SMSF loans drive up prices in booming real estate market
Loans to self-managed pension funds for real estate soared 18.5% last year as investors chased away soaring house prices.
Limited-recourse SMSF loans — those used to buy property — rose $12 billion to $65.8 billion.
This rise was about the same as overall household loan growth, as measured by the ABS, of 18.2%.
Exceptionally, loans to homeowners rose only 3.4%, according to the ABS.
Since SMSF loans can only be used for investment properties, strong increases in investor loans were seen in both the SMSF sector and in loans made to investors outside of super.
Independent economist Stephen Anthony, who is also a former chief economist at Industry Super Australia, said the surge in SMSF loans reflected “wealthy individuals wanting to acquire assets and structure them to take advantage of the benefits offered by tax system”.
Along with the jump in SMSF loans, similar levels of growth in residential and commercial property were observed. J
The former jumped 19% and the latter 17%.
The figures show that real estate was the best performing sector for SMSFs, with shares held in the funds increasing in value by 12.6%.
Cash and time deposits in funds actually fell 1.5% to $147.78 billion as low interest rates encouraged SMSF members to shift to growth assets.
Dr Anthony said SMSF’s figures highlight the advantages these investors have over ordinary superannuation funds.
“Remember that other pension investors can’t use debt and that will make a huge difference in terms of returns later on,” he said.
Indeed, members of traditional funds can only contribute in cash from their salaries or savings.
They cannot borrow from these super funds to increase returns like SMSF investors can.
make things worse
The effect of these SMSF borrowings is helping to drive up “a supercharged property market and is only making it worse”, Dr Anthony said.
“That’s especially true because a lot of this borrowing is just driving out existing properties,” he explained.
“It’s just another subsidy for high earners that should be reallocated elsewhere.”
Figures from CoreLogic show house prices across the country rose an average of 22.1% in 2021.
If SMSF investment loans were for the purchase of new properties, they would help address the housing shortage by helping to fund new construction, Dr Anthony said.
The numbers on borrowing to buy property through SMSFs are very compelling for those in a position to use it.
“If you borrow $200,000 in super and deposit 20% [as a deposit] then you have 100 percent of the ownership working for you,” said Stephen Lazar, director of the properT network advisory group.
This means that all capital growth the property experiences goes to the SMSF owner, while the tenant’s rent pays off the loan.
Interest and many costs of holding the property are also deducted from the taxable income generated by the property.
Certain costs, such as depreciation charges, which can be significant on new property, are only deductible from super contributions. It is therefore advisable to obtain detailed advice on the tax position of such investments.
Reduced tax liability
Since super fund income tax is only 15%, tax bills are significantly lower than similar property held outside of a super fund.
Additionally, if the property is sold, capital gains are taxed at just 10%, or zero if the SMSF owner is retired.
Despite the increase in SMSF lending over the past year, “very few banks are lending for this now,” Lazar said.
“As a result, investors are increasingly using intermediary groups to secure funding,” he said.
SMSF money can also now be used to fund new properties that provide accommodation for people with disabilities under the National Disability Insurance Scheme (NDIS), Lazar noted.
Once a property is built and certified suitable for the NDIS, the government pays rent.
“Returns can be as high as 12-18%,” Lazar said.
Such arrangements mean that SMSF investments no longer compete for existing properties on the market against home buyers.
The new daily is owned by Industry Super Holdings