"Proposed SMSF Change Could Cause A Property Price Correction" - Steve McKnight

[MoneyNverSleeps]

What is your opinion on this piece which has just been put up by Steve McKnight on his blog:

http://www.propertyinvesting.com/proposed-smsf-change-herald-property-price-correction/

I think he raised a good point there.

 

[Terry_w]

SMSF purchases of residential property is a very low % of total being purchased.

 

[perthguy]

The article says:

Between 2008 and 2014 the value of real properties owned by self managed superannuation funds (SMSFs) is reported to have increased from $40b to over $100b.

That?s a heck of a lot of new money pumped into the property market, and I bet a lot of it found its way into the coffers of developers selling off the plan property.

$100b sounds like a big number, but what is the value of real properties in Australia?

statistics show the value of residential properties rose to $5.02 trillion in the December quarter (1)

However, I assume real properties owned by SMSFs would include non-residential property? That makes the proportion even smaller. I don't think it is a game changer.
(1) http://www.abc.net.au/news/2014-02-11/investors-at-decade-high-drive-growth-in-home-lending/5252294

 

[Hoffy]

http://fsi.gov.au/publications/interim-report/04-superannuation/leverage/

 

[Redwood]

"The proportion of SMSFs with borrowings increased from 1.1 per cent in 2008 to 3.7 per cent in 2012. The average amount borrowed increased over this period from $122,000 to $357,000. Total borrowings in 2012 were over $6.2 billion"

This might have something to do with to introduction of the exception in s67A at this time allowing borrowings.....I cannot see how this argument is supported "If allowed to continue, growth in direct leverage by superannuation funds, although embryonic, may create vulnerabilities for the superannuation and financial systems."

The exposure of borrowing in super is immaterial to the overall asset base of SMSFs. I have seen subprime - this is not subprime. Whilst there is a trend to increase - that may have a link to Australians wanting direct exposure to the real estate market market using SMSF rather than seeing their money disappear in industry funds.

Cheers Ivan

 

[perthguy]

The exposure of borrowing in super is immaterial to the overall asset base of SMSFs. I have seen subprime - this is not subprime. Whilst there is a trend to increase - that may have a link to Australians wanting direct exposure to the real estate market market using SMSF rather than seeing their money disappear in industry funds.

I agree with this. My super lost around 1/3 of its value during the GFC. My personal direct investment in real estate has performed a lot better. I can see how direct investment in real estate would be attractive for SMSFs.

 

[Paul@PFI]

"The proportion of SMSFs with borrowings increased from 1.1 per cent in 2008 to 3.7 per cent in 2012. The average amount borrowed increased over this period from $122,000 to $357,000. Total borrowings in 2012 were over $6.2 billion"

Statistics again.
- 3.7% of total fund asset values. Not of total number of funds ?
- $357K is a low value borrowing
- $6.2 billion is total outstanding debt. Not amount financed in 2012.
I'm not aware that LRBF equity is a statistic available to Treasury or the ATO based on the Regulatory return fields. Borrowings can be obtained from lenders. However I'm not sure if it captures related party LRBF loans. Many members use a LOC to lend to their own fund without any disclosure.

Limited recourse borrowing facilities comprise well under 2% of total assets of all funds. However this hides a factor that is not accurate. This value is the net assets of the LRBF. ie Value of asset less the loan debt. In the period 2008-2014 that initial equity has risen and accounts for an unexplained proportion of this growth from almost 0% in 2008 to under 2% in June 2014.

It could be argued that LRBF have actually contributed to the asset growth through successful investing !!

 

[HomePage]

My super lost around 1/3 of its value during the GFC.

Surely it has recovered and then some by now?

 

[Paul@PFI]

Surely it has recovered and then some by now?

The issue with losing money is the fund must outperform the loss just to get back the original sum. Easier said than done.

For example pre-GFC $1,000 would be $700 after a 30% loss. To get back to $1,000 the fund must earn 43%^

Many lost 50%+...They had to double earnings. More risk ??

This issue is common to many funds like industry funds. They have a mandated investment range to the growth, moderate etc strategies. So when shares (int and ASX etc) crash 40% their strategy says to hold a similar holding. Maybe a reduced %. But not zero. So they don't sell and the financial adviser says - Hold them they will come good. Then they don't have the cash to buy back to the rising market cause the mandate dictates the cash holding also. So its harder to get up a hill than to fall down it the first time.

Our financial services business manage our clients investments under a Managed Discretionary Authority (MDA). they sold the lot and took a loss day one. Wasn't pretty but faced it head on. Went to 100% cash while the dust settled. Lost a lot less than half of the total market fall. 60days later bought back in and made much more as selected shares rose after being oversold. Clients made 30% net that year because they didn't ride losses down. The rode it down a small way but then rode it up.

 

[perthguy]

Surely it has recovered and then some by now?

No idea. Long story but I ended up dumping a fair bit of cash into my super fund, so it's pretty hard to tell how that original measly amount fared. It was probably my fault for leaving the funds in the growth category in the lead up to GFC but I was new to super and didn't know I had to actively manage it. I thought all those exorbitant fees were for that. Lesson learned and I now follow it a lot more closely.

I guess my point is that if I can pay a fortune for some professionals to lose 1/3 of the value of my super then I think it is pretty mean for the govt to decide I can't direct invest in real property. I can't think of a single person that I know who lost 1/3 of the value of their real property.

 

[perthguy]

Many lost 50%+...They had to double earnings. More risk ??

We shouldn't let smsfs direct invest in real property. Too risky