It has long been my view that the Howard Government’s decision to allow self-managed super funds (SMSFs) to leverage into property and other investments was a mistake.
Specifically, it allowed SMSFs to be turned into speculative vehicles rather than savings vehicles, in turn dramatically increasing the riskiness of Australia’s retirement savings and financial system, further inflating Australian house prices, and transferring some of the downside risk to taxpayers, who of course backstop the retirement system via the Aged Pension.
Last night, ABC’s The Business ran an important segment examining concerns about the SMSF sector lending to property, which is pumping-up property values and risking both retirement savings and financial system stability.
According to the segment, SMSFs went from being around 20% of the superannuation system to 30% currently. Moreover, SMSFs are piling on debt to invest in property.
David Murray, the chairman of the Financial System Inquiry (FSI), once again called for SMSFs to be banned from borrowing to invest because of its risk to the financial system:
“Superannuation funds should not be leveraged, including SMSFs, because leverage magnifies risk. If the system is unleveraged, then if asset prices rise, bubble and fall then all the loss is contained within the superannuation funds and does not have another contagion effect because there are no forced sellers of other assets”.
The Chief Economist of Industry Super Funds Australia, Stephen Anthony, noted the startling growth in SMSF leverage:
“The total debt in SMSFs rose by about 1500%, or by 70% annually… Conservative estimates would suggest that there’s around $150 billion now in property assets in SMSF”…
SMSFs are potentially exacerbating the peaks and troughs of the property market. So now you have mums and dads rushing in to property investment using the tax-subsidised position of superannuation to do so, driving up asset prices, feeding what is already a property boom”.
Finally, financial advisor, Noel Whittaker, warned that people could be taken for a ride:
“The average Australian doesn’t trust shares, but they love bricks and mortar. Most people are conned by spruikers into buying overpriced apartments and they will get a bloodbath”.
It’s a shame that the FSI’s recommendation to ban super fund borrowing was ignored by this Coalition Government.
