Summary: That self-managed super funds have lifted their exposure to property through limited recourse borrowing arrangements is undisputed. But there has hardly been an avalanche. In reality the total number of funds with direct property exposure is quite small.
Key take-out: As discussions around a looming housing crisis escalate, don’t shoot the SMSF messenger. Potential reforms should not be focused on SMSFs as being the enemy of first-home buyers.
|Key beneficiaries: General Investors. Category: Superannuation|
Property and superannuation are top of the pops at the moment – barely a TV news bulletin occurs without one of both or them getting coverage.
Trust me … this is more airplay than either of them usually get.
Putting them both in the same story is becoming more frequent too.
A few weeks ago, it was that young'uns should be able to access their super to be able to buy their first home. A stupid idea, if there ever was one, that I refuted in this column (Super is not a housing affordability solution).
This week, however, it has been that self-managed super funds are to blame for rising property prices.
Yes, super funds are buying more property. And they are doing so with borrowings – a relatively recent phenomenon, because of rule changes (made in 2007, that, because of the GFC, didn't really start to have an impact until about 2010).
But no, they are not buying in quantities that would be artificially having a major impact on pushing up home prices.
Statistics out in recent days from the Australian Tax Office in regards to SMSF assets show that there has been a considerable increase in the amount of money being used by super funds to buy geared property.
Since June 2012, the quantum of assets held by SMSFs in limited recourse borrowing arrangements (LRBAs) has risen from $2.5 billion to $24.3 billion (a near 10-fold increase. (However, the ATO has previously announced that it had changed the way it calculated LRBAs in recent years, which now capture more data, so the 2012 figures are likely to be understated and this is likely, therefore, to be a bigger increase that it seems.)
However, at $24.3 billion, this equates to about 3.7 per cent of the total asset base of SMSFs of $653.8 billion.
If the average property price of those SMSF purchases is $500,000, then approximately 48,600 properties are owned under LRBA structures. If the average price were $700,000 per property, then it equates to around 34,800 properties.
That’s out of millions of dwellings in Australia, or hundreds of thousands that change hands every year.
While we can't dive deep enough into the ATO's statistics to find out, my estimate would be that SMSFs are potentially buying about 5000-6000 properties a year.
As stated before, sadly too many of these properties are of questionable investment value, most often sold by property developers who only have their own profits, not your financial well-being, at heart. For more on that, please see these columns (In defence of SMSF borrowing restrictions and Beware the property spruikers).
In the majority of cases, yes, these properties would be similar sorts of properties to those being sought by first home buyers (FHBs). But an investment property is not (certainly should not be) an emotional decision, which it inevitably is for FHBs.
What that means is that SMSFs, when investing, must make a decision on what is a “reasonable” value for a property. They need to put an actual value on that. If the property cannot be attained for that value, or less, then they should be walking away.
A FHB, reasonably, can allow some emotion to come into play, to potentially pay a little more for the property. Buying a home is not strictly about making money. It is about a lifestyle.
For the SMSF investor – or any investor – it is about one thing and one thing only. Making money. And given that you make your money when you buy, there comes a point, where SMSFs must walk away and find the next target.
Those who believe SMSFs are uncontrolled bulls bidding up the price of property with LRBAs are also forgetting, or are unaware, of the lending changes that have occurred that restrict how much SMSFs are allowed to borrow.
Several years ago, the ATO closed down the opportunity that SMSFs members had to be the lender to their super fund, at non-commercial rates. This loophole had allowed some SMSFs to borrow up to 100 per cent to buy a property and potentially pay no interest. A huge advantage, used by a few, that has been shut down.
More recently, SMSFs have also been caught in the cross-fire of APRA's crackdown on the major lenders and their lending for investment purposes.
When it comes to punters buying investment property, banks have raised interest rates for investment purposes and restricted loan-to-valuation (LVR) ratios, among a range of triggers.
But they have also been turning the screws on SMSF investors also. A few years ago, the standard LVR for SMSFs to purchase a property was 80 per cent. The standard is now 70 per cent. Where 80 per cent is allowed, there have been restrictions made on the length of time interest-only is acceptable for (the usual maximum is five years).
Some lenders have imposed minimum SMSF sizes also, of $200,000 or more. Others have said that if the loan is to be interest-only, then LVR restrictions come into force.
SMSFs can buy property. And those who understand the asset class properly, should be allowed to do so.
But there was one particular comment that got me riled. It suggested that because LRBAs were “limited recourse” that “those arrangements mean SMSF investors can take bigger risks on prices and avoid the danger of losing everything if deals go bad”.
Essentially, that's rubbish. I don't believe there are any SMSF trustees out there who are prepared to deliberately overpay for a property, in the belief that they don't have to worry if they do, because the loan is limited recourse.
Further, if the “investment goes bad”, then pretty much every lender has “personal guarantee” conditions on the loan, which mean the SMSF member/trustee will have their personal assets chased by the lender.
It is still the member's/trustee's super savings. And they are no more likely to be accepting of overpaying for a property than any other investor.
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 advisor/s, as some of the strategies used in these columns are extremely complex and require high-level technical compliance.