Am I putting property on a pedestal?

“What’s the best thing to invest in?” “Well, it depends…”

That’s not the cop-out answer it first appears to be. It really does depend. Helping our clients develop their investment strategy, choose investments and manage them is a key part of what we do.

Of course, there are lots of investment options and there’s no absolute right or wrong. There are good investments, there are better ones and there are worse ones. You could invest in shares, or bonds, or options, or bitcoin or a dozen other things.

 

I’m happy to put my bias on the table.
I think property – specifically residential property
should be the foundation of your investment portfolio.

 

Why? Well, let me give you a few reasons.

One. Most people understand property to a reasonable level. It’s the one investment class that most people will get involved in at some stage over the course of their life. Those of us fortunate enough to buy our own home or buy an investment property will have at least a basic understanding of finance, capital growth, perhaps leverage and the buying and selling process.

Two. It’s relatively easy to understand the fundamentals that drive the growth of property values. Population growth, demand for housing, proximity to services and amenities such as transport, schools, shopping centres, cafes and entertainment.

Three. Perhaps most importantly, residential property is the best performing asset class over the last 10 years.* In fact, bricks and mortar has produced an average annual compound return of 8.1% That’s taking into account the total returns from the assets including increases in value and income such as rent and dividends for shares. And that’s across all the major capital cities in Australia. Most likely, if your property is in Melbourne or Sydney, you’ve done better than that.

What’s surprising is that Australian shares produced an average annual compound return of 4.3% over the 10 years. Global shares did slightly better at 5.5% and Australian bonds returned 6.1%.

Yes, I know this is not the whole story… We have to take tax into account and how much actually ends up in the owner’s or investor’s pocket will depend on their marginal tax rate, whether the assets are owned inside or outside superannuation or other structures, income distributions etc.

BUT, this is a big tick for making sure that you get into property and make it a key part of your investment portfolio.

Four. Banks like property. There is no other asset class that is as well regarded by the banking sector when it comes to leveraging for finance. That means you can utilise equity to a greater extent to secure other investments or raise money for whatever else you happen to be doing.

So, when people ask me what’s the best thing to invest in, my go-to answer is still property.

*The reference to property being the best performing asset class is based on the 2017 Russell Investments/ASX Long Term Investing Report.

Popping the housing bubbles bubble

Apparently we’re in “the grip of a housing bubble”. If your bits have been feeling a little errr, constricted, this could be the explanation.

What is a housing bubble anyway? In high school they told me it’s always good to start with a definition, so here’s mine:

Housing Bubble (def): Device for driving traffic to media websites, catch-cry of the week for economists and property commentators, mythical object only seen by the eyes of a blind virgin on a full moon.

I’ve been doing quite a bit of reading and here’s what I’ve learned about the bubble – not much. Economists and experts can’t agree on how to define a housing bubble, let alone whether or not we’re in the grip of one. Nor can they agree on what the implications of the bubble might be for homebuyers, first homebuyers, investors, downsizers, developers, the banks and government revenue.

So, what is this thing called a housing bubble? The best definition I can find is that its simply when property prices reach a level that can no longer be sustained and they drop to a lower benchmark. Of course there is no agreement on what that lower benchmark should or will be and whether that drop will have any flow-on effect or even go on to become a fully-fledged recession. This rise, a slight drop and then rise again is what property prices have been doing at pretty regular intervals for the past hundred years or so. I’d say that’s a market correction, rather than a bubble and its influenced by factors other than price – like population growth, household income, savings levels, tax policy, buying psychology and many others.

If you want to talk about a bubble, you could perhaps point to mining towns where property prices were pushed to ridiculous levels and then “popped” when the mining companies pulled up stumps and left town. If you’re an investor, there’s an important lesson there about “hotspots” vs. good investing fundamentals, but that’s a discussion for another time.

Interestingly, the chief executives of National Australia Bank, Westpac and Commonwealth bank, testifying at a parliamentary inquiry into banking this week, said that while they have some concerns about aspects of the housing market, they don’t believe prices are over inflated. Read, there is no bubble. Rather they claim, the higher prices are supported by the fundamentals.

Bubble or no bubble, about to pop or not, the fundamentals should continue to be the major drivers in your purchasing and investing decision-making.

Life is for living. All the best on your investing journey!