Australians’ long-lasting love affair with property is a major factor in our increased wealth but there are growing concerns that heavy dependence on a single investment strategy may not be healthy.
Like every asset class, property moves in cycles and the cracks could be starting to appear in a market that has made Australians the richest people in the world.
According to the latest global wealth report from investment bank Credit Suisse, Australia has the third highest level of average wealth in the world.i
But it also revealed that 60 per cent of our wealth is tied up in property. That’s not a problem when property values are soaring, but what happens if and when the music stops?
A ‘real’ asset
As well as the obsession to own our own home Australians are drawn to real estate as an investment, attracted by the tangible nature of bricks and mortar, the potential for income and some handy tax benefits. There is something about being able to drive past your investment that makes it feel like a safe place to park your money.
In recent years the investment choice has been vindicated. Despite slowing growth in recent months, combined capital city home values rose for four years up to December 2015, increasing by around 30 per cent, with Sydney and Melbourne the outstanding drivers.ii
With domestic and global interest rates at record lows the search for yield has been widespread. Local and international investors have flocked to buy Australian property which is viewed as less volatile than shares and higher growth than cash and bonds.
While the official cash rate has stayed around 2 per cent, capital city rental returns for all rental properties have been about 3.5 per cent.iii
Mind the cycle
But property hasn’t always been the best place to be. Prior to the latest growth phase property values across the country fell for 18 months.iv Price growth has slowed, though slowing turnover and transaction numbers are expected to head this off.
For investors who have only residential property in their portfolio, warning signals about future house prices and rental returns are a timely reminder of the importance of diversification.
Long term data shows that in any given year one asset class may do better than others, but rarely does one asset class take out top honours for more than a year or two running. Only by diversifying your investments across and within asset classes can you be confident of capturing the best returns on offer year in and year out and avoid being wiped out by a single bad investment.
A major downside of real property is that a large portion of your capital is tied up in a single asset that can be difficult to sell in a downturn. What’s more, you can’t just sell the bathroom to free up cash when you need it. If it is rented there will be tenants to find and repairs and maintenance to keep up-to-date.
Real property isn’t the only option for property lovers. Listed Real Estate Investment Trusts (REITs), which can be bought and sold on the Australian Securities Exchange (ASX), offer a more flexible alternative as well as diversification.
Professionals invest in property across different sectors of the market including residential, retail, industrial and commercial as well as different domestic and international locations. If a downturn is occurring in one sector in one part of the world there is a chance that somewhere else is performing well.
Property investment should always be considered within the broader context of your wealth creation plan.
If you would like to discuss your property investment options as part of a diversified portfolio give us a call.
ii http://www.abs.gov.au/AUSSTATS/abs@.nsf/DetailsPage/6416.0Dec%202015?OpenDocument http://www.corelogic.com.au/research/monthly-indices.html
iv http://www.corelogic.com.au/resources/pdf/ reports/qtrly-economic-property-review–nov2014. pdf p.3