Morgan Stanley Australia chief executive Steve Harker has joined the growing chorus of commentators echoing the belief that self-managed super funds are going berserk borrowing funds to invest in property.
In an interview with the Australian Financial Review (AFR), Mr Harker says low interest rates boost the appeal of real assets – such as property, and the newspaper reports that he is deeply worried that Australia is sowing the seeds of its next financial crisis, by allowing people to borrow money in their SMSFs to buy property. Mr Harker claims $200 billion in superannuation savings could be blown up thanks to unviable property schemes, spruikers and promoters.
But according to the Australian Tax Office's (ATO) SMSF Statistical June 2013 report, SMSFs held just $17.5 billion in residential property. Many SMSFs are setup by small business owners, and the SMSF is used to purchase commercial property, such as the land and property owned by the business. $58.6 billion is invested in non-residential real property, four times more than in residential.
Given Australia's total residential property market is valued at $4.9 trillion, according to RPData's Capital Market report – Spring 2013, SMSF investment in residential property represents just 3% of the total market. Additionally, in August 2013, a presenter at the SMSF Professionals Association of Australia conference estimated that SMSF had borrowings of around $6-$7 billion, hardly the $200 billion Mr Harker cites.
Low mortgage rates of around 5% offered by the likes of the big four banks, ANZ Bank (ASX: ANZ), Commonwealth Bank (ASX: CBA), National Australia Bank (ASX: NAB) and Westpac Banking Corporation (ASX: WBC), may have spurred an increase in investment in property since June 2013. But it appears that based on the data, SMSFs do not have hundreds of billions of dollars at risk in residential property.
Foolish takeaway
What is a concern raised by Mr Harker is that Australians can have a triple play exposure to residential property, through their own home, their SMSF as well as outside their SMSF. If the property market were to crash, that could see many Australians lose their life savings, particularly if they are heavily exposed to residential property. The lesson for investors and SMSF trustees is to consider how diversified their investments are, both inside and outside super as a whole.
