Property investing a high risk for superannuation funds

I ’M bringing two of my favourite subjects together — property and superannuation. But only so I can celebrate their divorce.

I ’M bringing two of my favourite subjects together — property and superannuation. But only so I can celebrate their divorce.

When they stand alone, property and super can prosper or fall on their own merits.

But when they are locked together until death or debt do them part, the outcome can be devastating. Their separation is long overdue.

Superannuation and borrowing money to buy property is an unnecessary and overly risky practice put in place by uninspired (lazy) self-managed super fund members who have limited horizons when it comes to investing.

Oh, and, of course, lending to super funds has also been heavily promoted by developers and real estate agents, which helps boost their property sales. Not to mention the bankers who saw yet another way to charge these borrowers extra-high interest rates.

Time and money.

And, let’s not forget the financial advisers charging fees to SMSFs to put these arrangements in place.

So, yeah, it’s a risky investment option dominated by professions and industries not recognised for their ethics.

Unfortunately, the regulators have been missing in action on this problem. Firstly, they had the bad sense to allow this practice to operate and then exhibited worse judgment by not banning it once the problems were recognised.

But lending for property within super funds is being stomped on anyway — by the lenders themselves.

Yep, the banks are doing the right thing — maybe for their own selfish reasons — but in doing so it will be the right thing for borrowers and super fund members.

Phew! Now that takes a bit to get our heads around.

The Commonwealth Bank is the last of the major lenders to dump these property loans, following in the footsteps of Westpac, along with its subsidiaries and brands, St George, Bank of Melbourne, and BankSA.

The other majors had already kept a wide berth.

Geared property investing by SMSFs has long been criticised for adding too much risk to super funds, helping to worsen housing affordability and increasing the risk within the banking and financial system.

The Reserve Bank has warned heavy promotion through brokers and advisers has increased the appetite and ability for property speculation by super funds.

The problem with this property investment is such a large single asset accounts for a huge amount of total assets and comes with a lump of borrowing attached to it — and very little chance of diversification.

The median account balance of a SMSF member is about $640,000. Owning a debt-laden house leaves no safety margin.

The type of properties SMSF are pushed (conned) to buy often come packaged with finance deals to help the fund members overlook the drawbacks and overly optimistic valuations.

There are few, if any, benefits to the SMSF members from these acquisitions but huge benefits to the financial advisers, mortgage brokers, lenders, property developers and real estate agents.

And God forbid, if anyone actually retires and needs to draw an income from these debt-laden super funds.