Perfect storm in a teacup: warnings of SMSF property moneytrap not backed by figures
1 Oct 2013
IT is called a perfect storm. ASIC, APRA and now the Reserve
Bank have bought into the argument that self-managed super funds
could be a key factor in fuelling a property bubble as residential
prices -- especially in Sydney -- increase sharply.
This year, housing prices have jumped 6.4 per cent nationally,
with Sydney leading the pack at 9.4 per cent.
But it was the Reserve's Financial Stability Review released on
Wednesday, warning of the growing property holdings held by SMSFs,
that really sparked a media firestorm; Australia's love affair with
bricks and mortar, when coupled with the central bank's warning,
always meant it would command the headlines.
So it's worth noting what the bank actually said in its
overview. ``Changes to legislation in recent years have permitted
superannuation funds, including SMSFs, to borrow for investment,
including property. Since then, property holdings have increased
and this type of investment strategy is being heavily promoted. The
sector therefore represents a vehicle for potentially speculative
demand for property that did not exist in the past.''
That was essentially it: SMSFs are potentially a vehicle for
speculative demand. And the SMSF Professionals Association of
We have constantly warned that SMSFs must approach property,
like all investments, armed with the best professional advice.
Property is not an inappropriate investment per se; but it must be
appropriate to the fund and consider the member's circumstances,
just like all investments.
Where we do strongly disagree is the inference by the
regulators, and other critics of the sector, that many SMSF
trustees are listening to the siren call of the property spruikers
and gearing up to rush headlong into unsuitable residential
The figures don't bear this out. At June 30, property assets in
SMSFs stood at $75 billion, of which $58bn was mostly commercial;
$17bn was residential. With total assets at $495bn, it means
residential property comprises 3.4 per cent of all SMSF assets.
When it comes to limited recourse borrowing arrangements (debt),
the numbers should be even more soothing for our regulators.
According to tax office statistics, geared assets in SMSFs make up
less than half of 1 per cent (0.48 per cent) of their total
investments. Hardly an avalanche, especially when gearing has been
an option for six years.
But what's the long-term trend? Is property as an asset class in
SMSFs growing exponentially?
Again, the evidence simply doesn't support this. When the
one-off $1 million contribution cap and gearing was allowed in
2007, there was a spike in property investment, with a 53 per cent
jump in investment in 2006-07. But the figures for 2012-13, showing
14.7 per cent growth, were below that for 2007-08 (24.5 per cent)
and 2008-09 (18.3 per cent).
Growth was also higher in the two years before the advent of
gearing and the $1m contribution cap. Add the fact that interest
rates for a part of 2012-13 were at record lows and it's perhaps a
mystery why there hasn't been more investment in property.
There are another two aspects to this issue. Unquestionably, the
housing market is hotting up, and much of it is driven by
investment demand, $2 in every $5 in NSW going into investment
What we don't know is how much is being driven by demand from
SMSFs compared with other investors. What SPAA research does show
is lowering the concessional contributions caps in recent years has
prompted people to look for alternatives including opting for
negative gearing outside super as a retirement-incomes strategy.
Yet we seem to hear little from regulators about this and the
damage negative gearing does to government revenue.
It seems to us at SPAA that any train wreck will most likely
occur there, and for one simple reason. SMSF trustees, if they seek
advice on any investment, require advice from a licensed financial
adviser to assess whether the investment is appropriate to the
circumstances of the fund and its members.
Individuals don't require professional advice to consider their
particular circumstances before they invest in geared property,
suggesting these investments pose a higher risk compared with
SMSFs, where far stricter protocols are in place.
SPAA agrees with regulators. To misquote Winston Churchill, the
price of financial security is eternal vigilance. The obsession
with SMSFs and property investment is out of all proportion to the
evidence; not so much a perfect storm, more a storm in a
The SMSF Professionals' Association of
Australia (SPAA) is the authoritative voice for the self-managed
superannuation fund (SMSF) sector. SPAA, which represents
professionals providing a range of services across various
disciplines in the complex area of SMSFs, is an advocate for the
highest professional standards and competence to ensure SMSF
trustees always receive the best possible advice.