Ban SMSFs from borrowing
ASIC chairman Greg Medcraft’s suggestion that Sydney and Melbourne house prices are in a bubble has been predictably shot down by the ceos of developers Mirvac (MGR) andStockland (ASX: SGP). Stockland ceo Mark Steinert believes prices are responding to undersupply in these areas, although his view might be influenced by his company’s large exposure to the residential sector.
Our views on house prices are well known and so readers don’t need to guess on which side of the fence we sit.
Medcraft is also concerned that self-managed super funds (SMSFs) that have invested in property – particularly those which have borrowed to do so – will be one of the main losers should house prices fall. Although I disagree with his suggestion that SMSFs are distorting the housing market, this is something I hope the government acts upon soon.
One of the conclusions of the recent financial system inquiry was that SMSFs should be banned from direct borrowing to purchase investment properties. I agree with this, as allowing SMSFs to borrow risks wiping out retirement savings should house prices fall significantly. If this occurs, it would defeat the main purpose of the superannuation system, which is to encourage retirees to be less dependent on the government and taxpayers.
SMSFs that invest in residential property without using debt will still suffer losses should prices fall but the chances of their total investment being wiped out will be far less over the longer term.
Assistant Treasurer Josh Frydenberg has indicated that he’ll merely curb borrowing by SMSFs. Let’s hope he goes further and bans it altogether.
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Frequently Asked Questions about this Article…
The concern is that if house prices fall significantly, SMSFs that have borrowed to invest in property could see their retirement savings wiped out. This would undermine the purpose of the superannuation system, which is to reduce retirees' dependence on government support.
ASIC chairman Greg Medcraft suggested that Sydney and Melbourne house prices are in a bubble, but this view is contested by developers like Mirvac and Stockland, who argue that prices are driven by undersupply in these areas.
Mirvac and Stockland, both major developers, disagree with the notion that Sydney and Melbourne house prices are in a bubble. They believe that the prices are a response to the undersupply of housing in these regions.
The inquiry concluded that SMSFs should be banned from direct borrowing to purchase investment properties, as borrowing poses a risk to retirement savings if house prices fall.
SMSFs that have invested in property, especially those that have borrowed to do so, could suffer significant losses if house prices fall. Those investing without debt would still face losses, but the risk of total investment wipeout is lower.
Assistant Treasurer Josh Frydenberg has suggested curbing borrowing by SMSFs, though there is hope that he might take further action to ban it altogether.
The call to ban SMSFs from borrowing is based on the risk that a significant drop in house prices could deplete retirement savings, which contradicts the goal of superannuation to ensure financial independence for retirees.
SMSFs investing in property without borrowing would still face losses if house prices fall, but the likelihood of their entire investment being wiped out is much lower compared to those that have borrowed.
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