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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