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Recently talk has bubbled to the surface in reference to the ever increasing SMSF cash that is flowing into the property market and the potential inflationary impact on values. This chatter has come about off the back of the RBA issuing a warning against risky borrowing practices including a heavy focus on SMSF’s lending for the first time.
We at Property Planning Australia (PPA) have been providing predictions and commentary on these topics for some time –
1 – Risky property investment strategies within SMSF
2 – SMSF’s driving property values
In mid 2012 PPA’s Director David Johnston predicted SMSF’s would help to underpin residential property values. This was at a time when the property market was flat, rates were significantly higher and the people were predominantly fearful to invest.
Fast forward more than a year onwards and interest rates are significantly lower and even more people own property via the SMSF vehicle.
The Result = The property market is recovering and the RBA is concerned it could be the beginning of a bubble or property boom.
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The word bubble is scary because bubbles pop! Taking a more understated approach it appears that we have begun a property ‘recovery’ and I envisage this could continue until rates are increased. My belief is that low rates are currently the main driver of the resurgence in confidence. The true concern for the RBA is that it’s most powerful lever of adjusting the cash rate can impacts many aspects of the economy simultaneously in a positive and negative direction.
In other words a rate reduction could be positive for keeping the dollar lower which can assist with export markets. Conversely this could potentially overly inflate property prices. You get the picture!
So let’s think outside the square and provide the RBA and other stakeholders a suggestion that could help curtail any proposed property market bubble whilst protecting consumers against risky property investment practices within the SMSF space.
One option could be to adjust legislation and lending policy within SMSF’s. As I wrote some time ago there is a lot of extra money running into the property market that previously would never have ended up there. This may have helped our property market from falling further post GFC. Now might be the time to make a simple change such as only allowing SMSF’s to borrow 50% of the value of the property.
The benefits of borrowing at a high Loan to Value of the property Ratio (LVR) within a SMSF can be limited for various reasons, the most obvious being a lack of negative gearing benefits along with taking on higher risk. Lowering the maximum LVR could also help unwitting investors from making investment mistakes when attempting to jump on the proverbial SMSF property investment band wagon. This could also help to make selling more difficult and therefore less profitable for the spruikers in this space.
This suggestion may be overly simplistic and could rely on an unrealistic necessity for co-operation from lenders. However why not strive for greater simplicity. I will leave any ramblings about the challenge of red tape cutting when trying to implement an idea like this to bureaucrats and others. As Shakespeare said “Simplicity is the ultimate sophistication”.
Regularly investors do not have finance approval in place prior to purchasing. They also are unaware that most lenders require a financial planner to sign off on the loan documents that the strategy is appropriate. PPA can assist you in both these areas whilst helping to ensure that you do not make a mistake with the actual asset you purchase.
For a balanced & considered discussion on investing via SMSF in property click here
Written by David Johnston, founding director of Property Planning Australia (PPA) and co-author of Property For Life – Using Property To Plan Your Financial Future. Property Planning Australia was established in 2004 and is a multi-award winning property, finance and financial planning consultancy that provides its clients with a holistic approach to financial and investment advice.
The PPA team specialise in developing holistic property strategies for first home buyers, investors, upgraders and those transitioning into retirement. To find out how PPA can help you make the right property decision today for your tomorrow, contact us.