Super property strategy questionable ANNETTE SAMPSON - December 4, 2010

PROPERTY developers and other vested interests are falling over themselves to convince Australia's baby boomers that borrowing through a self-managed super fund is the answer to their retirement savings shortfall. But before signing on any dotted lines, investors should ask one vital question: what will happen if my investment produces a low or negative return?

Despite some of the rosy projections being put forward, investors borrowing through their super funds could find themselves going backwards fast if returns don't come up to scratch.

There's a real possibility some investors will be left poorer in retirement due to the borrowing hard sell, raising the question of whether the government has opened the door to a future financial debacle.....

.... super funds have historically been banned from borrowing except for short-term loans to meet cash-flow requirements. There was good reason for this. As a concessionally taxed investment designed solely to provide retirement incomes, super wasn't seen as the place to take big risks with your money.

But in 2007, the then Howard government amended the rules to ensure self-managed funds could continue to invest in instalment warrants - an investment with internal borrowings that allowed funds to gain leveraged exposure to shares without risking any of the fund's other assets. To everyone's surprise, the new rules didn't just cover instalment warrants - they allowed funds to use similar limited-recourse borrowings for other assets, such as property, as well.

Earlier this year, the government introduced legislation to clarify the rules on borrowing - a measure intended to protect investors but that conversely seems to have encouraged the sales brigade by giving added legitimacy to these arrangements.

Several financial planners that have spoken to the Herald say clients have turned up with leaflets or having seen advertisements wanting to know how to get in on the act.

A typical sales pitch is for someone with $200,000 in super to set up their own self-managed fund and borrow a further $400,000 to buy an investment property.

The appeal is obvious. Having $600,000 working for you is much better than having $200,000 and every Australian knows that bricks and mortar is the ideal investment.

Then there's the added sweetener that while both super and gearing are tax-effective by themselves, this strategy combines the two, making it even more tax-effective - particularly if you can realise the investment after you've started a retirement pension as pension funds don't pay tax on their capital gains or income.

And in the unlikely event that something does go wrong, don't forget this is a limited-recourse loan, so the lender only has rights over the investment you've borrowed to buy - not any other assets in your super fund.

However, modelling carried out by a financial planner with Discovery Financial Management, Lawrence Lam, shows that just like any other geared investment, this strategy carries real risks.

Lam looked at a couple, both 55 and on the 31.5 per cent marginal tax rate. They have $500,000 in cash in their self-managed fund, split evenly between them.

They want to either use the $500,000 to buy a small unit for the fund or borrow another $600,000 to buy a more upmarket apartment for $1.1 million. If they borrow, an interest rate of 7.5 per cent is assumed - a figure Lam says is conservative as limited-recourse loans are generally more expensive than standard mortgages.

Lam assumed the property would earn a positive return but growth would be muted given the uncertain outlook for the housing market. He assumed capital growth of 2 per cent a year with net income of 3 per cent for both options.

In that sort of low-return environment, Lam found the couple would be much worse off if they borrowed - even after all the tax benefits.

If they used their $500,000 to buy a small unit outright, their self-managed fund would be worth $737,000 when they turned 65. But if they borrowed to buy the more expensive unit they'd have about $100,000 less - $638,000 - after funding their interest costs and repaying the loan.

In this case, he says the property would need to grow by 3.825 per cent a year just to break even - more if you incurred higher borrowing costs.

While that may not sound like a high hurdle rate, no return is guaranteed and Lam believes the borrowings add an unnecessary layer of risk to the couple's retirement savings plan.

If the property lost value, the situation would be even worse, he says, with a 40 per cent fall in the value of the investment resulting in a fund worth $498,000 without borrowings but a mere $112,0000 using borrowed funds.

The Self-Managed Super Funds Professionals' Association of Australia has also highlighted a couple of traps in the new legislation of which it believes borrowers may not be aware

The new rules require that the borrowings be used to obtain a ''single acquirable asset'' and there are restrictions on replacing or improving the asset once it has been acquired.

The national technical director for the association, Peter Burgess, says separate borrowing arrangements are needed for shares in different companies or even different classes of shares in one company. He says buying property on separate titles is also not permitted unless a separate borrowing arrangement is put in place for each title.

He says renovations or improvements are not permitted as they may give rise to a different asset to the single acquirable asset that was the subject of the arrangement. If the property is improved, the limited-recourse borrowing arrangement will have to cease and the improved property be transferred to a new borrowing arrangement.

Hippies forced to do the maths
December 4, 2010

In less than 40 years we have travelled from the Age of Aquarius to the Age of the Human Calculator, and many have proven unfit for the journey.

Where once it was a badge of honour to be anti-materialist and innumerate, now the world belongs to those who know the best mobile phone plan and can self-manage their superannuation.

What has happened in the name of expanding individual choice is that the government and employers have shifted a load of financial risk from their shoulders to ours in recent decades. And some of us ageing flower children are wilting under the strain.

A splendid report by the Australia Institute on financial numeracy reveals that only a minority of Australians - one in five - are human calculators, alert to the best deals in electricity, gas, water, and internet and phone plans, and are, in short, entirely rational and scarily competent in matters financial.

The rest of us are overwhelmed, oblivious, erratic or foolishly overconfident in our approach to money - the saving, spending, borrowing and investing of it. Quite a few of us do really dumb things - like have a special savings account for the holiday or the wedding while paying 20 per cent interest on unpaid credit card bills. Even more can't name their electricity provider.

Yet the times are demanding that we all be human calculators. The assumption is we are all capable of managing the new risks that have been foisted upon us. The theory goes that rational adults possess the required information and skills to make the optimal calculations and the decisions that are right for them.

Governments and business put great emphasis on running or subsidising financial literacy programs so they can wipe their hands of responsibility when ordinary citizens make wrong choices, such as invest with the nice folk at Storm Financial. "Human calculator" is just another way of saying "responsible adult", and if you don't pay attention in class, it's your fault.

Just as we arty/literary types once scorned the numerates who signed on to defined-benefit super plans while the rest of us danced barefoot with flowers in our hair, so now do the human calculators tell the rest of us to get our acts together. "It's like cleaning the toilet," they say. "It mightn't be fun but a mature adult has to do it."

In the Age of Aquarius it was enough to be able to balance a cheque book. Mortgage rates were standard. The banks treated everyone with equal disdain. Superannuation was handled by employers for the chosen few and most people expected to live on the age pension in retirement. Modest pay packets were divvied up on a Friday night between bills and cigarette money.

No one had to spend their weekends wrestling with Excel spreadsheets, or poring over pamphlets from rival electricity providers, or grappling with private health insurance packages, or shifting virtual money around in order to qualify as a responsible adult.

Few people worried about which school to send their children to and could they afford the fees. Public education, public health and public provision of utilities meant people had a lot of free time on Sunday to spend with the family. Only a rudimentary knowledge of maths was required to have a decent enough life.

Australia is infinitely richer now - gross domestic product has increased by 40 per cent since 1990, thanks to privatisation, globalisation and labour flexibility.

Few would choose to return to the days when Telstra was a monopoly and took six weeks to connect a phone or repair a fault.

But riches and choice have been bought at the price of more stress, less equality and less security. Instead of relying on the age pension, we can choose a super fund. But there are right and wrong choices. It is no longer enough to be prudent about finances. The spoils go to the savvy, to the human calculators.

But how do we make the right choice when one fund alone offers more than 230 different products, one of them doubtless best-suited to our circumstances, if only we could divine it?

The decline of the book is being attributed to the rise of e-communication but the more likely culprit is the pile of pamphlets from super funds, utilities, and phone companies that is the responsible adult's obligatory bedtime reading. Who has time for Freedom, Jonathan Franzen's new blockbuster, when one is a slave to bargain-hunting for low-price electricity?

Requiring individuals to absorb more of the financial risks that once lay with government would be easier to bear if more people had secure jobs. Just as infants need to feel a secure attachment to their parents in order to feel emboldened later to take risks and roam, so is risk-taking for adults easier if they have a secure income to underpin it. But more Australians are in contract, casual or precarious work, and fewer in full-time jobs that attract paid leave benefits as employers shift more of the risks of the labour market onto workers.

Arty types must find a way to survive and prosper in the Age of the Human Calculator. Either they must hire a human calculator who charges upfront fees to give financial advice and doesn't take commissions; or they must marry one.

But given marriage is so risky these days, it is probably best to pay attention when someone mentions "Transition to Retirement Pension". I'm told all the human calculators are into it.

muhaha wrote:the other problem is that it helps in prevention of any property market correction. Therefore an artificial price for a our property carries on

A super (bad) idea?
December 28, 2011

Industry groups claim that letting first home buyers to dip into their superannuation will boost housing affordability. But who does it really help?

In propertyland, it seems the default solution to housing (un)affordability has become to throw ever greater amounts of money at the problem, especially when it's someone else's money that gets spent.

It should come as no surprise that the loudest calls for more interest rate cuts and taxpayer-funded incentives — boosted first home grants, stamp duty cuts, etc — are coming from special interest groups like the agent-oriented real estate institutes.

These lobbying efforts, which are always framed in the language of ''improving'' affordability, have become more aggressive as Australia's property market has posted one of its weakest performances in years.

Never mind that a sustained decline in property prices probably represents the only way to measurably improve affordability after years of strong price growth in parts of the country.

Never mind that the falling interest rate, cut in a time of global economic uncertainty, doesn't mark a sustainable, long-term improvement in the financial position of would-be buyers.

Never mind that boosting the first home owners grant has a record for inflating prices (and debt) to unhealthy levels.

Never mind that home ownership rates haven't improved despite years of government incentive programs.

These efforts to pump up the market could be simply written off as the normal activities of groups looking out for the best interests of its membership. Fair enough.

But then there's the Real Estate Institute of Australia's growing push to give first home buyers access to their superannuation to fund otherwise unaffordable purchases.

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