SMSF Self Managed Super Funds to fuel surge in Australian residential property prices
SMSF Self Managed Super Funds to fuel surge in Australian residential property prices; I often get asked can the housing market continue to grow from its current levels and reach new heights
Tweet Topic Started: 12 Jun 2013, 01:25 PM (1,037 Views)
I often get asked can the property market continue to grow from its current levels and reach new heights.
While I do not believe every property in the market will show the same level of growth, there is a title wave of money on the horizon that will have an enormous impact on property value in years to come.
For many years the primary reason to buy property was to provide a roof over your head. As time went by, however, another driver entered the market. Investors started to look at the property as a money-making venture to help fund their retirement.
This really gathered momentum in the 1980s to the point now where over 1 million Australians own investment property.
We are now at the very early stages of a new and very powerful player entering the property market – superannuation investors.
Compulsory superannuation has only been around for 20 years and is in its infancy. Today there is over $1.4 trillion sloshing around in superannuation locked up until retirement and this is growing.
In the early years of superannuation all funds were managed by professional fund managers to maximize returns and the vast majority was tied up in the sharemarket.
Unfortunately sharemarket performance has not lived up to investor expectations in recent years. This year the share market has taken two steps forward and two steps back. On December 31 last year the All Ordinaries was at 4664 and peaked at 5200.
However, it has now lost all its gains and yesterday closed at yesterday it closed at 4748.
Even if we project back a few more years we find the market is sitting below 2010 levels.
The share market has been a great place for investors who trade regularly to make a lot of money. However for the investor that just wants a ‘set and forget’ strategy it has proved disappointing.
While I do not think that investors will turn their back on the sharemarket completely they will certainly look around for other options to diversify their investments. It is cycles like this that will make more people look towards the property market.
The desire for people to take control over their superannuation has seen an explosion in self-managed superannuation funds (SMSF’s). According to the Australian Prudential Regulation Authority, which oversees our superannuation system, thousands of self-managed super funds are set up each year. Traditionally, SMSFs have been the province of the self-employed an increasing number of salaried employees are now setting them up too. There is now $439 billion held in SMSFs and that figure is growing.
However, to date only a small fraction of people have elected to add direct property to their super fund. This is mainly due to a lack of funds in their super and uncertainty and complexity around the structure.
These investors have the opportunity to include residential property as part of the asset mix in their self-managed funds, thanks to regulatory changes in 2010 that enable gearing into super funds. Residential property is primarily a capital growth-based asset, and because of its stability relative to shares, it can provide a solid long-term way to boost the value of SMSFs.
Provided they choose high quality assets, investors with residential property in their SMSFs will be able to enjoy the best of both worlds when they retire. Residential property will give them geared growth assets, whilst shares will produce income in the form of dividends. They can draw down on the dividend income tax-free and use it for living expenses, whilst taking advantage of gearing to increase the capital value of their super fund.
This mix of residential property and shares is an ideal strategy for SMSF investors - it reduces the possibility of running out of retirement savings, by maximising capital growth as well as income.
Generally speaking, most people who borrow to purchase residential property for their super fund tend to adopt a conservative investment approach, and may gear at around 50% of the property’s value. This is a significant contrast from buying residential property outside super, where the gearing level is usually 80% or higher.
Even so, a 50% gearing level means the amount of money flowing into residential property from superannuation will explode in years to come.
Buying property needs to be viewed as a long-term play. The flow of superannuation money entering the market will be slow wheel to turn but it will gather momentum in coming years and push the property market to new highs.
Regulators and superannuation experts have flagged concerns that self-managed superannuation funds risk becoming "vehicles of choice" for property spruikers.
Real estate spruikers are conducting seminars around the country with the promise of securing a comfortable retirement by borrowing to buy property inside a self-managed fund.
Once the preserve of small business owners and well-off professionals, self-managed superannuation funds (SMSF) are being advertised heavily on TV, radio and the internet.
Australian Prudential Regulatory Authority data out this week shows the number of self-managed super funds increased by 7 per cent to 509,362 over the year to June 30 from the previous financial year.
The Australian Securities and Investments Commission has a taskforce looking at the risks of SMSFs.
Pauline Vamos, the chief executive officer of the Association of Superannuation Funds of Australia, said she is concerned that those selling real estate in connection with self-managed superannuation funds can be outside the licensing regime. "Anyone making the link between property and self-managed superannuation funds should be required to have a financial advice licence," Ms Vamos said.
If SMSF want to take the risk of using leverage to goose their fund returns and risk blowing up in the process, they should be paying marginal tax rate on any gains. Super is supposed to be for retirement, not a vehicle to speculate.
It is totally out of control. Did anyone hear that batshit crazy woman at the end of the leader’s debate the other night? This country has lost all perspective on the whole point of the scheme, which is to fund retirement and ease the unsustainable burden on the state to look after our ever ageing population.
Arguing that young people should be able to cash in their super to fund a house deposit, and that retirees should be able to access their money at 55 regardless of whether they are still working as it is ‘their money’.
She struck me as epitomising everything that is wrong with this country and the sense of entitlement of the baby boomer generation (apologies for generalising) and ignorance of what the intention of the super scheme actually is.
It is an interesting concept, that millions more aussies will divert there super into property, it may happen, if these people get self motivated. Most are not, most don't even know what their super is invested in today. But I am dubious of residential property holding its value in the years to come. The world has changed and seems poised for severe austerity. It is already happening in most countries but not here. If you were to choose property as a retirement vehicle you would have to be convinced that severe austerity will not come here, even as the rest of the world experiences it. I am not convinced of that. I think our time as big spenders is nearly up.
Being a landlord is a good business, while business is good.
Each week, about 700 self-managed super funds are established. No one is saying holding mortgaged property inside an SMSF cannot be a good investment. But it is the hard sell from unlicensed property spruikers that has the Australian Securities and Investments Commission, and others, worried.
''In the right hands, SMSFs can be very effective retirement savings vehicles,'' ASIC Commissioner Peter Kell said in a speech in April. ''In the wrong hands, however, SMSFs can be high-risk.''
Andrew Hewison, a financial planner with Hewison Private Wealth, which has many SMSF clients, says borrowing to buy a property inside super is not a strategy the ''average person should be playing''.
The risks of the strategy are probably not being discussed at the seminars, Hewison says. They are probably not discussing what happens if the property is vacant and no rent is coming in or if the people making the investment lose their jobs.
Also, with interest rates at historic lows, the strategy needs a buffer for when the cash rate and mortgage interest rates return to normal levels.
Once the preserve of small business owners and well-off professionals, SMSFs are being mass marketed. However, the rules and regulations designed to help protect people from unscrupulous operators are far from clear cut.
The superannuation rules were changed in 2007 to allow SMSFs to borrow to purchase real estate. Before then, only property that was owned outright could be held in an SMSF. The change put the strategy within the reach of most people.
Real estate operators are paying incentives to financial planners and accountants to recommend property to their clients. SMSF administrators, who set up and take care of the accounting and legal aspects, are advertising heavily on prime-time television, radio and the internet.
They are appealing to those who want to take control of their super. This mass marketing is increasing the awareness of SMSFs among ordinary wage and salary earners, most of whom are members of low-cost, well-managed super funds. It is also making the ground more fertile for the sales pitches of property spruikers.
The head of advice, wealth and super at researcher CoreData, Salvador Saiz, says its surveys of members of large super funds show up to 10 per cent say they intend to set up or join an SMSF over the next one year. A little less than a quarter say they are likely to establish or join an SMSF in the next five years.
It is an interesting concept, that millions more aussies will divert there super into property, it may happen, if these people get self motivated. Most are not, most don't even know what their super is invested in today. But I am dubious of residential property holding its value in the years to come. The world has changed and seems poised for severe austerity. It is already happening in most countries but not here. If you were to choose property as a retirement vehicle you would have to be convinced that severe austerity will not come here, even as the rest of the world experiences it. I am not convinced of that. I think our time as big spenders is nearly up.
Being a landlord is a good business, while business is good.
I'd rather be relying on property for my retirement than super in a period of serious austerity. At least the rent will (generally) turn up regularly.
Good on Julie for asking the best question at the leaders' debate at Rooty Hill, to which - naturally - she got no answer.
Why can't first home buyers use some of their superannuation as a deposit to buy a home, she asked.
For Mr Rudd it was a ''tough question and I wish I had an easy answer''. Mr Abbott said ''the reason there's no access is because you need it for retirement''. Um, don't you need a home, too?
But Julie had her wires crossed on one count and, unfortunately, it's an all-too-common misconception. She thinks super has to go into shares, which isn't true. It can go into virtually anything except your own home. Yes, even an investment property, though you would have to run your own fund for that.
The other misconception was that you have to stop working to get at your super. That's only half-true. Once you're 55, you can take super out without having to stop working; it's called a transition to retirement pension. You're limited to 10 per cent of your fund a year, but it's there. It even comes with its own tax concession of a 15 per cent rebate.
For that matter, from 55 you can simultaneously put money into super and take it out again, an otherwise pointless exercise except it triggers a series of very handy tax breaks.
Anyway, there's nothing inconsistent about drawing down some of your super when you're young - and, realistically, it's not likely to be much - as a deposit for a house and saving for your retirement. Or, for that matter, when you're older and paying off the mortgage with some super. The way to guarantee one doesn't rob the other is by having the mortgage interest from the deposit paid back to the fund, which is where it stays, along with the rest of your super, until you retire.
Julie is dead right: this would make super less risky. It would be like investing in a bond - while your home might lose value in some years, your super fund never can. It gets the interest year in, year out, unless you default on yourself.
There's already a precedent, too. If you own your own business, your DIY super fund is allowed to buy it as long as you pay it a market rent. So how come you can't use super to buy a house where you can live when you retire, but you can for a shop where, presumably, you can't?
The idea of encouraging people to provide for their retirement is often the justification trundled out for supporting the giant superannuation milche cow.
No one is disputing that motherhood statement.
A simple low cost retirement savings scheme could be implemented right now and offered as an alternative to compulsory super or SMSF.
Each person opens a special ‘deposit’ only retirement savings account with a mobile account number (perhaps their tax file number). Deposits can be made but no withdrawals until age 65.
The account can be moved between financial institutions to obtain the most attractive interest rate. The financial institutions will perform their ‘old fashioned job’ of allocating these savings to those who can use the cash productively.
Govt may decide to make additional deposits for low income earners.
Some deposits could be made compulsory if it was found to be necessary.
No tax on a capped amount of earnings in the account. For example if the interest rate being paid on the balance was 5% the earnings on a $500,000 balance would be $25,000 per year. If that was the tax free level of earnings – it would be an attractive and simple to understand system for people to save for their retirement. Put money in and the interest will not be taxed until it reaches $25K per year. If $25K is considered too low the tax free component can be increased.
Low cost
Simple to understand
No need for a multitude of ticket clippers.
Can be done immediately and offered as an alternative to the current scam.
The idea of encouraging people to provide for their retirement is often the justification trundled out for supporting the giant superannuation milche cow.
No one is disputing that motherhood statement.
A simple low cost retirement savings scheme could be implemented right now and offered as an alternative to compulsory super or SMSF.
Each person opens a special ‘deposit’ only retirement savings account with a mobile account number (perhaps their tax file number). Deposits can be made but no withdrawals until age 65.
The account can be moved between financial institutions to obtain the most attractive interest rate. The financial institutions will perform their ‘old fashioned job’ of allocating these savings to those who can use the cash productively.
Govt may decide to make additional deposits for low income earners.
Some deposits could be made compulsory if it was found to be necessary.
No tax on a capped amount of earnings in the account. For example if the interest rate being paid on the balance was 5% the earnings on a $500,000 balance would be $25,000 per year. If that was the tax free level of earnings – it would be an attractive and simple to understand system for people to save for their retirement. Put money in and the interest will not be taxed until it reaches $25K per year. If $25K is considered too low the tax free component can be increased.
Low cost
Simple to understand
No need for a multitude of ticket clippers.
Can be done immediately and offered as an alternative to the current scam.
Make the rules that no tax is paid on either deposits or interest/returns (up to a sensible limit) and then treat withdrawals as income for tax purposes.
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