An urban myth: the Collins dictionary defines it as “a strange or surprising story that many people believe, but which is not actually true”. An oft-cited example is alligators living in New York City’s sewer system. Closer to home could be the ‘story’ that SMSFs are responsible for Australia’s latest residential housing boom.
Indeed, if the myth is to be believed, SMSFs are not only responsible for pushing housing prices up to levels where many Australians can’t afford to enter the market, but by investing heavily in housing they leave their investment portfolios dangerously exposed to any sudden market downturn. It’s an urban myth where data is deliberately distorted to paint SMSFs in the worst possible light.
So what are the facts? According to ATO statistics at 30 June 2017, SMSFs had $74.8 billion in non-residential domestic property and $31.7 billion in residential property. Those numbers translate into 11.6 per cent and 4.2 per cent of total SMSF assets, respectively, or about $700 billion.
Now, Australia’s total housing stock is worth about $6.4 trillion. This means $31.7 billion equates to about 0.49 per cent of the market, hardly a number that suggests SMSFs have cornered it.
It’s significant, too, that the figures show SMSF members have a greater penchant for non-residential property – which is hardly surprising. SMSFs are commonly used by small business owners and professionals to hold their business premises as a key asset to be used to fund their retirement.
Shrewd SMSF members would have noted listed and unlisted property funds offered total annual returns of 14.7 per cent and 11.2 per cent, respectively, for the five years to 30 June 2017. Although no investment is foolproof, property funds have proved a sound investment in terms of capital growth and income since the 2008 financial meltdown.
For those SMSFs that have opted for residential property, it’s been a sound investment decision. With only 4.2 per cent of total assets invested in residential property, the sector can hardly be accused of being overweight, and as an investment it has clearly enjoyed capital growth. Although the market has been much more subdued in recent months, few analysts are predicting a savage downturn.
It’s not just that SMSFs are supposedly overweight; their other apparent crime has been to use gearing to enter the market. At 30 June 2017, the ATO figures show limited recourse borrowing arrangements (LRBA) stood at 4.1 per cent of all SMSF assets or about $28.7 billion. Again, it’s a modest percentage of the sector’s funds under management, especially considering the split between borrowing for residential property versus non-residential is almost level pegging at 46 per cent and 45 per cent respectively.
What has made LRBAs such a target for critics was the sudden upsurge in demand for this investment instrument about the same time the housing market began to surge in 2013. Yet this sudden growth in LRBAs in 2013 was a furphy. What happened was that at 30 June 2013, the ATO changed its methodology relating to LRBAs, a decision that resulted in this borrowing instrument jumping from $2.695 billion at 31 March 2013 to $8.875 billion at 30 June 2013 in SMSF portfolios – a 229 per cent increase. This relevant fact was conveniently ignored by many to draw an erroneous picture of irresponsible borrowing by SMSFs.
There can be no doubt the housing boom brought property spruikers into the market; booms always attract the unscrupulous. Individuals were being urged to use an SMSF to enter the property market, effectively establishing a single-asset fund. But the regulators quickly got involved and potential SMSF trustees got the message to ignore these siren calls.
But even in those heady times it’s worth remembering that, as a lending prospect, SMSFs have always been assessed conservatively by lenders. Industry analysis suggests loan-to-value ratios (LVR) today average about 50 per cent; they never exceeded 70 per cent. Compare this LVR with the fact investors outside superannuation were getting interest-free loans of up to 100 per cent to enter the market.
Finally, there is another factor that acts as a brake on using LRBAs to buy residential property – it’s called flexibility. Buying a property outside an SMSF is far simpler. There are less costs and paperwork, as well as fewer restrictions on what you can buy, when you can sell it and what you choose to do with it, such as renting and renovations.
Like all good urban myths, the facts never get in the way. But when they are used to undermine the SMSF sector, then it’s time to call a spade a spade, and say there’s simply no evidence to support the argument SMSFs are responsible for the residential housing boom.