The surge in self-managed super funds borrowing large sums of cash to plough into investment properties is threatening to hit the retirement savings of tens of thousands of Australians, as falling house prices and stalling rents reduce earnings.
The fast rate of growth in borrowings has prompted renewed warnings by financial system inquiry head David Murray that market risk in self-managed retirement savings funds is “higher than it has been before”.
The latest figures from the Australian Taxation Office reveal the number of DIY super funds that have borrowed from the bank to invest in property has doubled over the past five years to more than 50,000 accounts.
Now, almost one in 10 SMSF owners has accessed limited recourse borrowing arrangements, which are mostly used to fund property investments.
SMSF borrowing for property has ballooned from $2.5 billion in 2012 to more than $25bn this year. Although the total rate of borrowing does not have analysts worried yet, the high gearing of individual funds that have bought investment property leaves thousands of SMSFs vulnerable to a housing downturn. In his 2014 financial system inquiry, former banker Mr Murray recommended banning SMSFs from borrowing to invest in property. It was the only one of 44 recommendations that the Turnbull government ignored.
Speaking to The Weekend Australian yesterday, Mr Murray said the government should act on the proposed ban.
“I have no doubt about our recommendation,” Mr Murray said.
“Our recommendation was directed at leverage in superannuation funds generally.
“We didn’t want Australia to have a highly leveraged banking system and a leveraged superannuant system as well, for reasons of systemic stability.
“Borrowing magnifies risk irrespective of the asset, and in self-managed funds, given the average size of savings versus median house prices around Australia, it is likely the property will form a significant part of the portfolio in any fund and create a concentration of risk.
“Irrespective of the asset, you shouldn’t leverage super funds.
“If it’s done in the housing market, given what’s going on at current prices versus incomes, it’s a more risky market than it has been. There’s another layer of market risk that is now higher than it has been before.”
Rice Warner chief executive Michael Rice, one of Australia’s leading actuaries, said using superannuation to borrow and invest in residential property was “not the smartest investment”, particularly when house prices around the country were starting to slide.
“I think it’s very risky,” Mr Rice told The Weekend Australian. “Using debt can increase both risk and therefore return, but if you get it wrong it can wipe everything out,” he said.
“It’s more likely that these people will certainly be worse off than if they were just in a balanced fund in a large fund.
“People are relying on capital gains, but it could be a decade before the capital gains are realised because they’re buying at the top of the market.”
House prices in Sydney and Melbourne continue to weaken.
The latest CoreLogic data shows the housing cycle has turned, with Sydney home prices falling in January and now 3 per cent below the September peak. The Melbourne market is also now believed to have peaked, with the Australian Prudential Regulation Authority’s 30 per cent limit on interest-only lending, its 10 per cent annual growth cap on investor lending, and a government clampdown on foreign buyers continuing to cool the housing market after years of absurd growth.
Self-managed super funds now make up almost 30 per cent of the $2.3 trillion super sector with funds being set up at the rate of 2800 a month. Total assets in SMSFs grew by 65 per cent to $697 billion in the five years to 2017. More than 1.1 million Australians now have SMSFs.
In its housing affordability plan, the Labor Party has proposed banning borrowing in super funds, alongside other measures such as grandfathering negative gearing tax breaks.
Treasury spokesman Chris Bowen has raised concerns SMSF borrowing has grown by grown by more than 860 per cent since 2012.
Mr Bowen recently told the McKell Institute’s housing affordability summit the ban would “prevent the unnecessary build-up of risk in Australia’s superannuation system, reduce future calls on the aged pension as a result of a less diversified superannuation system and make the financial system more resilient” in the face of potential economic shocks.
SMSF Association chief executive John Maroney said the lobby group would prefer that funds were allowed to use limited recourse borrowing.
“We don’t think it’s a problem for the system at the moment,” Mr Maroney said.
“We agree that it should be monitored. But the level is relatively low at around 4 per cent of the assets in the SMSF sector.
“Half of that is probably commercial property and half is residential.”
He said there was no level of borrowing that would concern the association.
“Borrowing occurs in all different parts of the super system,” Mr Maroney said.
“There’s a lot of indirect borrowing through unit trusts and other mechanisms in the APRA regulated funds.
“It’s not as if this is the only area of gearing in the super system.”