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.
Late last year, the major lenders clamped down on SMSF property borrowing following damning evidence presented to the Banking Royal Commission in April, which revealed how one of Westpac’s financial planners advised a client with $200,000 in an industry fund account to set up a SMSF, sell her home and take out a loan to buy a million dollar investment property.
However, despite these measures, leveraged investment into property by SMSFs continues unabated, according to analysis published last week by The Australian:
A surge in property speculation by leveraged self-managed super funds amid sliding house prices in the nation’s biggest cities has sparked concerns among the powerful Council of Financial Regulators that many may be in over their heads…
Documents collated for the regulator show the total value of property investment loans held by SMSFs has raced to $39 billion — more than 5 per cent of all assets in the $700bn self-managed super sector by the end of the June quarter…
“Of interest is that NSW and Vic have the highest number of SMSFs and Sydney is ranked first and Melbourne ranked third for falling house prices,” the ATO’s director of superannuation told Treasury in September…
This had led to warnings from ATO about $12 billion of SMSF property loans that are secured by assets held outside of super, such as owner-occupied housing. From The AFR:
ATO assistant commissioner Dana Fleming said the risk of property market contagion was exacerbated for SMSFs by the fact that 30 per cent of these borrowings involved a personal guarantee or other security…
“If people are providing a personal guarantee and we had a massive property decline that caused the bank to foreclose on the loan, and selling the property didn’t cover the loan, the personal guarantee is triggered.
“This means their other personal assets outside of super become at risk.”
Back in 2016, David Murray – the chairman of the Financial System Inquiry (FSI) – reiterated his call 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”.
Saul Eslake has also described the Howard Government’s decision to allow super funds to borrow as “the dumbest tax policy of the last two decades”:
“The last thing Australians really needed in the last 20 years is yet another vehicle or incentive for Australians to borrow more money in order to speculate on property prices continuing to rise”…
“You might have thought that someone would have heard the term ‘limited-recourse borrowing’ and recognised that there were some significant risks associated with it that we could have done without in the Australian context.”
Certainly, having mums and dads rushing into property investment using the tax-subsidised position of superannuation, and feeding what was already a property bubble, was a recipe for disaster.
It’s a crying shame that the FSI’s recommendation to ban super fund borrowing was ignored by the Coalition Government. Now, it has added another layer of pro-cyclicality and risk to Australia’s housing market, with the potential to exacerbate the bust as Labor and the regulators belatedly crack down.