Self-managed super fund members are diving into property at a rate much faster than the total asset growth within both SMSFs and the wider pooled-fund sector, according to new ATO figures.
Between December 2017 and December 2020 total SMSF balances rose 11 per cent to $764.34 billion and the total in pooled super funds was up 19 per cent to $2.1 trillion.
But over the same period limited recourse lending arrangements used by SMSF owners to borrow for property jumped a massive 25 per cent to $55.4 billion.
Residential property holdings in SMSFs also jumped over the same period by 25 per cent to $41.3 billion and non-residential property was up 24 per cent.
That all means that property, and property financed by debt, is increasingly becoming the focus of SMSF investors at a time when capital city property prices are tipped to rise dramatically.
“The ANZ has forecast that house prices in Sydney will rise 17 per cent over the course of the year while in Melbourne and Brisbane it’s 16 per cent,” said Steve Mickenbecker, chief commentator at consumer comparison site Canstar.
Property has come out of the pandemic with a rocket under it due to a range of factors including stronger economic growth and record-low interest rates.
“For every 1 per cent fall in interest rates, if it is seen as temporary, it pushes up property prices 10 per cent and if it is permanent it pushes prices up 30 per cent,” said Brendan Coates, household finances director with the Grattan Institute.
The strength of the SMSFs’ property push is demonstrated by their exposure to shares.
Over the past year, share exposures were down slightly in SMSFs, which isn’t surprising given the COVID market shakeout.
But even over four years the value of Australian shares held in SMSFs has risen only 4.4 per cent to $202.46 billion.
That is remarkable given the fact that during the early years of the last decade, when SMSFs grew dramatically, one of the main drivers was exposure to blue chip shares.
Although holdings of foreign shares have risen 32 per cent over the past four years, they account for only $8.8 billion, or 1.15 per cent of total assets, making their influence negligible.
SMSF investors have also moved out of cash as they’ve jumped into property, with holdings down 5 per cent to $151.07 billion and bond holdings relatively flat, up 7 per cent to $10.9 billion.
There are a couple of ways to look at the rush into property by SMSFs.
SMSF investors have grown property assets by total of $20 billion and boosted borrowings by about $15 billion.
Although it is not clear how much of the rise is due to valuation increases, new borrowings, or turning cash holdings into property, a reasonable estimate is that $20 billion would be new investment.
That comes to 11.4 per cent of the “$175 billion in new investment in property we have seen over the four years to December 2020,” said Angie Zigomanis, a property expert with valuers Charter Keck Cramer.
What are the effects?
“That is a drop in the ocean compared to the total market,” Mr Zigomanis said.
However, it was also “tax-advantaged money” that can compete with residential buyers at the margins and influence the market in that way, he said.
But the presence of SMSFs in property investment has worried regulators.
Former CBA chief David Murray’s and ex-Treasury chief Ken Henry’s financial system reviews recommended against it for financial stability reasons.
“Don’t add to a leveraged banking system with a leveraged superannuation system,” Mr Murray said in 2015.
Industry Super Australia chief economist Stephen Anthony, then chief economist at Macroeconomics, came out strongly against SMSF borrowing, arguing it is inequitable.
“It must end,” he said.
“In an uber-low interest rate environment with tax settings where they are, the attraction of property investment by SMSFs will supercharge the market,” Dr Anthony said.
“Most of this borrowing is carried out by the wealthiest 2 per cent of the community and it is nothing to do with building retirement income.”
“It has everything to do with tax and estate planning,” Dr Anthony said.
Meanwhile, Nicki Hutley, partner with Deloitte Access Economics, said she “took a middle ground view on SMSF property investment”.
“It might be good if it was directed to new properties to encourage building,” Ms Hutley said.
Young Australians disadvantaged
“That would remove the negative effect of keeping young Australians out of the property market by pushing up prices for existing properties,” Ms Hutley said.
She was also concerned that SMSF borrowers might not fully understand the risks they were dealing with.
“SMSF borrowers could be vetted for the risk component of those investments,” Ms Hutley said.
Borrowing inside an SMSF was not as easy as some might think, Mr Mickenbecker said.
“The property has to be owned in a trust which needs to be established,” he said.
“While the loan is non-recourse in the super fund [meaning other super assets cant be called upon if you default] the banks take personal guarantees from the trustees outside super.”
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