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Reserve Bank reopens debate on SMSF borrowing

The Reserve Bank has reiterated to the government 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 including demand and supply drivers in the housing market, the impact of current 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, and stated 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 RBA stated.

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“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 RBA first disclosed its fears about SMSF borrowing in late 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 sector therefore represents a vehicle for potentially speculative demand for property that did not exist in the past,” it said at the time.

“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.”

Reserve Bank reopens debate on SMSF borrowing
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>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 including demand and supply drivers in the housing market, the impact of current 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, and stated 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 RBA 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 RBA first disclosed its fears about SMSF borrowing in late 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 sector therefore represents a vehicle for potentially speculative demand for property that did not exist in the past,” it said at the time.

“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.”

Reserve Bank reopens debate on SMSF borrowing
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