Reserve Bank warns of DIY super trend
In its latest health check on the financial system, the central bank on Wednesday said some households running their own retirement funds were taking on more financial risk.
It singled out the increasingly popular strategy of borrowing to invest in houses within a self-managed super fund, which it said "represents a vehicle for potentially speculative demand for property that did not exist in the past".
Amid rapid growth in the DIY super sector, the Reserve noted the strategy had been "heavily promoted" and it was assessing the effects on the financial stability.
"One risk of the increase in property investment by SMSFs is that at least some of it is a new source of demand that could potentially exacerbate property price cycles," it said in the Financial Stability Review.
"It also raises consumer protection concerns in the event SMSF members are exposed to greater financial risks than they envisage."
With house prices growing at their quickest pace in three years, the Reserve also stepped up its attempt to talk down the prospects of another property boom.
It advised home-buyers to have "realistic" expectations for house price growth over the coming years, and urged banks not to ease lending standards.
With official interest rates at a 60-year low of 2.5 per cent, senior Reserve officials and the banking regulator have repeatedly warned borrowers not to take on more debt than they can manage.
Although the central bank has dismissed talk of a housing bubble as "alarmist", many economists now believe the rising housing market will stop it from making any further rate cuts.
Citi economist Paul Brennan said the concerns about SMSF investment in property reflected a wider dilemma facing the Reserve as it tried to reignite the economy with cheap credit.
"Monetary policy is a blunt instrument and some sectors respond more aggressively than others," he said.
Within the $1.2 trillion mortgage market, the amount that SMSFs have invested in houses is relatively small at $80 billion. However, it has grown significantly after legal changes to allow gearing strategies within super, which have been advertised on prime-time TV.
Graeme Colley, the technical director of the SMSF Professionals' Association of Australia, called for tougher laws on who could advise people to borrow within super.
"We would like to see the legislation amended so that only licensed financial planners are able to give advice in relation to gearing within SMSFs," he said.
The RBA said SMSF investment in property did not pose "material" risks to the financial system, but it was important to many households' financial position and warranted "careful observation".
It also said SMSFs had snapped up "most" of the $18 billion in hybrid securities - complex assets that are part debt, part equity - issued between late 2011 and June this year.
"These investors seem to have been attracted by the higher yields offered on hybrids compared with conventional debt securities; it is important that they fully appreciate and price in the risks embedded in these more complex products," the RBA said.
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The Reserve Bank warned that growing self-managed super fund (SMSF) investment in real estate — particularly borrowing to buy houses within SMSFs — creates a new avenue for property speculation that could affect financial stability and exacerbate property price cycles.
The RBA says gearing inside SMSFs can be speculative and expose members to greater financial risk than they expect. It raises consumer protection concerns because some SMSF members may not fully appreciate or be able to manage the extra debt and volatility that comes with leveraged property investments.
SMSF investment in houses is around $80 billion within the roughly $1.2 trillion mortgage market. While relatively small overall, SMSF property holdings have grown significantly since legal changes allowed gearing strategies within super.
The RBA said SMSF property investment does not currently pose a 'material' risk to the financial system but is important to many households’ finances and therefore warrants careful observation by regulators.
The RBA has urged home buyers to have realistic expectations for future house price growth and warned banks not to ease lending standards. It has also cautioned borrowers not to take on more debt than they can manage given low official interest rates.
Some economists cited in the article believe the rising housing market — supported in part by SMSF activity — may be a factor that prevents the Reserve Bank from making further rate cuts, even though the RBA has dismissed talk of a housing bubble as 'alarmist.'
Hybrid securities are complex investments that are part debt and part equity. The RBA noted SMSFs bought most of the $18 billion in hybrids issued recently; while hybrids offered higher yields, investors need to fully understand and price the additional risks in these products.
Graeme Colley, technical director of the SMSF Professionals' Association of Australia, has called for legislative changes so only licensed financial planners can provide advice about borrowing (gearing) inside SMSFs to better protect members.
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