There are about 600,000 self-managed super funds (SMSFs) in Australia, managing $696.7 billion in assets as at the end of the last financial year, according to the Australian Prudential Regulation Authority (APRA) and the Australian Taxation Office (ATO).
Many have invested in property.
The recent ‘correction’ on the stock market was a reminder not to put all your eggs in the same basket in relation to shares, and the same is true for property investors, especially the mum and dad and SMSF varieties. With the current low interest rates on offer, the temptation is there, but what goes up must come down – or what is low now, i.e. interest rates, must go higher.
The fact that so many SMSFs have borrowed to buy property, means retirement savings are at risk.
SMSF borrowing grew 50 times, from $497 million in June 2009 to $25.4 billion by June 2016, with more than 90 per cent of it related to property, according to Glen McCrea, chief policy officer at the Association of Superannuation Funds of Australia (ASFA).
“Growth by 5000 per cent over seven years is astonishing and, as custodians of the super system and the peak super industry group, the Association of Superannuation Funds of Australia considers this type of borrowing needs to stop now,” Mr McCrea said.
He noted that the number of SMSFs which were borrowing was rising. “Over the five years to 2016, SMSFs with borrowings increased from 4 per cent to 9 per cent. The average amount borrowed also increased by 4 per cent, from $356,000 to $372,000.
“Around 42,000 SMSFs currently borrow, mostly to buy property. More than half the SMSFs making use of limited recourse borrowing have more than 80 per cent of the fund’s total assets supported by such borrowing.”
The implications are clear, he wrote in a column in The Australian, if the property bubble bursts.
“The government could come under pressure to bail out SMSFs to prevent people losing retirement savings. There also would be an increase in expenditure on the Age Pension due to lower retirement savings.
“While property is a legitimate asset class for super funds, allowing self-managed funds to borrow to invest in property adds risk to the economy as well as directly to those funds.”
While super funds use diversification strategies to reduce risk, SMSFs that have borrowed to invest in property have few buffers.
A recent government inquiry called for a stop to this type of borrowing, a view backed by the ASFA.
“The latest ATO statistics and the state of the property market mean now is the time to act,” says Mr McCrea.
“Given the contractual arrangements currently in place and the difficulties associated with forced sales of more than $25 billion in assets, any changes to the law could be grandfathered, at the same time removing the ability to enter into such borrowing arrangements in the future.
“A sensible reform in this year’s budget would stop SMSFs gambling with their super.”