The Reserve Bank of Australia is worried about self managed superannuation funds.
Their potential to do some real damage, if not managed carefully, is a theme running through the RBA’s half yearly Financial Stability Review.
What’s worrying the central bank is the combination of low interest rates and recent law changes allowing SMSFs to borrow to invest in property, both residential and commercial, under limited recourse conditions.
Limited recourse loans prevent the lender from making a claim on assets in the super fund other than the one asset bought with the borrowed money.
SMSFs, or “smurfs” as they are sometimes referred to in the finance industry, now hold around $500 billion, or nearly a third, of Australia’s $1.6 trillion of superannuation assets.
They hold about 15 per cent of their assets in property, and that proportion is rising.
Members of these microfunds may be vulnerable if the risk they take on turns out to be greater than they expected, the RBA said.
The risk extends beyond individual investors.
“One risk in property investment by SMSFs is that at least some of it is a new source of demand that could potentially exacerbate property price cycles,” the RBA said in the review.
So soon after the global financial crisis, centred on a financial system meltdown sparked by a collapse in housing prices in the US, it’s understandable that the RBA would be keenly aware of this risk.
It’s not just about property either.
“There is also evidence that SMSFs have been a large part of the recent demand by retail investors for the non-common equity capital being issued by banks as well as hybrid securities more generally,” the RBA said.
“These instruments attract a high yield as they combine features of debt and equity, and are also quite complex products that carry higher risk than more traditional debt securities.”
The RBA said that lending to the SMSFs sector currently posed only small “direct, near-term risks” to the financial system.
And the RBA has made it clear that’s the way it should stay, saying the sector “has a number of aspects that warrant careful observation in the period immediately ahead”.
