Analysts are reacting to new reports that self-managed superannuation funds (SMSFs) are exacerbating risks in Australia’s boom and bust property cycle, setting investors up for major losses once the market retreats.
New analysis from Industry Super Australia, which examined data from the Australian Taxation Office (ATO), found that in the year to June 2016, SMSFs with assets of less than $50,000 lost an average of 16.7% and failed to achieve any gains between 2009 and 2016. The SMSF sector as a whole made 2.9% in the year to June 2016, well below the 4.1% made by industry funds.
Three out of every five funds with balances of up to $100,000 had 80% or more of the funds invested in a single asset class, such as cash, property, or domestic listed shares.
While the data looks convincing, Andrew Zbik, senior financial planner for wealth advisory group Omniwealth, said it was misleading to assume that SMSFs are a danger to the financial system.
“Once again, I have read claims that the ability of SMSFs to borrow money to buy property are a danger to the financial system and investors with SMSF are at risk of losing a large part of their retirement savings,” Zbik said. “A first glance of the numbers presented to support this argument seem to imply that this is a big issue.
“The fact that limited recourse borrowing arrangements [LRBAs], under which funds borrow to buy shares or property, swelled from $21.5 billion to $25.4 billion between June 2015 and June 2016 looks scary. An increase of 18 per cent.
“What about the shocking statistic that the amount borrowed to buy residential real estate doubled between June 2014 and June 2016, climbing from $6.3 billion to $12.2 billion.
These statistics seem [to suggest] that we are experiencing debt fuelled rampant property speculation with superannuation monies.”
Zbik added that it was best to examine the data in the context of the broader environment. The total value of residential mortgage loans in Australia is now approximately $1.73trn. As of September 2017, total LRBAs in SMSFs amounted to $30.73bn.
“Thus, assuming most LRBAs are for the purpose of purchasing residential property, LRBAs within the superannuation system account for up to 1.78% of all loans. Actually, it’s not even that high because SMSFs also use borrowed money to purchase commercial property and shares,” Zbik said.
The current value of the residential property market is about $6.78trn. As of September 2017, the value of residential property within SMSFs was about $33.8bn. Moreover, SMSFs actually own more commercial property compared to residential properties, coming in at $79.13bn.
“When taking the total value of residential property purchased in SMSFs into perspective, this only accounts for 0.50% of the value all residential properties in Australia.”
Zbik went on to outline how much harder it was to buy property with an SMSF compared to buying an investment property in one’s own name. To buy a property with an SMSF, buyers need a 30% cash deposit and enough money to cover the stamp duty. Some lenders also require a liquidity buffer of at least 10%.
“Most SMSFs are contributing up to 35%-40% of the purchase price of an investment property in cash. Investors buying investment properties in their own name are making nowhere near the same cash contribution to their purchase,” Zbik said.