Summary: Falling interest rates will likely give rise to an easier hard-sell for property spruikers. These spruikers tend to push inferior property and lower quality destinations, and many Australians have destroyed capital investing in mining towns or the latest tourism hotspots. Meanwhile, the FSI recently recommended the abolishment of gearing in SMSFs, putting long-dated contracts at risk.
Key take-out: If ads about how easy property investment is inside an SMSF pique your interest in the coming months, be very wary about where you’re buying a development property with a long settlement timeline.
Key beneficiaries: SMSF trustees and superannuation accountholders. Category: Superannuation, Property investment.
Just when you thought the bonfire was fizzling out, the Reserve Bank of Australia throws on a little fuel.
The RBA’s surprise interest rate cut last week will, no doubt, have property players frothing at the mouth. Or, perhaps, knocking the top off a frothy one in celebration.
Last week, the RBA cut the official interest rate from 2.5% to 2.25%. And, if the pundits are right, there are more to come, based on their reading of the RBA’s tea leaves on the lack of strength in the Australian economy.
But, for trustees of some self-managed super funds keen on geared property as an investment, danger lurks. The cut in interest rates will, most likely, give rise to an easier hard-sell for the property spruiker industry.
For those experienced with property investment, lower interest rates will probably be seen as a boon. With each rate cut – and there are more expected to come now – properties edge closer from negatively geared to neutrally geared to, eventually, positively geared.
Interest rates were cut quickly by the major lenders. Somewhat surprisingly, fixed rates are also being slashed. Seriously slashed. And it is the potential lure of these lower rates coming on offer that should herald a warning for those considering a big investment in property.
There was an interesting article in The Australian earlier this week. A property that was bought for $1.3 million in Port Hedland four years ago was passed in at auction at just $360,000. It says more about the ridiculous prices that were being paid at the height of the mining boom than it says about the price that it recently didn’t sell for.
But it is there that the concern lies. Property spruikers prey on the inexperienced. This can be new-ish SMSF trustees. It can also be those who don’t have an SMSF, but who aspire to own investment property. For the latter, the combined super balances of a husband and wife tipped in to an SMSF could be the only way they could potentially get a foothold in the property market.
Not only do mass-market spruikers, by their very nature, tend to push inferior property as their wares, but they also push lower quality, or even get-rich-quick destinations.
Combined, countless Australians, including SMSF trustees, have destroyed hundreds of millions investing in “the next big thing” in mining towns. Add numerous more that bought the spiel about the latest tourism hotspot. And any other sales con job you would care to name.
So many people have little understanding of the fundamental drivers of property prices. It’s outright dangerous.
On top of that is a major legislative concern. In its report released in December last year, the Financial System Inquiry, headed by former Commonwealth Bank chief David Murray, recommended the abolishment of gearing in SMSFs. The government has said it would consider responses to the FSI’s recommendations until the end of next month (March).
Any SMSF trustee that is currently considering a geared property investment needs to be on high alert. This applies almost no matter where the property is situated. But particular caution must be exhibited where properties are being purchased through property developers.
The reason for this? If the government acts on the recommendation and decides to ban geared property in super, then the state of your contract could be particularly important.
It’s unlikely that the government would back-date the change of laws. That is, if you already had owned a property inside super that was geared, then it would be unlikely that the SMSF would be forced to sell the property (though possible).
But any stage up to actually owning a completed property could be a risk, as I outlined earlier (Gearing in DIY funds under threat, November 19, 2014).
So the risk lies in the fact that so much property sold by spruikers or developers is sold off the plan, including to SMSF trustees. You’re agreeing to buy the property, but often the property isn’t built. It might not be completed for up to 18 months.
Be warned. If your interest is piqued in the coming months by advertisements about seminars on how easy property investment is inside an SMSF, be very, very wary about where you’re buying a development property with a long settlement/completion timeline.
I am a card-carrying property nut. I love investment property. I’ve written six books, five of which are purely about property investment.
But I hear stories every month of people who have been fleeced buying property that was never designed to assist their wealth creation prospects. Though I’m sure the developers did just fine out of the sale.
Be careful. Property is a monstrous investment – it’s not like buying a few thousand dollars worth of shares. You are usually spending multiples of the amounts of money on property that you would on shares. You need an equivalent percentage learning to understand how property works.
Or your super, your future, could be the loser.
The information contained in this column should be treated as general advice only. It has not taken anyone’s specific circumstances into account. If you are considering a strategy such as those mentioned here, you are strongly advised to consult your adviser/s, as some of the strategies used in these columns are extremely complex and require high-level technical compliance.
Bruce Brammall is managing director of Bruce Brammall Financial. E: firstname.lastname@example.org. Bruce’s new book, Mortgages Made Easy, which covers SMSF geared property investments, is available now.
- Starting an SMSF with a balance of $200,000 or less is becoming increasingly feasible, according to accounting firm HLB Mann Judd. “This has led to a younger cohort setting up an SMSF at an earlier age than their predecessors,” the firm’s director for superannuation Andrew Yee told a Sydney function.
- Superannuation funds continue to flow from APRA-regulated funds into SMSFs, according to ATO figures. Over the five years to June 30, 2013, $75.6 billion was rolled into SMSFs and $19.9 billion was rolled out of SMSFs, the SMSF Association’s Graeme Colley said, according to media reports.
- The SMSF Professionals’ Association of Australia has changed its name to the Self Managed Super Fund Association. CEO Andrea Slattery said the change was needed to reflect the body’s leadership of the broader SMSF community.