Back in 2016, David Murray – the chairman of the Financial System Inquiry (FSI) – recommended self-managed superannuation funds (SMSFs) be banned from borrowing to invest because of risks 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”.
In 2019, the Council of Financial Regulators (CoFR) backed David Murray’s call, recommending the federal government ban property investment via SMSFs after 18,000 of these Funds were found to have more than 90% of their savings in a single asset class, specifically investment properties. However, its recommendation was snubbed by Treasurer Josh Frydenberg.
Now, non-bank lenders Better Mortgage Management and FirstMac have launched products targeting self-managed superannuation funds with limited recourse borrowing arrangements (LIBRAs). And these vehicles have proven to be increasingly popular, with the use of LIBRAs in the super system hitting $50 billion late last year after experiencing explosive growth:
LRBAs in the super system have surged in popularity, hitting $50 billion late last year – a more than 10-fold increase on the $400 million level recorded a decade ago and an 8.8 per cent jump over the last year…
Firstmac managing director Kim Cannon said the bank’s new “Residential SMSF” product would be a game changer in the “poorly serviced” segment of the market. The loans, which will offer a 4.75 per cent interest rate, will be “a compelling proposition for brokers”, he said.
Better Mortgage Management boss Murray Cowan said its LRBA loan, which offers a starting rate of 4.84 per cent and allows SMSF owners to access up to a $1.25 million line of credit, would be “a strong offering to this under-serviced sector”.
Is this really the purpose of Australia’s superannuation system: to allow SMSFs to operate as speculative 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 backstop the retirement system through the Aged Pension?
SMSF borrowing is known as “limited recourse” because if the borrower cannot pay the loan back, the bank cannot go after any other assets — only the property in question. This is precisely the type of lending that was at the heart of the global financial crisis more than a decade ago.
It’s shame that the recommendations to ban SMSF borrowing was ignored by the Coalition Government. Because now we have another added layer of pro-cyclicality and risk to Australia’s property market.
Having households use the tax-subsidised position of super to buy property, and adding fuel to the bubble, is a recipe for disaster.