SMSF investors generally are more interested in the future than the past – but sometimes it’s useful to study a little history. Because, as Spanish-born American philosopher George Santayana, observed, those who cannot remember the past are doomed to repeat it.
Superannuation investment is about investment and economics and taxation but it’s also about market behaviour and investors’ psychology and moods – and especially timing. Anyone who loses sight of this in the current markets is not remembering the past in either property or share markets.
It is, of course, easy to be led astray in the current excitement in the markets when everyone is talking about how the rules may allow SMSF members to maximise their extra contributions. The revised rules seem to have made everyone happy, allowing couples to put up to $1 million into super before June 2017 and still giving them either tax-free withdrawals in retirement and/or concessional tax treatment if they have more than $1.6 million balances.
Sound a little familiar? Students of history will recall that it is only just over 10 years since Peter Costello ripped up the old rules on reasonable benefits, made pensions payouts tax-free – and then allowed super fund members to put up to $1 million into their funds.
It all seemed so easy then. With a mining boom, Federal budgets in surplus and the stock market roaring along towards a peak, investors needed no further encouragement. SMSF members sold other assets and even borrowed so they could take advantage of the changes and plunged more than $70 billion into their funds in 2006-07 (rather than the usual $10-20 billion a year).
What could go wrong? Answer: the stock market cycle. The markets waited about 18 months until all those new funds were invested and then in October 2008 began a collapse of more than 50% before bottoming in early 2009. Peter Costello was a popular Treasurer but, in 2006 at least, he was a lousy investment market timer.
Once again, 10 years later in the era of Scott Morrison, perhaps investors should again be watching the markets rather than the superannuation rules. Very low interest rates are enhancing the apparent value of assets – especially residential properties. The home markets – notably in Sydney but also in Melbourne – recently has been in an exuberant mood with people bidding well above reserve prices for properties, spurred on by the cheapest housing finance rates in living memory.
But the underlying conditions in the property market have been flashing danger signs. Rental yields are the lowest for two decades according to CoreLogic. (In share market terms, this translates into very high price/earnings ratios.) Property speculators are betting on interest rates staying very low and on cashed-up Chinese buyers continuing to feed demand for residential property.
There is still some uncertainty about how the proposed new limits on tax-free assets in pension mode could will affect investments – or at least limit their popularity. Then there’s a potential overhang of yet-to-be settled, off-the-plan contracts for apartments. All told that adds up to an unattractive prospect for SMSF investors with large, lumpy residential property holdings in their portfolio.
And now, it seems, some people appear to want those SMSFs, eager for higher returns, to lend money to bail out property financiers. Going back to the 1960s, real estate lending has been a guaranteed path to capital losses for investors greedy for that extra return and oblivious to George Santayana’s advice.
Ah, say the optimists, but these times are different. If so, they should recall another piece of advice loosely attributed to US humourist and homespun philosopher Mark Twain -“History doesn’t repeat itself, but it does rhyme”.
If that isn’t clear enough, Twain had the final word for those investors tempted to chase those extra returns: “There are two times in a man’s life when he should not speculate: when he can’t afford it, and when he can.”
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