This article by Paul Howes originally appeared in the Financial Review on the 7th of January 2014
Acronyms like CDSs, CDOs and MBSs once held little meaning for most Americans. During the national global financial crisis postmortem, of course, they suddenly took on a frightening new presence.
Lately, I’ve started fearing Australians may one day feel similarly about self-managed super funds.
While it would be alarmist to draw a direct comparison at this stage, nevertheless deeply worrying parallels are starting to mount.
The tale of the GFC started with a speculative, debt-fuelled housing bubble. That is precisely what SMSFs risk creating at the moment.
Of all the mistakes that John Howard and Peter Costello made when tinkering with our national retirement savings system, allowing individuals managing their own superannuation to incur investment property debt may turn out to be the most boneheaded of all.
Due to their changes, SMSF owners can borrow to purchase investment properties and avoid capital gains tax once they reach 65. Business owners can transfer their commercial properties into their SMSF without penalty. This dramatic tilting of the field towards unproductive, speculative investment has had a dramatic and predictable result. Already, $75 billion worth of property is held in SMSFs and analysts expect this to boom in the next few years.
The number of SMSFs with borrowing has tripled over the past four years. The average loan size is now $357,000 and a new report from the Tax Office shows as of June last year, SMSFs held some $6.3 billion in borrowing. There should be no surprises in any of this. It is just the market operating rationally.
Yet it means the housing boom, driving a widening wedge between the haves and have-nots in our major cities, is being fuelled in no small part by SMSFs.
A DISTURBING TREND
For the self-interested voices who cry there is nothing unstable about investing in Australian housing, consider this: recent analysis from UBS found that 81 per cent of all landlords are mortgaged, meaning they are investing for speculative and tax minimising reasons rather than for the income the assets produce.
When those same parties point out the economic flow-on effects of housing investment, consider this: 95 per cent of negative gearing investment flows into existing houses, rather than into job-creating greenfield construction.
So how is it that this disturbing trend is not being checked but rather encouraged?
Primarily, because the sector is home to the noisiest and most powerful group of rent-seekers in the country.
The Grattan Institute has calculated that various favourable treatment to housing owners amounts to $36 billion a year in lost revenue, with $7 billion going to landlords. These tax gifts distort capital markets, draining precious resources from areas of true job creation that are starved for investment, like small business owners and innovative entrepreneurs.
The housing rent-seekers’ constant squawking, and exploitation of the peculiarly Australian obsession with property, means reform of the sector has become the third rail of Australian politics.
Even Paul Keating, a politician not known for baulking at tough economic reform, was forced to reinstate the negative gearing tax lurk in 1987 after removing it two years prior. Furious and sustained lobbying from the minority stung by the change proved too much to resist. Now the raggedy band of operators who benefit from SMSF proliferation are in on the act too, which only adds to the pressure against reform.
Yet if we continue kicking the can further down this particular road, it is tough to see how economic disaster can be avoided. But not for all individuals, of course.
There are those using their SMSFs to invest in property debt today who will enjoy the swelling of the bubble during their retirement and die before it bursts.
Good luck to them. But the job of government is to prioritise the long-term future of the majority ahead of the self-interested, short-term gains of a minority.
And if this government is serious about reforming the rorts in our super system, the SMSF sector is the place to start.