Ban SMSFs from borrowing

ASIC chairman Greg Medcraft’s suggestion that Sydney and Melbourne house prices are in...

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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