Property affordability is high on the political agenda nowadays and by the sound of things, Mr Shorten is not going to let facts get in the way of a bit of useless class warfare for as long as he’s seen by his base as hurting the “wealthy”. Unless of course he’s trying to please some influential lobbies such as industry superannuation funds who have been bleeding business to SMSFs without finding any commercial answer for such a long time? Either way, he allowed himself some very uneducated comments.
Restricting SMSF lending
Mr Shorten stated among other non sense that the real estate market was overheated, partly because of “wealthy Self Managed super funds” and therefore a ban on SMSF loans would help cool it down (afr.com/news/politics/labor-escalates-housing-war-with-smsf-ban-proposal-20170420-gvoqme).
He did not feel the need, perhaps because he does not understand it, to detail that the overheating only affects a select number of postcodes in Sydney and Melbourne and that the rest of the country can certainly do with willing buyers (ask anyone in Perth if they need the market to cool down…).
Negative gearing & SMSF lending
It’s also worth noting an interesting discrepancy between how he addresses negative gearing and SMSF lending. According to Mr Shorten both are causing an overheated real estate market but one (negative gearing) he will restrict to new dwelling to stimulate new supply to the market, while the other (SMSF loans) he will abolish altogether. It’s a strange to say the least – would not the same remedy work for both if the concern was indeed what he claims it is?
A few facts and thoughts about SMSF gearing that Mr Shorten may have overlooked
According to the ATO (ato.gov.au/about-ato/research-and-statistics/in-detail/super-statistics/smsf/self-managed-super-fund-statistical-report-june-2016/?page=3), as of June 2016, SMSFs own $68.5 million worth of commercial properties and 24.3 millions of residential properties securing 21.8 million worth of loans.
That’s an overall 23.52% loan to value ratio, which hardly sounds like a debt driven investment trend.
Based on my experience organizing LRBAs for SMSF, the “wealthy” argument from Mr Shorten might be politically rewarding but is the most incorrect one all the same, as the wealthier the SMSF, the lower the lending.
Small balance SMSF trustees consistently are the one seeking higher loan to value ratio SMSF loans, while medium size balance SMSF tend to gear less and really wealthy SMSF very little or not at all.
A ban on SMSF loan will mostly hurt smaller funds and let the wealthy ones continue without much disturbance. It’s sadly ironic that a measure presented to curb the rich’s bad behavior is going to mostly hurt the suburban mums and dads who are trying hard not to end up on the pension.
The questionable market impact of SMSF lending restrictions
The above figures may seem like big numbers but they need to be put in perspective. According to the ABS (abs.gov.au/ausstats/abs@.nsf/mf/6416.0), the total value of residential properties in Australia was 6,438,537.30 millions as of December 2016. That means that SMSF currently own 0.038% of properties in Australia.
Considering the proposed ban on lending would only affect, out of that tiny percentage, only those needing SMSF loans, it’s questionable at best how much cooling it will provide to the market. You would also have noted that by and large, most of the SMSF direct property ownership is through commercial properties, a market which does not really need any cooling to start with.
Many small business owners purchase their premises through their SMSF to free cash in their business which can subsequently be used to invest in the said business. At a time when it is extremely difficult for these businesses to raise funds, this ban on borrowing could cool down small non mining business investment. That would be a real shame since we constantly hear the reserve bank impatiently whining about how there is not enough of it.
Eventually, Australia may learn the hard way that trying to manipulate the market through regulatory changes may have unpredictable, uncontrollable and undesirable consequences. One should be careful about what one is wishing for. A solid real estate market is at the heart of the economic stability of this country and should not be taken for granted.
