Small wonder there is a boom in property
Between them, the Reserve Bank and federal Treasury have combined to create an unavoidable residential property price boom.
The Treasury's contribution was to convince the previous Labor government to drastically reduce the superannuation tax concessions, especially for higher income earners, while still providing open-ended deductions for negative gearing. The Bank's contribution has, of course, been to reduce interest rates to historically low levels, even though the economy has been performing well.
The lower interest rates have boosted both owner-occupier and investment purchases at the same time as Treasury policies have been increasing investment demand. Instead of admitting its part in the boom, the Reserve Bank has pointed the finger at self-managed super fund purchases funded by borrowing as a contributing factor.
This is a prime example of not letting the facts get in the way of presenting one's case in order to shift blame.
The residential property market is huge, around $4.9 trillion in total. SMSF ownership of residential property is only $20 billion, a mere 4 per cent of SMSF assets.
How the Reserve Bank can even suggest SMSFs owning less than 1 per cent of residential property in Australia are anything but insignificantly minute participants, or could actually be causing movement in the market, defies explanation.
Further, compared with the lax supervision and generous tax assistance for negative gearing, owning a geared residential property in an SMSF has few attractions. This is why that at April 2013 only $2.4 billion of the total SMSF investment of $20 billion was geared.
Consider the facts. Unlike negative-gearing laws, there are strict SMSF purchasing and borrowing controls. The regulations prohibit purchases from related parties and subsequent rental to or use of the property by related parties or personally. The lenders are also forced to scrutinise the valuation of the property and its investment merits because it has to be a limited recourse loan funded solely by the project.
This is why financial institutions require deposits of at least 20 per cent and verification of the contribution record of fund members. By contrast, past property booms, notably the Gold Coast apartments in the 1980s, were fuelled by full recourse loans and in many cases secured by the purchaser's home.
Valuations were not relevant for numerous transactions then because of the collateral provided and the cash-flow contributions from the accompanying gearing transactions. This time around, negative gearing tax deductions are still fully available for borrowing on an open-ended basis.
Combined with low borrowing costs and easy access to credit, negative gearing will again drive the current boom, just as it did before. SMSF involvement will at most be minor, especially because limited recourse lenders have to focus on valuations and investment merits when approving loans.