Property slump sounds warning bell for super funds

Former PM issues warning on ramifications for funds.

Property slump worries for super

The property boom is over and self-managed superannuation funds (SMSFs) are an “accident down the road”.

That was the clear message delivered by former prime minister Paul Keating, a key figure in the establishment of Australia’s $2.5 trillion compulsory superannuation system, in addressing a financial forum in Sydney.

“Superannuation funds being allowed to borrow and get into debt is very bad,” he said. “It should never have happened.

“I have always been opposed to it and it is an accident down the road for certain.”

About 1.1 million Australians have SMSFs with total assets of around $700 billion.

Figures from the Australian Tax Office (ATO) show that borrowing by SMSFs for property had ballooned from $2.5 billion in 2012 to $25 billion this year, The Australian has reported.

The figures showed that almost one in 10 SMSFs had access to limited recourse borrowing arrangements, which most used to buy property.

Limited recourse borrowing was banned until changes introduced by the Howard-Costello Government in 2007.

Funds that had borrowed to buy property could be vulnerable given the downturn in the housing market, Mr Keating said.

AMP Capital chief economist Shane Oliver said funds needed to be cautious if they were planning to buy properties in Sydney and Melbourne, with new analysis predicting a five per cent price drop in those cities this year.

He told the SMSF Adviser bulletin that median property prices in Sydney and Melbourne would fall by another five per cent this year, followed by further cuts through to 2020.

Population growth and demand would prevent a steeper fall in prices, but Dr Oliver believes the market is in for a “lengthy period of weak prices”.

“There remains a case to be cautious regarding housing as an investment destination for now. It is expensive on all metrics and offers very low income rental yields compared to other growth assets,” he said.

Do you have a SMSF? Have you borrowed to buy property? Are you concerned?

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    COMMENTS

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    Cowboy Jim
    10th Apr 2018
    10:16am
    We heard time and time again about house prices becoming too high for many people and
    we might have arrived at the point where the jug breaks. Interest rates have been too cheap for quite a while and those rates made people reckless. Low rates also mean low wage gains and that does not look good for borrowers. If investors lose a bit of skin is no big concern but families being tossed out of homes in future would be a disaster.
    Old Geezer
    10th Apr 2018
    11:13am
    Last property downturn saw a fall in the early 1990s of about 30% in Sydney prices. How it was able to controlled because interest rates were at record highs and wages were rising. Today we have nothing to stop such a fall with interest so low they can only rise and stagnant wages. I wold not be surprised to see Sydney prices fall 50% or more myself.
    Old Geezer
    10th Apr 2018
    11:14am
    I forgot to mention our high debt level on property as well.
    Grateful
    10th Apr 2018
    12:36pm
    But, how much irreparable damage has been done in the meantime??
    That $25 Billion went into houses that would/should have been bought by first home buyers, thousands of whom are those that are now renting them and faced with great uncertainty about their future residences when investors either sell or jack up their rent.

    And what will happen WHEN negative gearing is banned on existing houses from 2020 if Labor is elected in 2019?

    John Howard and Peter Costello have MUCH to answer for in what has become an unprecedented sociological disaster, negative gearing's incredible tax concessions and allowing SMSFs to borrow to buy property. ALL in a failed attempt just to get re-elected, but, the damage was already done.

    Live by the sword, die by the sword!!! Sorry, no sympathy from me to those investors, they should have known that it was too good to be true!!! Greed!!
    TREBOR
    10th Apr 2018
    2:37pm
    No wonder the Chinese Cultural Revolution listed rich property owners on its list of the top ten undesirables...

    Funny that.....
    Cowboy Jim
    10th Apr 2018
    2:42pm
    Trebor - a lot of the rich property owners here are Chinese, does that mean they have not learnt their lesson in the Chinese Cultural Revolution? Mao Tse-tung might have the last laugh!
    Anonymous
    11th Apr 2018
    1:02pm
    No, Cowboy Jim. It means they learned that they couldn't get away with it in China, but other countries were dumb enough to let them rort all they pleased and do all kinds of harm,
    Rae
    13th Apr 2018
    7:53am
    The Chinese are very clever for Socialists. They not only own all their own country, as you can lease there but never buy , but they now own some of the best bits of Australia and many other countries as well.
    musicveg
    13th Apr 2018
    2:28pm
    Yep, maybe their plan is to take over the world. How stupid are we to keep selling to them and other foreigners. Oh but the money....
    Franky
    10th Apr 2018
    11:47am
    For a long time now property prices only went up because of our high immigration intake. This is clearly not sustainable and Paul Keating is right predicting very slow growth from here on. Unless of course we get another mining boom
    musicveg
    10th Apr 2018
    2:06pm
    Yes, 200,000 LEGAL immigrants are year is not sustainable. Check out the Sustainable Australia Party policies. It is making it harder and harder for renters and buyers, everyone needs a home and it is sad many cannot even afford one of their own anymore.
    We could get a boom not in mining but in renewable energy, be the leader for the world, if it wasn't for the coal lovers.
    Cowboy Jim
    10th Apr 2018
    2:44pm
    Musicveg would like us to bottle wind and solar energy for export but, alas, coal is cheaper to transport.
    musicveg
    10th Apr 2018
    2:59pm
    That's okay for you Cowboy JIm you are obviously not concerned about the impact on pollution and climate change. Coal is only cheaper to transport because of all the subsidies the industry gets. We could also be encouraging more organic farming growing and export but they are chopping up the land for coal seam gas too. All short term gain, nothing for long term sustainability for the future generations.
    Rae
    10th Apr 2018
    3:16pm
    With our resources and mines we could have been manufacturing solar panels, solar stills, solar cookers and lithium batteries for export.

    But no sell 83% of all the mines off and let the owners ship the wealth away.

    We don't even process meat and send it frozen and packaged off in ships but cook sheep alive for some Muslims worried about Halal.

    They would stop worrying if they were hungry enough and Australian packaged meat was for sale.

    The World is screaming for organic fruits and vegetables and willing to pay top dollar too.
    Lark Force
    10th Apr 2018
    5:28pm
    I once loved my Country! by Gary J. Matthews. This was applicable for Australia Day.
    I remember back in 1968 living in Brisbane, that the 3 major cities back then were Sydney. Melbourne and Adelaide.
    And Adelaide was the Industrial City. Adelaide - South Australia was where you went to work in Iron Ore Industry or where you could get a job making railway tracks for B.H.P.
    You could get a job building Ships, Submarines, Cars, Washing Machines, Fridges,
    TV’s, Hills hoists, Victa Lawn Mowers, or make Tyres at Bridgestone Tyres. Lightburn Washing Machine Company even made a car called a Zeta.
    It was not much of a Car but at least it was Australian and we built it. I worked at Stanvac where we made our own Petrol, Diesel, Kerosene and Oil.
    We had Oil Rigs in Bass Straight, North West Shelf and the Timor Sea.
    We even had Australian owned Service Stations like (H.C. Sleigh) Golden Fleece and many of us young wanna-be Mechanics back then worked as a driveway attendant.
    I remember catching a train from the city to Gawler and then on to Freeling, Hamley Bridge, Stockport, Riverton, up to Clare, Gladstone, Laura etc.
    And all these towns were bustling with activity and on the weekends they were all open for business.
    Our shops were filled on every shelf with food and products all proudly made or grown in Australia.
    Our fridge was full of Lamb Chops and Steaks because it was cheap as we were a huge Lamb and Beef growing Nation.
    And once a month Mum would make us all a delicacy! It was called a Sunday Roast Chicken.
    I remember when we all had trade skills and high quality tools that would last and last.
    But most of all we had Mates. We as Australians watched each other’s backs even if we had not met yet, and we all said G’Day to everyone with a smile.
    Our kids could go anywhere they liked on their bikes just as long as they were home before dark.
    Australia was pretty safe back then. Yes Australia was once a self-supporting nation that had it all. It had Farms that produce our dairy, fruit & vegies and meats etc.
    And Politicians back then were known as statesmen and they were voted by the people for the people on behalf of the people and did what the people wanted.
    We had public utilities owned by us the people that guaranteed our electricity, Water and Sewage forever.
    No one knew how much the Snowy Mountain Scheme cost, we just built it.
    No one knew how much the Sydney Harbour Bridge or the Indian-Pacific railway cost!
    We just built it!

    Then came Corporate greed !!!!!!!!!!!!!!
    Now everything above has gone.
    Now we don’t watch each other’s backs anymore but watch each other through security bars, burglar alarms, and security screens.
    Now we dob each other in.
    Now we import poor quality processed food
    Now we import cheap tools that break just taking them out of the packet they come in.
    Now we rely on Ships to bring in our Fuels.
    Now we can’t afford our own Lamb or Beef anymore
    Now we eat steroid pumped Chicken just about every day.
    Now we import trade skill workers on 457 Visa’s
    Now we have high unemployment as nearly all of our Industry and Manufacturing has gone offshore.
    Now we have that many Laws that we have just about outlawed ourselves.
    But I guess we need even more laws so now we will have Sharia Law as well.
    We now pay for water that falls out of the sky at $3.80 a litre.Now we have taxes for everything.
    Taxes for carbon, taxes for sake of having taxes, (They call them Levy’s).
    And don’t forget the newest tax is the Islamic Tax (Halal Certification)
    Now here in South Australia in our towns we have Railway Stations and Railway tracks but no Trains.
    We have Public Bus stops in our Towns but no Buses.
    We have Hospitals and Clinics but no Doctors or Nurses.
    We all have Mobile Phones and have little to no reception.
    We have Digital TV’s with stuff all Signal.
    And the worst of all is our once great Nation is being sold off piece by piece to every other Country on Earth except us.
    Yes I did once love my Country. !
    musicveg
    10th Apr 2018
    5:29pm
    I agree Rae, supply the world with organic fruit and veg and stop buying overseas fruit and veg too. We need to stop the GMO's too. And yes processing meat in Australian will create a lot of jobs too. Have you signed the petitions on Animals Australia about the sheep exports?
    musicveg
    10th Apr 2018
    5:35pm
    LarkForce that sounds like the ideal Australia that we have lost and how sad we now even talk more Americana. The greed of Governments to fund their own pensions for life has played a big part too. The greed of multi-national companies setting up shop here and pushing out the smaller guys. You can't even find a few screws in a hardware store, have to buy in a packet or box. We could go on. But how to turn it back around is my biggest question?
    Cowboy Jim
    10th Apr 2018
    8:55pm
    @Lark Force - you described an Australia I remember when I arrived here from Europe. 6 o'clock closing was just recent history. Yes, we
    all had jobs, the only cloud was the Vietnam conflict which frightened quite a few young blokes. I had an alien passport so I was excluded from the draft. In Darwin I was just 2 weeks over the age to have a beer with the mates where I worked, age then was 21 years.
    Just wish we would get the spirit of comradeship back the way it used to be. Without Al Grassby's multi-kulti idea we would never have lost it.
    Rae
    11th Apr 2018
    6:16am
    Yes Lark Force that sums up the history pretty well.

    Yes music veg I certainly did. That was a terrible situation and should not be happening.

    All meat should be processed here and value added in my opinion with our rules about animal husbandry applied.

    Crops are bolting to head and the plants think Spring is here.

    I've never seen such a shortage of insects. Plenty of ants though and they are predicting a long hard winter.
    Seadove
    11th Apr 2018
    9:53am
    Thank you Lark Force for that wonderful trip down memory lane and I concur on every point. When we as a nation started selling everything off that was the slide down the abyss. No chance of ever getting back up again, the place is in such a mess that it will take a very, very special individual with an old aussie back bone to even get us on the first rung of recovery. I truly hope there is someone out there cause at the moment I despair where we are and where we are heading. Thanks again Lark Force, I loved those old days and we need to be reminded every now and again of what we have lost as a country and it even lets new comers know how it used to be in our Lucky Country.
    Anonymous
    11th Apr 2018
    4:47pm
    Lark Force, do you mind if I copy you post to other forums - with credit to you of course? Younger Australians NEED TO KNOW THIS.

    10th Apr 2018
    1:00pm
    We bought a house in 1979 for $28,500 and in 1982 it was valued at $72,000 because of a boom. In 1984 it was back to $39,000 and is now probably worth considerably more. My point is that property is subject to boom and bust on an irregular cycle and because of that, most financial advisers suggest that property is viewed as a long term investment. If property is being purchased by SMSF's on a long term basis then there should be very few problems.

    What we are not told is whether the borrowings are after a deposit or for the full amount. The increase in borrowings by SMSF's is misleading as we are not given the percentage increase of SMSF's
    Cowboy Jim
    10th Apr 2018
    2:52pm
    Long term property investment in SMSF is really not for the maintenance of the person's aged living expenses but used for inter-generational wealth building. The superannuation fund was not really ever meant for passing on to children and grandchildren. That is what Labor does not like as it creates more well-to-do and on the flip side
    a lot of have-nots in future. The fear of a dual Australia.
    Anonymous
    10th Apr 2018
    3:33pm
    Thanks Cowboy Jim, perhaps we have a different opinion of what constitutes "long term". If a person with a SMSF is in their 40's and purchases an investment property through the SMSF and sells it just before they retire, they will achieve a capital gain, rental proceeds and repayment of the loan to increase the cash value of their SMSF. This is what I meant by "long term".
    Adrianus
    11th Apr 2018
    9:56am
    Old Man with limited recourse borrowing a substantial deposit is required.

    Cowboy Jim, a SMSF is a trust which has a 99 year expiry period. Typically these funds are kept to 4 members because of economies of scale and admin costs, reporting etc. I don't see a problem with mum dad and the 2 kids in a fund.
    musicveg
    10th Apr 2018
    2:09pm
    No sign of property prices going down where I live, and real estate agents can't even get enough properties to sell, and they sell fast. Selling off blocks around here so fast too, building big double storey houses, wonder who can afford all of it.
    TREBOR
    10th Apr 2018
    2:38pm
    Yes - I believe there is one for sale here right now at the moment ...
    maelcolium
    10th Apr 2018
    2:13pm
    All this crystal ball gazing wisdom from the man who created the worst recession since the Great Depression? This is the same genius who with that traitor Hawke convinced the unions to force people into giving up present income to put into super, thereby creating the biggest financial Ponzi scheme ever seen in this country which has benefited only the wealthy 10% while the rest have next to nothing for retirement. He has the gall to rail against people who have tried to second guess successive Governments' carving up the trillions now held by the financial robber barons.
    It would be better if this parasite just kept his opinions to himself and disappeared back into the woodwork with the rest of the free loaders living off their fat entitlements.
    GeorgeM
    10th Apr 2018
    11:05pm
    Spot on! This idiot, who destroyed 10s of thousands of jobs (and hence homes) has suffered from Relevance Deprivation Syndrome ever since Australians kicked him out! Unfortunately, the stupid media still reports his nonsense.
    Rosret
    10th Apr 2018
    2:24pm
    Did you hear his full proposal. He felt that if you died early then your remaining super should go back into the pool of money available to the superfunds.
    Never would it hurt the poor, women and children so cruelly.
    No one would put extra money into super if they did that and then everyone would pull it out as soon as it was permitted. - Its not his money!
    TREBOR
    10th Apr 2018
    2:39pm
    Amazing - that's your money pure and simple and goes to your beneficiaries.

    Added to the policy list.
    Cowboy Jim
    10th Apr 2018
    3:02pm
    That is the way most overseas universal pensions work, that is why there is no income and means test necessary. The universal pension stops as soon as you die and the spouse keeps getting theirs till they expire. Nothing left for anyone else. Maybe now the universal pension does not look so attractive any more. A friend was asked by the UK pension fund to refund her husband's half a month's pension because he died mid-month and the UK sends their pensions monthly.
    Rosret
    10th Apr 2018
    7:43pm
    Except our private super contributions aren't allocated pensions. Its our money - self funded. When its gone its gone - its not a life time guaranteed pension as it used to be.
    Rae
    11th Apr 2018
    6:32am
    Cowboy Jim we had a universal pension introduced by Whitlam. The Welfare Fund was subsequently stolen by Fraser.

    There was nearly half a billion dollars in it way back in the 70s.

    The universal pension was attractive for all but those wanting the money for themselves.

    The extra tax levied to put into the fund was not reimbursed though.
    TREBOR
    10th Apr 2018
    2:35pm
    That's what happens when you're gullible enough to play the banker's game for them and put all your eggs in one basket.
    TREBOR
    10th Apr 2018
    2:40pm
    I also have no tears to shed for property investors - they've had a fine run to date with concessions and such - time to pay the piper, methinks.

    It's the home owners I am concerned about.
    Not a Bludger
    10th Apr 2018
    4:01pm
    He would say that wouldn’t he.

    Just another ex union boss turned pollie and who is publicity deprived.

    Nick off, Keating.
    Retired Knowall
    10th Apr 2018
    7:03pm
    Keating was born in Sydney, and left school at the age of 14. He joined the Labor Party at a young age, serving a term as state president of Young Labor and working as a research assistant for a trade union. Keating was elected to the House of Representatives at the age of 25, winning the Division of Blaxland at the 1969 federal election. He served as Minister for Northern Australia for three weeks in the dying days of the Whitlam Government. After Labor lost power in 1975, Keating held increasingly senior portfolios in the shadow ministries of Whitlam, Bill Hayden, and Bob Hawke. He came to be seen as the leader of the Labor Right faction in New South Wales, and developed a reputation as a talented parliamentary performer.
    Keating was never a Union Boss
    Cowboy Jim
    10th Apr 2018
    8:46pm
    Retired Knowall - you certainly know your onions. Thanks for the info about PK's background - liked the bloke but sometimes he came across as arrogant.
    Karenglp
    10th Apr 2018
    5:54pm
    The inference here is that borrowing equals negative gearing. Yes I have a SMSF and have a limited recourse loan. I borrowed 55% of the property the rent easily paying the loan and other outgoings. I do not need to rely on contributions to the fund or on income from other assets. If the fund members are not dependant of each other borrowing and using an loan offset account can enable on the death of a member for their balance to be paid out without forcing the sale of the property. Borrowing can be a useful strategy used correctly. Sure people can get into trouble with it but then they are free to make poor share purchases and go to dodgy planners. The real problem with super is the crazy restrictions put on contributions Rather than a simple tax on earnings over a certain amount we have a mega complicated system enticing individuals to spend rather than save for their retirement.
    MD
    10th Apr 2018
    8:03pm
    Every dog has its day. Maybe the SMSF money grubbers have had theirs. If PK's right, just wait till the dog poo hits the fan and then we'll have to put up with their howling and whining - they'll expect gubbermint and the rest of us to pick up their sh-poo.
    However you look at it - it still stinks.
    Adrianus
    11th Apr 2018
    9:46am
    In my opinion, its not a very smart move to hold residential property in a SMSF, particularly if the property is in Sydney or Melbourne. Firstly, any tax advantage is limited to 15% which is well below the top marginal rate and only half the corporate rate. Secondly, the income yield is far too low, typically only 2-3%. Thirdly, the res property market is a potential hot bed of political turmoil. I imagine that the $25b in SMSF borrowings would be mostly NOT invested in Res Property.
    The bottom line is I agree with Paul Keating to some degree, but until we see published figures on "residential property" held in SMSFs and financed by LRBs then we don't really know what the level of exposure is.
    Adrianus
    11th Apr 2018
    11:44am
    Why is Paul Keating concerned about SMSFs holding res property? Why is he not more concerned for individual res property investors. This is a much larger group which has a much higher risk. Sounds like Keating is attacking SMSFs because they pose some sort of threat to Industry Funds? I wonder what sort of threat they pose??
    Rae
    11th Apr 2018
    11:54am
    There are hundreds of thousands now and they cannot be controlled nor can the money disappear as easily as from a large retail or Industry Fund.

    The sMSF also make the big commercial funds look bad as they just can't achieve the same returns or low fees.
    Adrianus
    11th Apr 2018
    2:32pm
    I agree Rae, the political class wields a lot of power with control of Industry and Retail Super Funds. There is plenty of union representation on Industry Fund boards. Imagine if instead of only 96% of funds being SMSFs there were 100%? Malcolm Turnbull's discussions with Donald Trump on a Trillion Dollars invested in USA infrastructure would sound very hollow. Likewise, the threats of a sell off of News Corp shares by Industry Funds would also fall on deaf ears?
    Hairy
    11th Apr 2018
    1:17pm
    Lark force I’m with you all the way,you said it all,
    Hairy
    11th Apr 2018
    1:27pm
    Lark Force .post your comment on aus to Facebook I’m sure lots of Australians would like to remember,and the young might like to know what a great country we lived in back then
    ex PS
    12th Apr 2018
    8:39am
    If you have invested so much of your SMSF in property that this will break you, you have missed a fundamental principle of investing, don't put all of your eggs in one basket. When you invest, you are essentially taking a gamble, you take a higher risk for higher profit, if you lose, you generally have only one person to blame. Most successful Super Funds are successful because they diversify so that one market disaster does not wreak havoc with the entire fund.


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