28 January 2014
Making sense of SMSF borrowing
If there is a single statistic that has provoked debate from the ATO annual SMSF statistical release in December, it is probably SMSF borrowings, and any link with increased residential real estate activity and prices.
When you have identities such as Paul Howes (National Secretary of the AWU and a Trustee Director of AustralianSuper) writing in the AFR on the topic, you know it has filtered into the financial mainstream.
The debate revolves around how quickly SMSF borrowing is rising, whether this matters in the scheme of things, and its impact on residential property markets, both in terms of price levels and helping to lock out first home buyers. Stories abound in weekend real estate sections of young home buyers being outbid by SMSF investors.
Stories are not data of course. So let’s look at the data. Our view of it says that SMSF borrowing appears to be growing very, very fast – faster than even the critics think.
That said, looking at the data is easier said than done. ATO disclosure of SMSF borrowing data is still evolving. In fact the December 2013 report (for the June 2012 year) was the first year in which a specific line was disclosed for SMSF borrowings ($6.3bn).
A separate figure is disclosed for limited resource borrowing arrangements (LRBAs), which appears to be a sub-set of total borrowings at $2.3bn. In prior years, this was described as “Derivatives and instalment warrants”. An LRBA is essentially a type of warrant arrangement.
There are three important limitations to note:
- We don’t have a ATO total borrowing number for prior years
- Total borrowing understate the true borrowing figure, as some SMSFs borrow by investing into a geared unit trust (this may not show up as a borrowing of the SMSF)
- The data is now out of date by 18 months
Much of the analysis on the issue to date has actually relies on commentary provided by the ATO rather than the numbers - here are the main numbers published by the ATO:
|SMSFs with borrowings
It should be pointed out that there is a confusing reference by the ATO to increased borrowings over the five years to 2012; but the ATO then refers to 2008 and 2012 data points, reflected in the table above, which is of course a 4 year period.
Assuming the ATO actually means the 2007-8 year as the base, and given we know the number of SMSFs in existance, we can backsolve:
Source: Tria analysis other than *ATO
|Total number of SMSFs*
|Implied SMSFs with borrowings
|Growth in number of SMSFs with borrowings
|Growth in SMSF dollar borrowings
Now that is pretty interesting.
Most of the analysis to date has looked at the increase in borrowing incidence from 1.1% to 3.7%, and concluded that SMSF borrowing has roughly tripled over the period. This is wrong. The numbers are far higher:
- The numbers of SMSFs with borrowing has more than quadrupled (a growth rate of 44% pa)
- The dollar amount of SMSF borrowings has risen by a factor greater than 12 (a growth rate of 88% pa)
Note that if the period is actually 5 years rather than 4 years, that doesn’t change the view much - the growth rate of the dollar amount of SMSF borrowings comes down to 66% pa, but it is still huge.
An important implication is that with an 18 month lag, these growth rates imply that SMSF borrowings could now easily be over $10bn, especially given that residential real estate markets didn't really get moving until after June 2012.
So we can say with some confidence that SMSF borrowing appears to be growing very quickly. Sustained growth rates of 50-100% pa is a boom in anyone’s language, even with a low base. It also suggests that given the size of the segment, we need better and more timely SMSF data – relying on data 18 months old when events are moving quickly is really not good enough.
As for whether SMSFs are complicit in fueling the residential property boom - that's for another edition.