David Murray’s Financial System Inquiry sounded the death knell of the massive surge in Australian property prices driven by investment borrowing we have seen over the past couple of years.
Murray’s recommendation 8 reads:
Remove the exception to the general prohibition on direct borrowing for limited recourse borrowing arrangements by superannuation funds.
This is important for housing and house prices because increasingly the larger part of lending growth in Australia has been driven by property investors, as Core Logic’s head of research Cameron Kusher tweeted after the release of the ABS housing figures last month:
What has worried Murray – and the RBA, according to the inquiry – is that:
Although the level of borrowing is currently relatively small, if direct borrowing by funds continues to grow at high rates, it could, over time, pose a risk to the financial system. The RBA states that “The Bank endorses the observation that leverage by superannuation funds may increase vulnerabilities in the financial system and supports the consideration of limiting leverage”. In addition, such direct borrowing could also compromise the retirement incomes of individuals. APRA was of the view that “… the risks associated with direct leverage are incompatible with the objectives of superannuation and cannot adequately be managed within the superannuation prudential framework.”
Don’t panic if you have borrowing in your SMSF though, because Murray suggests grandfathering existing borrowings within funds so there will be no need to liquidate or a wall of selling coming onto the market.
But to the extent that in housing, where it’s the buyer with the biggest leverage (mortgage) who often wins the auction and drives prices higher, this will take more heat out of an already slowing market.