Reserve warns DIY super may set new property debt trap
The Reserve Bank has warned that self-managed super funds' growing investments in real estate have opened up another avenue for property speculation, which could affect the financial system's stability.
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.