SMSFs are leveraging into Aussie property

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.

Unconventional Economist

Comments

  1. working class hamMEMBER

    Min super balance in SMSF is around 260k to get a foot in the door on a 600k property. These rorts are only for the wealthy, therefore completely acceptable.

    • Jumping jack flash

      Agree, i have about half the super required for this to make sense, otherwise i would do it in an instant. The current idea of super makes no sense in the New Economy and it needs to change or risk becoming irrelevant.
      I have no faith at all that my super will be able to fund my entire duration of retirement and after the age of, say, 75 it’ll be blankets and catfood rather than Rhine river cruises for me.

  2. Frank DrebinMEMBER

    You asked: “Is this really the purpose of Australia’s superannuation system ?”

    Then followed up: “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.”

    Absolutely it is !!!

  3. pfh007.comMEMBER

    There have been concerns ever since SMSF were allowed to lever up.

    The Cooper review in 2010 – a decade ago

    https://treasury.gov.au/review/super-system-review

    https://treasury.gov.au/sites/default/files/2019-03/R2009-001_Final_Report_Part_2_Chapter_8.pdf

    In principle, the Panel has concerns with the concept of direct borrowing within any superannuation funds, whether SMSFs or APRA‐regulated funds. In principle 8, the Panel expressed the view that leverage should not be a core focus for SMSFs.

    The original default position adopted in the SIS legislation was that superannuation funds should not engage in borrowing, other than in the very short term to address cash flow issues.

    The rationale for this stance was simply that leverage for asset acquisition amplifies both gains and losses and this was seen as placing fund members’ retirement savings at too much risk. The Panel agrees with the original default position adopted in the SIS legislation.

    On 24 September 2007, the SIS Act was amended to allow all regulated superannuation funds, including SMSFs, to invest in instalment warrants.33 Initial interest in instalment warrants was modest, with only 0.9 per cent of the SMSF population having a derivative or instalment warrant at 30 June 2008.34 There are, however, indications that this trend might have changed in recent times.

    Data from Investment Trends’ surveys suggest that more than five per cent of SMSFs already invest in such instruments.

    Recommendation 8.10
    The 2007 relaxation of the borrowing provisions and the consumer protection measures that
    have recently been announced should be reviewed by government in two years’ time to ensure
    that borrowing has not become, and does not look like becoming, a significant focus of
    superannuation funds.

    To assist in monitoring the levels of instalment warrant borrowings by superannuation funds, the
    Panel believes that credit providers should be required to collect and provide relevant data to APRA
    that would enable the RBA to publish statistics; in the same way that credit providers must currently
    report on the level of finance provided for residential purchases, margin loans etc. These statistics
    should be at a level that can distinguish the level of finance being provided to SMSFs and
    APRA‐regulated funds.

  4. happy valleyMEMBER

    “However, its recommendation was snubbed by Treasurer Josh Frydenberg.”

    That was our light bulb moment way back in to 2019 as to where Josh the Pawnbroker was headed as to (ir)responsible lending laws.

  5. Limited recourse is a lie, personal guarantees are required before these loans are issued.

    You are on the hook outside of super.

  6. The sole purpose of super is to save for retirement, so leveraging defeats its purpose.

    That said, leveraging super is stupid and therefore Strayan. Straya is great – never let me down in my expectations.

  7. Holiday In ScomodiaMEMBER

    Punters may learn that the recourse is not as limited as they thought… edited- exactly as mentioned above…