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The Reserve Bank has reiterated that it supports limiting the scope for leverage in superannuation funds since it may increase “vulnerabilities” in the financial system.
In a submission to the federal government’s Inquiry into Home Ownership, the RBA noted a significant change to the housing market in the past decade is that superannuation funds are now able to borrow to invest.
The inquiry will report on issues such as demand and supply drivers in the housing market; the impact of tax policy at all levels; and opportunities for reform.
The central bank has previously observed that leverage in superannuation funds may increase vulnerabilities in the financial system, stating in its submission that it continues to support limiting its scope.
“Some SMSFs have taken advantage of [leveraging capabilities] by adding geared property into the fund portfolio, both residential and, in particular, commercial property,” the Reserve Bank stated.
“At the margin, this has increased the population of potential investors. Although the share of the housing stock owned by these funds is small, it has grown quickly.”
The central bank first disclosed its fears about SMSF borrowing late in 2013, saying that gearing into SMSFs could potentially put household finances at risk.
“Property holdings by SMSFs have increased and this type of investment strategy is being heavily promoted,” the RBA said at the time. “The sector therefore represents a vehicle for potentially speculative demand for property that did not exist in the past.
“There are some signs that households are taking on more risk in their investment decisions, and the potential for a further increase in property gearing in SMSFs is a development that will be monitored closely by authorities for its implications both for risks to financial stability and consumer protection.”
[Related: How SMSFs are influencing property investment]
- <p>After a week or so in discussion about "negative gearing",<br>there starts right reports focusing on whether or not "wage" should<br>be allowed to have deduction (in terms of interest paid to banks) from the<br>taxable income.</p><p>So, the context is "negative gearing", despite knowing the existence<br>of the close related twin called "positive gearing".</p><p>This pair of twins, negative and positive gearing, both has one common<br>trait, offsetting of wage with interest paid to raise capital to invest on<br>property.</p><p>Yes, deduction of wage with interest is the main focus. It is because<br>that, for a company or registered business, deduction is made out of the<br>revenue not the wage.</p><p>That is to say that "removing negative gearing" means removing<br>the individuals, who are wage or salary earners (or self-employed as handyman<br>or contractor), from the property market.</p><p>Therefore, it means to say individuals are not encouraged to raise<br>capital to do property investments.</p><p>Then, what are the implications.</p><p>At least there is one possibility. With the removal of individuals from<br>the property market, will the property be healthier or not? Would that means,<br>also, that big developers have better control of property supply. Would small<br>developers get no chance of survival? Would rent go up?</p><p>Extending the idea, will individual wage earners be allowed to have<br>deduction from their wage the cost of raising capital by mortgaging their stock<br>shares to invest on stock shares in the future? That means leverage. That can<br>mean margin loan as well.</p><p>Therefore, if mortgaging property to invest on property is not<br>encouraged by tax deduction while mortgaging shares to invest on shares is<br>encouraged by tax deduction, then it is an exception. And this exception, this<br>time, is on property investment by individuals (with the term “negative<br>gearingâ€). Will there be “exceptions†later?</p><p>Are “exceptions†panacea? Of course they are not because at most they<br>kill symptoms only.</p><p>Recently, China uses administrative strategies to rescue the Shanghai<br>stock market successfully. Is this a good way in the long term? Or, just kill<br>the symptoms.</p><p>Would “exceptions†make economy more planned?</p><p>Greeks are having gigantic troubles in debt because they cannot cope<br>with the free market economy. They are still in love with the planned<br>economy.</p><p>Free market economy is for smart people while planned economy is for not<br>so smart people.</p><p>Exception or no exception?</p>0
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