Property research house RiskWise is calling on the Council of Financial Regulators to introduce legislation banning borrowing against SMSFs for property despite the regulator indicating recently that they would take no actions due to a shift in dynamics in the housing market.
According to RiskWise CEO Doron Peleg, all of the major banks have stopped loans to SMSFs, and this had flowed on to their subsidiaries, including the AMP. Figures from the Australian Prudential Regulation Authority (APRA) and the ATO shows that there are currently more than 600,000 loans against SMSFs in Australia; managing around $700 billion in assets, with assets growing by 65% by 2017.
“Lending to SMSFs is an accident waiting to happen as people gamble with their retirement funds,” Peleg said.
Although borrowing on super to feed into property is governed by strict guidelines, RiskWise isn’t alone in their push as the ATO has expressed concerns about the risks and the Financial System Inquiry (FSI) is recommending a ban on direct borrowing by SMSFs to prevent unnecessary build-up of risk in the superannuation system. The Labor party has also floated plans to ban borrowing against SMSFs if they win the next election.
Research results from RiskWise has shown that off-the-plan (OTP) properties are very popular with SMSFs, however, many carry a high level of risk largely due to potential oversupply – leading to squashed property values, high vacancy rates and a cooler market. Mr Peleg stated that in many cases marketers generated very large commissions that were factored into the property price, in some cases up to 8 per cent of the property value and that meant there was an increased settlement risk.
In many cases the buyer also had no idea how high the commission was or that the sellers were not independent. Inner-city Brisbane is a case in point where weakness in the market has led to a high level of risk for investors and therefore lower valuations and rising defaults on settlements, as well as huge price reductions and lower rents.