This blog has talked a lot about government policies that have contributed to Australia’s sky high cost of housing – from supply constraints to the first home buyers grant, negative gearing and implicit and explicit support provided to Australia’s mortgage lenders.
One topic that has yet to be discussed is the Government’s recent changes to superannuation laws enabling leveraged investment (speculation?) in direct residential property by self-managed superannuation funds (SMSFs).
Below are a collection of articles explaining the super changes and highlighting some of the anticipated market impacts.
From the outset I will admit that my knowledge of super law is scant, so I am hoping that readers with a better understanding of the new rules can elaborate further.
I first became aware of the super rule changes back in January when Fairfax ran an article entitled Property’s a super option. Apart from a good dose of spruiking about how you ‘can’t go wrong with property’, the article contained the following tid-bits explaining the changes.
Over the past three years, the regulations governing self-managed super funds have changed significantly, making them cheaper to set up while at the same time relaxing the rules on how they can be used to invest in residential property and even borrow to buy.
As a result, many real estate agents have, over the past six months, noticed a sharp surge in the number of buyers in the market looking for investment properties – usually apartments – to purchase through their super funds…
Before the rules changed, it could cost up to $12,000 to set up the complex financial structure of a self-managed super fund but now it can cost as little as $4000, says Chris Duffield, the head of Dixon Advisory Property, which sets up funds for customers and then either advises them on property to buy, or buys for them.
In addition, it’s now possible for super funds to borrow a large part of the property price, usually up to 70 per cent.
“As a result, particularly over the last six months, we’ve been inundated with inquiries from people looking to use residential property to secure their future in super,” he says…
Benefits of buying property with super include capital gains on assets held for 12 months or more being taxed at just 10 per cent and, during the pension phase, being totally exempt from tax – as is income earned.
Then an article published in the Australian Financial Review (AFR) on 19 May entitled Real estate agents target DIY super, added further insight into the new super rules and their potential impacts on the housing market.
Real estate businesses are partnering with financial planners to target property investors in the $420 billion self-managed superannuation sector to take advantage of new rules that allow schemes to borrow to invest.
Details of the tie-ups have emerged as Tax Office figures show that residential property investments by self-managed schemes surged 32.5% between June 2008 and March 2008…
Property experts say the growing interest among do-it-yourself super funds in residential homes and apartments valued at less than $1 million is helping to stem the fall in house prices.
Real estate agents, who are looking to expand their databases of potential buyers, are recognising that financial planners and tax agents represent a gateway to the largest sector of Australia’s $1.3 trillion super industry.
Partnership deals give advisers access to a new pool of clients who are likely to need help with tax and gearing strategies.
Among the first to announce a partnership is property agency Ray White. Its Sufers Paradise office has teamed up with planning network SMSF Strategies and is conducting information sessions for DIY funds which want to invest in property…
SMSFs have become more active investors in direct property over the past year, attracted by softening house prices, strong rental income and changes in legislation allowing them to borrow to invest in property and shares…
Changes in 2007 to the Superannuation Industry Supervision Act in effect opened the door for super funds to invest in property by allowing them to borrow to invest in direct property or shares, subject to certain strict conditions.
Estate agents argue that one of the main benefits of buying property in a DIY fund is that capital gains tax is much lower and can fall to zero once the owner is in retirement.
“Rental income received by the SMSF is also non-taxable and can go straight off the loan and will not count as a trustee contribution”, said Mr Lee…
Asked whether DIY super funds were having an impact on the stability of the weakening property market, Mr Lee said that “it was certainly a mitigating factor in keeping current property prices stable in the under $1 million segment of the market”.
Certainly property industry representatives are happy with the super changes.
Founder of McGrath Real Estate, John McGrath, labelled the DIY super as the “next big thing” for the property market in a recent AFR article (Sharemarket holds back Sydney prices: McGrath, 2 June 2011).
New laws allowing SMSFs to borrow to invest in property would “put an enormous amount of pressure” on properties priced less than $1 million, in the price range of those that appeal to first home buyers, making them more expensive.
“I think this DIY super phenomenon is the next big thing… The problem of people trying to get their foot in is getting worse, not better – they may as well take the plunge”.
Not surprisingly, Meriton Apartments founder, Harry Triguboff, also supports the new super rules; only he would like them loosened even further. From Open the door to super: Meriton (AFR, 15 April 2011):
Australian’s should be able to use superannuation funds to buy their own homes, billionaire developer Harry Triguboff says. Such a change would give a big lift to property sales.
The founder of Australia’s largest apartment developer, Meriton, has called for the federal government to ease laws limiting the buying and use of residential property, particularly by SMSFs.
“We want to have SMSFs that can buy property, where a person can live in the property they bought with the super fund, or they can rent it out to family… This we cannot do today”…
“I spoke to a few financial planners in the industry and a lot of people are setting-up their SMSFs… From what they tell me, 99.9% do it because they want to invest in property”…
Meriton markets apartments in Sydney, Brisbane and the Gold Coast to SMSFs.
Call me cynical, but from where I am sitting, the super changes look like another government policy aimed at supporting the housing market. As with all demand-side policies, without a corresponding liberalisation of the supply-side of the housing market, this measure (other things equal) is likely to make housing even less affordable, as the extra demand would feed predominantly into higher prices rather than new construction.
Given that housing already comprises the lion’s share of household assets – 62% as at September 2010 (see below chart) – one also has to wonder about the efficacy of a policy that encourages households to concentrate even more of their assets in housing.
And then there is the broader issue of whether superannuation – a policy designed to ensure that households save for their own retirement – should be allowed to borrow to invest, whether in shares or property. Gearing both amplifies an asset’s returns and losses, making superannuation a far riskier proposition.
Finally, if real estate agents are going to jointly market property to SMSFs, isn’t it about time that they are required to be properly licensed by the Australian Securities and Investments Commission (ASIC), and be subject to the same rules and responsibilities as financial planners?
I am interested in reader’s views. Are the new super rules good policy or a retrograde step?
