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Speaking to Broker Daily, brokers said they expected the ban to redirect rather than cease long-term investment activity, but warned the change could have an adverse impact on housing supply and alter the profile of who can invest.
From 10 August, SMSFs can no longer use new limited recourse borrowing arrangements (LRBAs) to acquire residential property, following the passage of the federal government’s housing tax changes.
The changes do not prevent SMSFs from purchasing residential property outright using fund cash, while LRBAs remain available for eligible business real property. Existing residential LRBAs are also unaffected, as are refinances of those arrangements.
SMSFs that had entered into a binding contract to purchase a property before 10 August are also covered by transitional arrangements, even where settlement or loan execution takes place after the cut-off.
The rush to beat the ban
The announcement precipitated a flurry of SMSF borrowing activity as clients sought to complete purchases before the deadline, which was set 45 days after the bill received royal assent.
At the time, brokers told Broker Daily they had seen a spike in interest and lodgements, including from clients yet to establish an SMSF before the ban was announced.
“From a broker’s perspective, the 45-day transition period created a real sense of urgency,” Blank Financial CEO Bernard Desmond said.
“We saw investors who were already considering purchasing residential property through their SMSF accelerate their conversations with brokers, accountants and advisers to understand whether they could realistically complete the required steps before the deadline.”
Lenders also reported an increase in applications from the point that the ban was announced.
Where does investor activity go now?
With the residential LRBA pathway now closed, brokers expect investors to reassess where they direct their capital, with some likely to look beyond residential property or potentially SMSFs altogether.
Desmond said the change would ultimately come down to “choice”, with some clients expected to redirect their super into other asset classes or consider property strategies outside super.
“Removing that option means some clients will simply redirect their super into other asset classes, while others may look at different property investment strategies outside of super,” he said.
Chris Dodson, director and principal of Mortgages Plus, said commercial property through an SMSF remained an option and could attract greater interest following the changes, but urged caution.
“Commercial property via SMSF is still on the table, which is where we expect more interest to land, though we’d urge caution around anyone spruiking it,” he told Broker Daily.
“Sudden regulatory change like this is where mistakes happen. These decisions belong in a long-term financial plan, not a rushed reaction.”
Xavier Quenon, founder of Gold Coast-based Go Mortgage, said commercial property was not necessarily a straightforward replacement for residential investment.
“You can say, ‘Just do commercial instead of residential’, but it’s a very different risk profile, and not every mum-and-dad investor who can invest in residential property safely through their super can do it safely through commercial property,” he said.
Non-bank lender Bluestone’s head of non-standard lending Aaron Taylor also said he expected some activity to move towards commercial lending, although not on a wholesale basis.
“I don’t think overnight we’re going to see all of the lending push into commercial,” he said.
“There’s potential for some of that to be redirected with the right investors getting the right advice... but not everybody’s going to want to go into that.”
Housing supply concerns
Brokers have also questioned what the changes could mean for housing supply, particularly given the role SMSF investors can play in supporting new developments.
Desmond said he did not expect the ban alone to have a dramatic impact on property prices, given the relatively small share of residential lending represented by SMSF borrowing.
However, he questioned whether removing another source of investment capital was helpful while Australia was trying to increase housing supply.
“I do question whether reducing another source of investment capital is helpful at a time when Australia is desperately trying to increase housing supply,” he said.
“In particular, SMSF investors can form part of the presale demand that helps new developments get off the ground.”
The Housing Industry Association has separately warned the changes could reduce detached-home commencements by between 3.5 per cent and 5 per cent annually while estimating around 2,500 new-home contracts already signed could be cancelled as buyers and developers fail to complete the necessary administrative steps before the deadline.
Similarly, the Australian Finance Industry Association (AFIA) said that the affected market is significantly larger than the government’s working assumption of around 4,000 new LRBAs a year.
Quenon added that he thought the ban could ultimately reduce investment in new housing.
“Unfortunately, it’s another measure that will ultimately reduce the supply of housing,” he said.
“It’s trying to make houses cheaper for the young ones when we tax them more and stop investors from building a rental pool.”
[Related: SMSF borrowing ban puts thousands of building contracts at risk]
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