Blame negative gearing for property bubble, not us: SMSF lobby

Michael Bailey Deputy editor

Blame negative gearing for property bubble, not us: SMSF lobby

Published 26 September 2013 11:28, Updated 26 September 2013 12:03

Self-managed super funds hold just 3.4 per cent of their $495 billion assets in residential property, and are being unfairly blamed for stoking a new bubble, claims the chief lobby group for the sector. Gearing within SMSFs is also not the problem that critics of the sector allege, says the director of technical and professional standards at the SMSF Professionals’ Association of Australia (SPAA), Graeme Colley.“According to Australian Tax Office statistics, geared property in SMSFs makes up less than one half of one per cent (0.4848%) of their total investments,” Colley says.

“It would take a huge shift in investments to influence the real estate market compared with individual investors who use negative gearing to purchase property.”

SMSFs may only hold $17 billion in residential property, but there is concern that growth will continue to accelerate as spruikers take advantage of Howard-era laws which allow SMSFs to borrow to buy investment properties, the capital gains on which become tax free once the superannuant reaches 65 years of age.

SMSFs also hold $58 billion in commercial property, sped along by rules which allow business operators to make one-off transfers of business-related property into their SMSF, up to the value of $500,00, without effecting concessional contribution limits.

The persuasive power of the spruikers is also exaggerated, Colley claims, because ASIC has said that all investments made by an SMSF, including property, requires advice from a licensed financial adviser.

“This requires an examination of whether the investment is appropriate to the circumstances of the fund and its members,” he says, leaving aside the vexed issue of advisers who work as part of a ‘one-stop shop’ with property marketers.

“Individuals do not require advice from a professional adviser to consider their particular personal circumstances before they invest in geared property. This means a higher risk is associated with the investment and the lenders experience a higher rate of default than the strict lending policies that are imposed on an SMSF.”

Speculators, spivs and tax dodgers

The SMSF lobby’s defence comes as UBS Investment Research joined the chorus of worry about the new property price bubble forming in Australia.

In a note to clients on Wednesday entitled “Investment property – speculators, spivs and tax dodgers?”, the firm worried about Australian banks’ relatively large exposure to a price bubble fuelled by investment property.

Mortgages over investment property represent 32 per cent of Australia’s total mortgage pool, compared to 20 per cent of New Zealand mortgages and 12 per cent of UK mortgages – all countries with similar culture, demography and home ownership levels, UBS points out (although there’s no negative gearing in the UK).

AS many as 81 per cent of Australian landlords are leveraged, ATO data indicates, and the run-off in line-of-credit mortgages suggests that the vast majority of Australian landlords are low-to-middle income earners.

“This implies Australia has a much higher proportion of investment properties purchased for expected capital gains (speculation) and tax minimisation (tax dodgers), rather than for rental income as seen in other countries,” UBS says.

The price rally reduced risk around investment property mortgages in the short term, but UBS frets that an unemployment shock will lead negatively-geared landlords to flood the market with houses and apartments for sale.

“We do not believe that there is another country in which the landlord population is as highly leveraged or in the middle-income bracket as Australia,” UBS says.

“In stressed scenarios, Australia’s large exposure to leveraged landlords could lead to a significantly more volatile economic cycle than current stress tests imply. We do not believe that these implications have been fully considered by the banks, regulators or market participants.”