anyhow – better off NG outside supper against your personal marginal tax rate.
        the BIG attraction, imho, is when you go into pension mode there is no tax payable, on fund income or CG if the investment property is sold. if punters always believe property goes up then they are looking at tax free CG.
        on the other hand the percentage of funds borrowing inside super is still small, but growing fast off a low base. Needs to be nipped in the bud now.

  6. Bring back the Keating era interest rates, which actually reflected inflation. They are needed for quite a few years to make up for the heavily sub inflation erosion of wealth to savers.

  7. “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”

    Yep, just another reason in the conga line of reasons why super is such a complete and total dud.

    Keating helped transform the usual middle-class saving vehicle of owning your own home into a fantasy, he then replaced this reliable and security generating mechanism with forcing people to save in highly financialised and usually rigged markets.

    That the process is, in a way, coming full circle is somewhat amusing.

  8. For the naive dufuses, compulsory super was only ever promoted by the Labor Party as a means for unionists to get an opportunity to ‘manage’ huge sums of money for a pretty penny and filter some of it back to the Labor Party.

    Hell those fund managers were creaming it in the middle of the bull market and they wanted their cut. Norrnal union operandus. Union membership was plummeting , they needed an easy source of funds.

    Hence compulsory super and ‘Industry Funds’ managed by, surprise surprise, unionists. Who, if you didn’t know already, were just naturals at being gun stock pickers haha. After all they were very good at darts.

    Ironically compulsory super will eventually bankrupt a generation or two of ‘workers’. The very people the Labor Party are meant to help but in fact end up financially screwing for their own purposes, again.

    • Dear God
      How much now in private Super Funds? Not sure it did not work, regardless of who skimmed the cream. Successive govts have kept it and both parties want to increase the comp super amount during the ‘good times’.

      Is it a Lab or Lib thing now? Not so sure….considering one man, Clive, stopped the planned changes.

      Anything could happen….

    • “Hence compulsory super and ‘Industry Funds’ managed by, surprise surprise, unionists. Who, if you didn’t know already, were just naturals at being gun stock pickers haha. After all they were very good at darts.”

      As compared to the bankers whose funds are generally out-performed by the industry funds.

    • I never did buy the idea that God was omniscient, and there’s further proof. I think you’ll find those industry funds outsource their investment management to the real professional *cough* stock pickers *cough* – you’ll have to excuse me, I have an inexplicably uncontrollable cough whenever I think of active *cough* investment management professionals. Anyhoo, those industry funds at most just give the ex-union organisers a dummy Bloomberg terminal (running data on a 20 year delay) and the morning investment ‘briefings’ involving ex-union staff are actually staged for their benefit, chaired by the cleaner and photocopy repairman on a rotating basis. That said, one of those dummy meetings did result in an investment in BrisConnections.

      • Yeah spleen re these investment banker types….it’s interesting to note that last year in Sydney a security guard was hit by a Cowards Punch and now a few days ago a young lad in Melbourne is now dead …..both at the hands (and feet) of Investment Bankers.
        Just saying…

      • @spleenblatt – –

        At least the Union Funds get abetter real return to their members than the Non Union Funds! The likes of the thieving AMP , Banks & the rest of that motley crew. The Super Industry in general as we ALL know is ripping off & apparently with Govt approval.

        Every Australian with half a clue & at least 50k in S/Funds should be running their own Self Managed Fund. It’s not difficult & costs need not be high.

        Superfunds should not be allowed to borrow – Full stop. That plus all the other rorts like buying Art also should GO! Its the greedy smarties that generally F%$# up a good idea.

        Putting $$$ aside for Ron has always been a smart plan – anyone who can’t get their head around that has SFB.

    • What I should have added is this is why Keating is so opposed to SMSF borrowing money for housing. There’s no cut in it for the Labor Party

  9. Are big super funds allowed to gear/leverage into property, perhaps a residential index or ETF?

    If so, why not SMSF.

  10. Keating once opined “If you’re not living in Sydney, you’re camping out. Anything he says is possibly relevant wrt Bankaston, Paramatta to Kiribilli but certainly of doubtful relevance to anyone north of Cammeray or south of Liverpool. I do not know why anyone should bother with what he says about anything. He will be right of course from time to time but only because the plane of reality accidentally intercepts his distorted world view. (As it does this time).

  11. “This is making it nearly impossible for younger people, owner-occupiers, to afford to house themselves”

    Ultimately owner-occupiers will not be able to compete with the cheap sources of capital in the property market and they will be better off renting and investing their own equity elsewhere. Australians don’t understand the concept of fairness (unless it affects them).

  12. notsofastMEMBER

    “Former Treasurer, Prime Minister, and architect of Australia’s compulsory superannuation system, Paul Keating,”

    In fairness to Paul Keating he established a very different superannuation system to the cluster that Australia’s superannuation has now become.