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RBA warns DIY Super may set new property debt trap; SMSF growing investments in real estate open up new avenue for property speculation
Topic Started: 26 Sep 2013, 11:03 AM (728 Views)
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Reserve warns DIY super may set new property debt trap

September 26, 2013
Clancy Yeates

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The Reserve Bank has warned that self-managed super funds' growing investments in real estate have opened up another avenue for property speculation, which could affect the financial system's stability.

In its latest health check on the financial system, the central bank on Wednesday said some households running their own retirement funds were taking on more financial risk.

It singled out the increasingly popular strategy of borrowing to invest in houses within a self-managed super fund, which it said ''represents a vehicle for potentially speculative demand for property that did not exist in the past''.

Amid rapid growth in the DIY super sector, the Reserve noted the strategy had been ''heavily promoted'' and it was assessing the effects on the financial stability.

''One risk of the increase in property investment by SMSFs is that at least some of it is a new source of demand that could potentially exacerbate property price cycles,'' it said in the Financial Stability Review.

''It also raises consumer protection concerns in the event SMSF members are exposed to greater financial risks than they envisage.''

With house prices growing at their quickest pace in three years, the Reserve also stepped up its attempt to talk down the prospects of another property boom.

It advised home buyers to have ''realistic'' expectations for house price growth over the coming years, and urged banks not to ease lending standards.

With official interest rates at a 60-year low of 2.5 per cent, senior Reserve officials and the banking regulator have repeatedly warned borrowers not to take on more debt than they can manage.

Although the central bank has dismissed talk of a housing bubble as ''alarmist'', many economists now believe the rising housing market will stop it from making any further rate cuts.

Read more: http://www.smh.com.au/business/reserve-warns-diy-super-may-set-new-property-debt-trap-20130925-2uei4.html
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RBA’s self-managed super worries a wake-up call for banks

Christopher Joye

While regulatory changes make it easier for self-managed super funds – the growth of which should be welcomed – to invest in property, I’ve only recently turned my mind to how this $530 billion sector could be a game-changer for the current cycle. And let there be no doubt: that’s exactly what it is.

My thinking on this subject was pushed along by the Reserve Bank of Australia’s appropriately punchy comment on Wednesday that SMSFs “represent a vehicle for potentially speculative demand for property that did not exist in the past”. Those last few words are the key: we’ve not been here before. It is especially novel because it is coming into play with equally abnormal borrowing rates.

The $530 billion or so squirrelled away by mums and dads who have elected to take control of their savings destinies, rather than outsourcing decisions to super fund trustees, has never had much exposure to bricks and mortar.

Legislative changes allowing SMSFs to borrow from banks to buy property on a “limited recourse” basis with loan-to-value ratios of up to 80 per cent, and to shift property that houses small business into SMSFs and get capital gains tax exemptions, have materially boosted the appeal of residential real estate. The regular daily “brain damage” wrought by equities’ volatility has not hurt either.

Perhaps unsurprisingly, some bank economists allege that the SMSF sector is nothing to lose sleep over because it is not presently a big housing participant.

But according to the latest Melbourne Institute-Westpac survey, Australian families rank cash (a bit over 30 per cent of respondents) and housing (slightly less than 30 per cent) pari-passu with one another as the “wisest place for savings”. Less than 10 per cent think equities is the best place to be.

But when the RBA dissects asset allocations across SMSF portfolios, it finds that equities and cash currently sit on a level-pegging with 30 per cent individual weights, or about $330 billion of the $530 billion in SMSF money. Of course, the odd man out is housing, which currently only attracts about 3.5 per cent, or $18.5 billion, in total SMSF investment.

Taking the survey results at face value, savers want to put about 30 per cent (or $160 billion) to work in residential property. So SMSFs are short $140 billion of exposure. This is why the RBA is highlighting that SMSFs could become a significant new source of speculative – and highly leveraged – investment demand.

The first game-changer is thus the quantum of SMSF dollars sitting on the sidelines that can be deployed into housing. The second is that SMSFs are likely to evaluate housing investment differently to the 65 per cent of buyers who are seeking to put a roof over their heads.

Cheapest money in history

Most SMSFs are heading into housing because they recognise that with the cheapest money in history and unusually attractive leverage (via ultra-long loan terms and relatively inexpensive rates), it seems to be a good investment bet. This is further backed by accelerating capital gains and decent rental yields of 4 to 5 per cent.

But SMSFs are also likely to be much more unemotional and mobile decision-makers. If house prices start falling when the RBA inevitably normalises mortgage rates back towards long-term averages – say 250 basis points above current marks – SMSFs may rationally decide to cut their losses. En masse. As such a substantial influence at the margin of effective demand and supply, this could have a big impact on house price dynamics.

Read more: http://www.afr.com/p/blogs/christopher_joye/rba_self_managed_super_worries_wake_4eOtKlb4WrHPpUN5AZoNHK
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A do-it-yourself financial bubble

PUBLISHED: 25 Sep 2013 20:27:00
Sally Patten

Another day, another warning about Australia’s booming $500 billion self-managed superannuation sector. On Wednesday it was the turn (again) of the Reserve Bank of Australia, which warned of the potential for property investments by do-it-yourself schemes to trigger a house price bubble, while raising the risk that unsophisticated investors will come a cropper.

It was the second cautionary note sounded by the RBA in little more than a week. Last Tuesday the central bank warned that households could be building up too much debt by borrowing to buy property through self-managed funds. The day before it had been the turn of the securities ­regulator.

The Australian Securities and Investments Commission said it was planning to impose tougher disclosure rules on advisers to self-managed schemes and set guidelines for the minimum balances.

Not to be outdone, the Australian Tax Office, the main regulator of self managed funds, unveiled a proposal to increase its scrutiny of do-it-yourself fund audits, with ATO assistant deputy commissioner Stuart Forsyth also expressing concern that some funds were purchasing property without understanding the rules.

So is it a case of paranoia or are the regulators right to be concerned, particularly when it comes to self-managed funds purchasing property, and in some cases borrowing to do so? Self managed funds had $76 billion of property investments as of June 30, representing some 15 per cent of their total assets.

Meanwhile, property is running hot.

According to RP Data, house prices have risen by more than 5 per cent in Sydney over the past three months alone, and by more than 6 per cent in Melbourne. In Sydney auction clearance rates have been hitting 80 per cent for most of the year, while in Melbourne they recently hit 75 per cent.

Amreeta Abbott, director of NowInfinity, a legal services firm for the SMSF sector, is just one of thousands of investors who have bought property in their self managed fund. Abbott purchased a $1.1 million terrace in inner Sydney’s Potts Point to house her business. She says the key reason she structured the purchase that way was the capital gains tax exemption for small businesses that buy commercial properties.
Perfect storm

The RBA is expressing concern that there could be a link between soaring house prices and the extraordinary growth in the self managed sector. In 1995 do-it-yourself funds accounted for 9 per cent of total super assets. Today the proportion is more than 30 per cent. Industry super schemes, the next biggest segment, boast a market share of just 20 per cent of assets.

Read more: http://www.afr.com/p/national/do_it_yourself_financial_bubble_aNnMWHkBkpYvcoR3hp8SNK
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dave
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chris joye is just posing as a housing bear (carefully worded op-eds, fake public debates with his boss mark bouris and last night with peter switzer) in order to garner public support. support that he will use for his future 'we need to let first home buyers use superannuation as home deposits to save the australian economy' lobby.

good luck with that chris
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Steve
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Whenever people talk about superannuation as “savings” I am reminded of the story of William Kiffin.

Kiffin was a successful wool merchant in the time of Charles II. Much like today, businessmen who wanted favours from government had to remain within the orbit of the “Executive”, which in those days meant the King himself.

The danger was that the perpetually impecunious Charles was wont to importune those close to him for money to keep his regime running.

And so the day came – as the story goes – when Charles turned to Kiffin and prevailed upon him for a loan of 30,000 pounds.

Not to be caught out so easily, Kiffin replied that it was beneath the dignity of a monarch to be indebted to his subjects, and he would rather make Charles a “free gift” of 10,000 pounds than to have him suffer such an ignoble fate.

Charles – so the story goes – was mightily impressed by this generosity and readily accepted.

Kiffin’s astonished friends asked why he had just given away 10,000 pounds.

To which he replied: “I haven’t. I’ve just saved myself 20,000!”

And so it is with superannuation.

“Savings” are only savings if one has a realistic expectation of having them repaid at some time in the future. For many people putting money into superannuation – especially younger people – there is little prospect that they will ever see their money again, or at least not all of it.

Superannuation, even self-managed superannuation, is subject to “sovereign risk”: the risk that the present government or some future government will change the rules to prevent it being withdrawn.

The track record does not bode well. For those born after 1960, the preservation age has already been raised. The funds management industry (looking to keep their 1% pa on $1.6 trillion of superannuation “savings”) are ramping up the pressure to have lump sum withdrawals banned altogether. Meanwhile, the private infrastructure lobby are leaning on the “Infrastructure Prime Minister” to force superannuation funds to invest a minimum proportion in their projects.

One can envisage the day when all that one may expect from superannuation is an annuity equivalent to the pension, with any extra being taxed at onerous rates to recover the “favourable” tax treatment it has received over the years.

Sinodinos’ comments are best interpreted in light of this campaign.

Any losses incurred in property speculation will be used as ammunition to ramp up the compliance costs of SMSFs, forcing them into the jaws of the funds management industry. Meanwhile, a perpetually impecunious government will imposed ever tighter rules on how the funds must be invested. Pushing them into public-private “partnerships” will allow government to maintain public spending without “wicked” public borrowing (at least in the short run).

I can foresee the day when the compulsory, defined-contribution private superannuation system has effectively morphed into a “private tax system” under which fund managers skim off 1% pa to direct “savings” partly into pensions and partly into public spending.

Not altogether different from what governments used to do themselves without the 1% pa overhead.

And not altogether unlike Kiffin’s 30,000 pound “loan”.
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