Westpac has slammed the door on lending to self-managed super fund owners who want to plough their savings into investment properties, as house prices soften across the nation and ahead of a potential crackdown on “SMSF property one-stop shops”.
The nation’s second-largest bank — and the largest lender to property investors — said it would no longer sell loans to SMSF owners for property investment from the start of next month. It will also withdraw from its business lending to SMSFs.
The move leaves Commonwealth Bank as the only major lender providing funds for property investment in self-managed super funds.
Westpac’s exit comes amid rising scrutiny on the surge in self-managed super funds borrowing large sums of cash to sink into investment properties, as falling house prices and stalling rents reduce earnings.
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 increased 65 per cent to $697 billion in the five years to the end of last year. More than 1.1 million Australians now have a self-managed super fund.
While the Productivity Commission’s latest report on the superannuation sector said the rise in borrowing through super funds to invest in property was not a systemic concern to the system, it said it warranted further monitoring.
However, the SMSF manoeuvre has copped heat from many in the banking sector and from the Labor Party. Treasury spokesman Chris Bowen recently raised concerns that SMSF borrowing had grown by more than 860 per cent since 2012.
“We continually review our products and services to ensure they meet the requirements of our customers,” a Westpac spokesman said. “We will continue to service and support our existing customers,” the Westpac spokesman added.
The royal commission has also unearthed a systemic problem across financial advice outfits that spruik SMSF property investment and stand to win lucrative fees whether or not it is in the best interests of clients.
The royal commission heard one instance in which former celebrity financial adviser Sam Henderson had advised Fair Work Commissioner Donna McKenna to roll her existing superannuation into an SMSF and borrow through it to invest in property, which would have immediately resulted in her losing $500,000 as a penalty for early redemption from her fund.
Regulators are now targeting the use of SMSFs to invest in property after the Australian Securities & investments Commission found 90 per cent of financial advice for self-managed funds failed to comply with the “best interests” tests.
Many customers were being shunted into high-risk property investments by one-stop shops, which typically involve real estate agents, developers, mortgage brokers, accountants and financial advisers.
The regulatory crackdown also comes as property investment becomes a more risky venture, with house prices softening around the country. Over the year Sydney has seen house prices fall 4.5 per cent, and Melbourne 2.3 per cent, with further declines expected next year.
Meanwhile, borrowing through SMSFs for property has become a national sport. The most recent figures from the Australian Taxation Office reveal the number of DIY super funds that have borrowed from banks 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 David Murray recommended banning SMSFs from borrowing to invest in property.
It was the only one of 44 recommendations that the Turnbull government ignored.
By Michael Roddan
The Australian Business Review
17 July 2018