Reserve Bank warns against self-managed super funds investing in Australia's property market

Updated

The Reserve Bank has delivered a clear warning about the risk of self-managed superannuation funds pushing up Australian property prices.

In its latest Financial Stability Review, the RBA says changes to legislation in recent years have allowed SMSFs to borrow money to invest in property.

"Since then, property holdings by SMSFs have increased and this type of investment strategy is being heavily promoted," the review said.

"The sector therefore represents a vehicle for potentially speculative demand for property that did not exist in the past."

The RBA says the trend could inflate property prices.

"One risk of the increase 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," it said.

The warning comes a week after RBA assistant governor Malcolm Edey cautioned against "unrealistic alarmism" about a possible property bubble in Australia.

The central bank had earlier released a warning to banks about prudent lending standards amid record low interest rates.

In recent weeks, the Australian Prudential Regulation Authority and the International Monetary Fund have also raised concerns about the risks of rising asset prices and loose lending practices.

NSW leads in amount of SMSF property investment

The RBA says there has been a particularly strong increase in SMSF property investment in New South Wales.

"Investor housing loan approvals now account for around 40 per cent of the value of loan approvals in the state, a share last recorded in 2004, although some of this no doubt reflects a decline in first home buyer activity," it said.

However, the RBA says the near-term risks from banks lending to SMSFs remain relatively small.

"Despite overall lending to SMSFs having grown strongly for several years, it still accounts for a small share of overall bank lending," it said.

SMSFs hold about $500 billion in assets, or roughly a third of the $1.2 trillion of wealth held Australia's superannuation industry.

The review says direct property investment accounts for around 15 per cent of SMSF assets.

About 77 per cent of those holdings are in commercial property, due to a number of incentives for small businesses to invest in property through SMSFs.

Report seen as a sign RBA not looking to introduce regulation

Over the past year, regulators overseas have moved to introduce restrictions on risky lending.

The Reserve Bank of New Zealand plans to impose strict limits on low-deposit home loans to take some heat out of rising home prices.

From next month, the Reserve Bank of New Zealand will limit the number of loans worth more than 80 per cent of a house to just 10 per cent of a banks' lending portfolio.

But Macquarie Bank senior economist Brian Redican says there is no sign in the RBA's review that it wants to impose the same restrictions in Australia.

"The RBA takes a very benign view of the overall financial system, and they note that loan quality hasn't deteriorated over the past couple of years," he said.

"What it has has said here today suggests that those macro-prudential regulations are not a risk in Australia over the next 12 to 18 months."

Topics: business-economics-and-finance, consumer-finance, economic-trends, industry, superannuation, australia

First posted