SMSF and borrowing for property
- Thread starter geoffw
- Start date
Hey HG,
I don't know if gearing is the issue so much. If you buy into a managed fund through your super sometimes that fund is geared so you get the gearing anyway. And gearing is OK depending on your time frame and investment strategy.
I think the problem is that residential property is speculative in nature - it doesn't 'earn' anything (nothing significant anyway - only a few percent yield). The only way they make signficant returns is the resale value. So I'm not sure if people should be speculating with their super fund. It's just not wise.
Also, at the macroeconomic level I think this is bad policy because if super funds aren't being invested in productive assets then the whole system won't work. We need the burst of 'real' capital investment to make up for the reduction in labour that will hit us when all these people retire. Probably too complicated to go through here but I'm sure you know what I am getting at.
Fair comment.
All SF's can (and do) go through cycles of losing money... the problem I see is that this kind of change will encourage the 'all eggs in one basket' approach from many people who are already heavily leveraged into Real Estate. (eg. those people right now with IP's who are licking their lips at setting up their SMSF's to get more IP... you guys know who you are
The RE market has become so stratospheric in it's 'values' that the only way to milk even more money is to pull it out of superannuation funds... the nest egg of the population.
In my opinion it's like throwing fuel onto a fire thats been going for quite a long time already... cycles exist both in nature and in economics so that some kind of harmony and balance can occur... if you keep pouring fuel onto any asset boom you are only artificially keeping the boom going... the downside is that when property is finally unable to keep rising... a very protracted bear market will begin (ala Japan). Sure, you smart guys will bail out of RE and into something else... but what about the rest of the people who are left carrying the bag ?
Well those that don't get out of the cycle before it gets ugly will go broke... and a burden on society in the say of pensions, and many of those are people who did not take this huge risk with all of their eggs, but simply lost out because their PPoR has dropped so much... (I think that's what HG is saying).
Superannuation has 2 reasons to exist:
-To allow people to have better retirements
-To reduce taxpayer burden of an aging population
My parents have a non-geared SMSF that has a few owned outright IPs and shares, with at most 50k per share. If the share market tanks, and house prices halve, maybe they won't be able to travel as much, but they certainly won't be having to ask the taxpayer for a pension.
If someone else in the same position geared up say, 80% then a 20% fall would WIPE OUT THEIR ENTIRE SUPER - and they would have to become a burden on the taxpayer.
The trouble is, if they gamble and win, they keep it all almost tax-free. If they gamble and lose, the taxpayer will provide for them. This would encourage risky behavior - I can already hear the drool running down the mouths of property investors who want to put everything they have (even their retirement money) down into 1 asset class as they think it's a sure thing.
It's totally unfair, I expect taxes will already have to be raised significantly to support the demographic bulge above me, I don't want it to be any higher, thanks!
-To allow people to have better retirements
-To reduce taxpayer burden of an aging population
My parents have a non-geared SMSF that has a few owned outright IPs and shares, with at most 50k per share. If the share market tanks, and house prices halve, maybe they won't be able to travel as much, but they certainly won't be having to ask the taxpayer for a pension.
If someone else in the same position geared up say, 80% then a 20% fall would WIPE OUT THEIR ENTIRE SUPER - and they would have to become a burden on the taxpayer.
The trouble is, if they gamble and win, they keep it all almost tax-free. If they gamble and lose, the taxpayer will provide for them. This would encourage risky behavior - I can already hear the drool running down the mouths of property investors who want to put everything they have (even their retirement money) down into 1 asset class as they think it's a sure thing.
It's totally unfair, I expect taxes will already have to be raised significantly to support the demographic bulge above me, I don't want it to be any higher, thanks!
Actually, I think that tax rates are going to be cut; the demographic bulge above you are in the main, supporting themselves, and most likely, your parents will probably leave you with a nice little inheritance due to their hard work.
Although I do agree that there is a risk of some funds overexposing themselves to one type of investment. But that is more likely to happen when they cant take out a loan, as is the case now.
Although I do agree that there is a risk of some funds overexposing themselves to one type of investment. But that is more likely to happen when they cant take out a loan, as is the case now.
An interesting psychological point, here. Do people push for riskier options when they CAN'T gear (because they need higher ungeared returns), or does it naturally become riskier when they CAN gear (in which case even a 5% return has a lot more kick)?
One wonders whether limiting or allowing gearing really has any actual effect. Many of the investors in private equity and hedge funds, for example, have been pension funds who can't gear. However, there are plenty of vehicles that allow you to get the effects of gearing. One wonders, if pension funds had been allowed to take on more risky by gearing, whether they would have been forced to chase, instead, inherently riskier asset classes such as subprime-backed CDOs.
As a bit of a primer, from 2001 onwards because interest rates were so low, pension funds found their returns (from, say, buying govt bonds) were low as well. Because they couldn't borrow, they went for 'higher return' (but higher risk) investments such as subprime backed securities. Now, if instead they had been able to borrow precisely the same cheap money that they could only lend it out so cheaply) and bought shares (as they usually do anyway), we may not have had some of the excesses we did.
After all, part of the reason why Wall St created those CDOs was because the demand was there. If the demand by pension funds had been alleviated by allowing them to borrow and get the returns they needed to fund pensions, arguably they wouldn't have needed to throw so much money at Wall St.
Alex
One wonders whether limiting or allowing gearing really has any actual effect. Many of the investors in private equity and hedge funds, for example, have been pension funds who can't gear. However, there are plenty of vehicles that allow you to get the effects of gearing. One wonders, if pension funds had been allowed to take on more risky by gearing, whether they would have been forced to chase, instead, inherently riskier asset classes such as subprime-backed CDOs.
As a bit of a primer, from 2001 onwards because interest rates were so low, pension funds found their returns (from, say, buying govt bonds) were low as well. Because they couldn't borrow, they went for 'higher return' (but higher risk) investments such as subprime backed securities. Now, if instead they had been able to borrow precisely the same cheap money that they could only lend it out so cheaply) and bought shares (as they usually do anyway), we may not have had some of the excesses we did.
After all, part of the reason why Wall St created those CDOs was because the demand was there. If the demand by pension funds had been alleviated by allowing them to borrow and get the returns they needed to fund pensions, arguably they wouldn't have needed to throw so much money at Wall St.
Alex
Well, you can think that, but if you look at the figures and the government's projections you'll find that it's not true.
Some of the boomers are really set, but many have only a few years wages in their super. You probably need close to a million dollars and a PPOR owned outright to not be a burden on the taxpayer.
Much of the wealth that the boomer generation is not wealth that they saved or produced, but rather inflated asset prices which are a claim on future generations incomes.
If house prices remain high, their wealth will come from the next generation having to work harder and longer and take out more debt to buy what the boomers bought for far less. Wages are now the lowest percentage of GDP and corporate profits ever - so the money is being siphoned off the young, productive workers - just via higher mortgages and lower wages and higher share dividends rather than being directly lifted from their wages via taxation.
Forget about everything - the most important numbers are the number of workers to non-workers. If there are a large number of non-productive people to support then there will be a burden on the productive.
The only way to prevent that would be to say invest capital to improve future productivity, but Australia's R&D is really low, we've slashed education and most of our foreign borrowing isn't going towards improving capital equipment or fitting out new factories to increase productivity, but rather bidding up asset prices (eg a home provides the same shelter at 400k as it did when it was 200k)
And if property and share prices collapse because of the deflation of the debt bubble, which you expect, do you think the boomers will require more govt help, or less?
Demographically, we look pretty screwed either way. Call it being born in the wrong generation if you want.
Back to the topic, though, SMSFs are currently able to buy warrants and (I believe) options. i.e. they can buy inherently geared investments anyway. How is buying a warrant much different in fact from using a margin loan?
Alex
Demographically, we look pretty screwed either way. Call it being born in the wrong generation if you want.
Back to the topic, though, SMSFs are currently able to buy warrants and (I believe) options. i.e. they can buy inherently geared investments anyway. How is buying a warrant much different in fact from using a margin loan?
Alex
I posted a thread on this recently but it didn't get much interest.
http://www.somersoft.com/forums/showthread.php?t=34963&highlight=warrants
They are essentially the same thing, except a warrant (eg. instalment warrant) is more expensive in terms of borrowing costs. In return for this though, there are no margin calls. A sensational investment vehicle for SMSF, IMO.
GSJ
It would seem impractical to have such a rule as how could it be enforced.
I might be +vely geared at interest rates of 6.55% AND NEGATIVELY GEARED a year later if interest rates move to 7%.
Still tax laws don't need to make sense, just raise money
The highest super tax rate is 15% and for some it is 0% so negative gearing is pretty irrelevant IMO.
At the moment boomers are still working and in heavy asset accumulation phase. In 20 years we'll have a smaller number of workers + boomers selling assets. I expect that assets priced in wage-years of working people will be peaking right about now....
If I was running the country I'd be trying to do all I can to get investment money flowing into things to increase future productivity and cash flows into the country like infrastructure, education, R&D etc. Without super our share market would probably be even more foreign owned than it is. But taking out foreign debt to buy non-productive assets at home like speculating on real estate (meaning we have many years of interest payment outflows to other countries) is just about the worst thing we could possibly do right now.
Also interesting that the countries with housing bubbles are the ones that have baby boomers retiring (US, UK, AU, NZ but with the exception of Ireland which also had a boom but didn't participate on the allies side in WW2)
At the moment boomers are still working and in heavy asset accumulation phase. In 20 years we'll have a smaller number of workers + boomers selling assets. I expect that assets priced in wage-years of working people will be peaking right about now....
If I was running the country I'd be trying to do all I can to get investment money flowing into things to increase future productivity and cash flows into the country like infrastructure, education, R&D etc. Without super our share market would probably be even more foreign owned than it is. But taking out foreign debt to buy non-productive assets at home like speculating on real estate (meaning we have many years of interest payment outflows to other countries) is just about the worst thing we could possibly do right now.
Also interesting that the countries with housing bubbles are the ones that have baby boomers retiring (US, UK, AU, NZ but with the exception of Ireland which also had a boom but didn't participate on the allies side in WW2)
Companies that are invested in via the SMSF also are geared (to different degrees). So gearing exists everywhere in a portfolio just at different layers.
I think the risk is allowing gearing and residential property speculation. For example imagine a 55 year old who runs a SMSF and is a bit short for his / her retirement - the temptation will be to gear up enormously and punt everything they have on residential property because they 'believe' it is no risk (not sure where they got that idea from?? )
Putting the individual aside, at the macro level (the real economy) \it won't help deliver those gains in productivity we need through genuine new investment. That is the worry for the rest of us.
I think the risk is allowing gearing and residential property speculation. For example imagine a 55 year old who runs a SMSF and is a bit short for his / her retirement - the temptation will be to gear up enormously and punt everything they have on residential property because they 'believe' it is no risk (not sure where they got that idea from??
)Putting the individual aside, at the macro level (the real economy) \it won't help deliver those gains in productivity we need through genuine new investment. That is the worry for the rest of us.
Green light from SMSF community
This is a really interesting development, and eagerly awaited by the focus groups run by CompareSMSF.
Check out the response to date in the poll on this subject at http://www.comparesmsf.com.au/index.php?option=com_content&task=view&id=32&Itemid=86
This is a really interesting development, and eagerly awaited by the focus groups run by CompareSMSF.
Check out the response to date in the poll on this subject at http://www.comparesmsf.com.au/index.php?option=com_content&task=view&id=32&Itemid=86
The ATO have issued the following SMSF newsletter on Tuesday concerning investment via instalment warrants.
The last paragraph would suggest the bill has not yet been made law.
Our focus groups from the last week certainty indicates a strong demand from SMSF members to use the proposed borrowing arrangement to invest in direct property.
The last paragraph would suggest the bill has not yet been made law.
Our focus groups from the last week certainty indicates a strong demand from SMSF members to use the proposed borrowing arrangement to invest in direct property.
