Limited recourse borrowing arrangements (LRBA) within the superannuation system are still too small to be responsible for driving a property bubble, yet a new report continues to propagate the myth that they are to blame.
“I recently watched another report on the TV claiming that the ability of SMSFs to purchase residential investment property is causing a property bubble in Australia by using LRBAs,” Omniwealth senior financial planner Andrew Zbik said.
“LRBAs have grown substantially since 2007, [when] SMSFs were permitted for the first time to borrow money to buy assets like property and shares.
“Putting this into perspective, the total value of residential mortgage loans in Australia today is approximately $1.63 trillion. As at March 2016, total LRBAs in SMSFs amounted to $19 billion. Thus, assuming most LRBAs are for the purpose of purchasing property, LRBAs within the superannuation system account for 0.12 per cent of all loans.”
Zbik said the current value of the Australian residential property market was around $6.05 trillion compared to the value of residential property within SMSFs at about $24.42 billion as at March 2016.
“When taking the total value of residential property purchased in SMSFs into perspective, this only accounts for 0.40 per cent of the value of all residential properties in Australia,” he noted.
“The relative value of both LRBAs within the superannuation system is relatively small compared to the value of the Australian financial system.”
According to Zbik individuals looking to establish an SMSF in order to purchase a residential investment property should consider a number of key guidelines to determine if such a strategy was appropriate, he said. “The Australian Securities and Investments Commission advises that a minimum of $200,000 is required to establish an SMSF, however, most lenders are now requiring a 10 per cent liquidity buffer of cash and/or shares outside the value of the property,” he said.
“So it really makes sense to have at least $250,000 if you’re considering using your super to purchase a residential investment property.” It was also not an ideal strategy for people who had less than 10 years to work, he said. “A full property cycle in Australia is around 10 years – you need to give time for your property to grow in value,” Zbik said adding another aspect to consider was protecting the fund’s cash flow.
“What happens if one of the members loses their job? Or if you lose a tenant?
“An SMSF should hold a cash buffer that amounts to six months of all property expenses that includes loan repayments and rental costs such as landlord insurance, strata fees and council rates.”