Will regulators ban SMSF property leverage?

By Leith van Onselen

The Pascometer has produced an interesting piece this afternoon arguing that regulators may clamp-down on self-managed superannuation funds (SMSFs) leveraging into property, rather than embark on macro-prudential curbs on investor mortgage lending:

Unlike foreign investors, SMSFs don’t have a regulated bias towards new housing – the building of which the RBA wants to encourage.

Banks are already required to treat loans to SMSFs as riskier – APRA doesn’t afford them the same risk rating as ordinary mortgage loans. Being non-recourse, banks are more exposed if an SMSF loan goes bad.

There also is an argument to be made about the danger to SMSFs if parts of the investment property market go the way they’re likely to go if they are “unbalanced”, as the RBA has suggested…

So if Murray loads and aims the gun, the regulators could argue that this would be a form of macroprudential action that would be doing SMSFs a prudential favour…

Voilà, investor activity would be cooled a gentle touch without collateral damage to first home buyers, banks would be protected from making loans they might later regret and, at least in APRA’s opinion, SMSFs would be protected from themselves.

It is no secret that regulators dislike rules allowing super funds to leverage into investments. As noted by the Pascometer, APRA’s submission to the Murray Financial System Inquiry was scathing:

“APRA has long had reservations about extending the ability of superannuation funds to borrow and was reluctant to facilitate relaxation of the borrowing rules, which took place in 2007, to accommodate instalment warrants…

“Additional direct leverage may amplify returns but exposes superannuation fund members to greater financial risks.”

“APRA remains of the view that the risks associated with direct leverage are incompatible with the objectives of superannuation and cannot adequately be managed within the superannuation prudential framework…”

Former Treasurer, Prime Minister, and architect of Australia’s compulsory superannuation system, 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”.

And lets not forget the draft report of the Murray Inquiry, which in July 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.

Let’s hope that the Pascometer is not signaling the end of the curbs.

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Leith van Onselen

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. SoMPLSBoyMEMBER

    Well, in the AUS we ‘think’ we have, leverage in SMSF will be restricted or eliminated as it is a really bad idea to ‘bet’ so heavily on a single asset category and leverage only amplifies the up/downside.

    In the Aus we ‘have’, this will be permitted to continue ( for awhile) with wide ranging endorsement and any talk of restriction will be a motivator to take action as ‘offer ends soon’ and ‘while supplies’ last. It may not ‘pull ‘em in’ like the inflatable gorilla or snapping air tube man, but it won’t hurt either.

    In the AUS we ‘think’ we have, decisions are made for the good of the people, the ongoing prosperity and security of her citizens and a ‘fair go’ for all.

    In the AUS we ‘have’, none of the above no longer forms part of the equation as debt expansion is the mission.

    The only way to keep the kite aloft when the wind stops is to start running and ‘create /fake’ the appearance of an ascending kite.

  2. Denying access to all that unearned wealth to a particular group of individuals such as superannuants is going to be a hard sell, until its too late.

  3. Has Ed Husic fingered these possible reforms to SMSF leverage as racist yet?

    The Battlers of Bidwell will be looking forward to Ed speaking up to protect their speculative SMSF investment strategies – they will need them to combat the foreign investment in existing housing that Ed is so keen to defend.

    http://www.aph.gov.au/images/maps/pdf/Chifley09.pdf

    • Yes remarkable performance from Ed. With talk like that, he must be mixing with that other noted Labor radical, Chris Bowen, who has said on more than one occasion that increasing taxes on the wealthy is “bad policy.” These Labor reds really need to be reined in before returning to power. Or we could have another Clyde Cameron or Jim Cairns sitting around the cabinet table.

  4. Hi,

    Long time lurker here, I noticed watching first contact on SBS the other night, that a small piece of footage was shown of “Sandy” the real estate agent. This footage was her in her car talking over the mobile to someone. Only one sentence was heard; it was ‘we’ll have to set him up a self-managed super fund’.

    How many SMSF’s are set up on the ‘advice’ of a real estate agents generally I wonder?

    (note that I have no knowledge of any impropriety here, nor the persons full qualifications/certifications or even the laws that may allow this advice) but did think it interesting to hear that phrase being uttered.

  5. ceteris paribus

    I reckon leverage in super will be recommended for termination in Murray’s finale.

    His interim report also gives me big hopes about other changes on super tax concessions. Only a few sleeps now.