The dangerous SMSF property cocktail

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In rising markets, leveraged investing can be wonderful. But it costs money and increases risk step-for-step with the potentially higher returns, so in falling markets it can be awful. And with tax rates in SMSF's so low anyway, the tax saving during ownership and on resale are nothing like standard negatvie gearing .. but the risk is the same. There's a prevalent notion here that house-investing entails minimal risk. True for 18 years but the mantra that is routinely chanted, then routinely ignored, still applies - "past performance is no guarantee of future performance". Chinese or no Chinese, SMSF's that play with leverage are putting their owners retirement at risk and in my view this loophole that was foolishly opened should be shut now. Leveraged punting is not what SMSF's are for. That this phenomenon is now big enough to help drive the market (and drive youngsters out of it) adds insult to their injury, and adds more risk for the punter. For Australia, SMSF's should be a SOURCE of useful capital, not a destination.

Leveraged punting is what has driven the stock market up so I assume you are arguing that SMSF's should be banned from investing in shares as well.

When Janet Yellen realizes that Bernanke’s fraud has dwarfed Greenspans, the percentage of SMSF choosing property will rise from 10% to at least 30%. Possibly more. That is an extraordinary amount of money headed towards property.

I absolutely agree,

The combination of SMSF and Chinese buying has changed the dynamics of Australia's property market in a way which is likely to introduce significant additional volatility not seen historically.

There is risk there which historical price behavior doesn't reveal.

The lack of action by successive governments is a clear indicator that policy makers have no intention of acting to limit demand from foreign investors or SMSF for existing or new housing stock.

There is no apparent enforcement of the restrictions on foreign investors or temporary residents. No detailed information from the FIRB is available so no one knows if there really is a boom , how big it is and whether people are simply ignoring the rules.

As for the SMSF use of leverage, the Cooper report was very clear in its recommendation.

"Recommendation 8.10 
The 2007 relaxation of the borrowing provisions and the consumer protection measures that 
have recently been announced should be reviewed by government in two years’ time to ensure that borrowing has not become, and does not look like becoming, a significant focus of 
superannuation funds."

Sounds like their concerns were well founded - so where is the review ? Should there be another one now that the % invested in property has increased by almost 100% in 12 months. Does that reflect an increase in leverage or not?

If action in relation to these sources of excess demand is too much to expect, how about at least relaxing the impediments and red tape constricting the supply of new land for development and housing. That would at least limit the tendency of these sources of demand to drive up prices.

That in itself will likely cool the enthusiasm of some of the more excitable members of the 'investing' fraternity.

Unfortuneatly Robert the SMSF statistics dont differentiate between types of property.A closer examination will reveal that many small business owners have premises owned by their superannuation funds and by and large it is the self employed who are most prevalent among the beneficial owners of SMSFs.There is a good chance that Roberts local dentist or veterinary practitioner own their premises in this way as do a wide variety of other business owners..Since commercial rents are higher than residential rents as a proportion of property value this is a lot better than investing in low net rental yielding high rise apartments. Further more periodic announcements about negative gearing dont tell us what proportion is residential property,industrial property,retail shops or mixed use such as a shop with a flat on top but both on the same title . Since tax returns dont differentiate by property class the statistics are meaningless. They are also allways a year behind because of the submission dates of SMSF returns and personal tax returns from which the ATO derives the statistics..The huge beat ups about negative gearing and or super funds buying residential units are meaningless without real statistics.Most people with money are smart enough to realise that apartments bought off the plan even with stamp duty saving are dud investments because of the huge proportion of sale price that goes into marketing them.Net rental yields in high rise apartments turn out to be dismal after rates water levies insurance agents management fees,body corporate charges and maintenance are deucted with heavier maintenance often required between tenants when the managing agent advises repainting and recarpeting are desirable to maintain rent. As the Americans say nobody checks the oil in a rental vehicle and likewise tenants dont take the same care with rental property as do owner occupiers.The bleating of those with gripes about negative gearing and SMSFs have no statistical basis for their complaints.

I saw a Morningstar report recently that indicated that 50 percent of the shares in the four big banks were owned by SMSFs as was 45 percent of Telstra.Maybe Australians are buying back the farm !