Why is property a good asset class to invest in? (Ep.25)

Leaving aside those who invest in vintage cars or antiques, the vast majority of Australian’s will make a choice between investing in propertyshares or a combination of both.  

There’s no doubt that the key to retiring comfortably is to make good investment choices throughout your working life.  

So, what’s inside your investment portfolio? 

In episode 25, we dissect “Why is property a good asset class to invest in”. 

Listen as David Johnston, Cate Bakos and Peter Koulizos take you through why property is perceived as a reliable investment, the pitfalls that you don’t get with shares and the need for diversification 

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Show notes

  • Property is unique! – no two properties that are the same, maybe you can find similar properties in high rises, but each property is different. You have different dwelling types, areas, locations, capital cities, coastal, inland – such variety! 
  • High demand – there are so many different reasons that Australian property has a high level of demand. Everyone needs a roof over their head, did you know that two thirds of the property market is owned by owner occupiers? Home owners will fight tooth and nail to hold on to a property and the priority for most Australian’s is a home for themselves and their family.  
  • Stability – historically, property is one of the most stable asset classes to invest in, because of the high demand.  
  • Emotional drivers – owner occupiers play a big part in underpinning property values. Home buyer’s will pay an emotional premium, because a home is a lifestyle choice. A property with mainstream owner occupier appeal will do well as an investment. Know the demographics of the location – who is the biggest contingent in the location, what dwelling type or features are they looking for? 
  • You cannot rely on financial econometrics alone – because of the emotional drivers which underpin property values, you cannot use pure investment metrics to measure performance. 2 out of 3 people (the owner occupiers) are not interested in the investment potential or rental return – they want to know if it has the right amount of bedrooms and is near their Childrens’ school.  
  • Beware of the Lies! Damned lies and statistics – numbers can talk in what ever direction you want them to talk to. Take all property stats with a grain of salt and a critical eye.  
  • Rolling out the red tape –  restrictions on construction and development ultimately restrict the supply of property, driving values up. The areas with the greatest restrictions have the most demand – the highly coveted established inner suburbs. This is the NIMBY effect – not in my back yard! 
  • Necessity, the mother of invention – as our population grows, the government can pull levers to allow supply to meet the demand.  
  • Variety – there is an endless litany of price points, vacancy rates, rental rates, style of properties. Whatever your budget or requirements, there will be something to suit. It also enables you to diversify within your property portfolio.  
  • Trustworthy and stable, Australia the nation – did you know we hold the world record for longest period of time without recession? Our stable economy means that people overseas want to invest in our banks, the lenders in turn, lend to our population to buy property, which bolsters the economy – it is self-perpetuating.  
  • You don’t have to be an expert to buy a quality property – step in the shoes of your target buyer and tenant, if you think carefully about what they want, you can pick a winner by keeping a property scorecard. Are they a downsizing single, a young couple, a young single? If you were that person, would you have an issue with any elements of the property? 
  • Predictability – while there are no crystal balls in investment, it is easier to predict the outcomes of property, than shares.  The plot of land doesn’t change and the dwelling is quite hard to change, which means that historical performance can give good insight into future.  
  • Population growth is a strong force – new arrivals are driving up demand and prices. The amount of new homes increasing supply is simply not keeping up.  
  • Flexibility of mortgage products – we have the most flexibility and choice when it comes to mortgage products. Until recent restrictions on interest only repayments, some lenders would allow 15 years of a 30 year loan term to be interest only. The use of offset accounts is also unique to Australia – helping you to reduce interest but keep a buffer aside which allows you to buy more property and hold during tough times. 
  • Room for improvement – you can always improve a property, whether that is a small cosmetic renovation, extending to subdividing. This is not an option with shares.  
  • Property v Shares – there may be some out of the box asset classes like antiques and vintage cars, but most people will invest in property or shares. All asset classes have their pros and cons which you should consider carefully.  
  • The case for shares:  
    • Liquidity – you can sell your shares and have cash in your account within 3 days. Selling a house is a longer process.  
    • You can’t sell half a house but you can sell a percentage of your shares.  
    • Shares don’t have tenants – you get a return once a quarter and don’t pay a property manager 
    • Transaction costs – buying and selling property comes with large costs on the way in and out, stamp duty when you purchase and real estate agent fees when you exit. The transaction costs relating to shares are much more palatable.  
    • You can buy shares no matter how much money you have – whether that’s $1,000, $10,000 or $100,0000.  
    • Easier to diversify – you can purchase shares in different companies, some blue chip and some new, some low risk and some high risk.  
  • Too big to fail – did you know that 1 in 3 jobs are linked to the property industry? That means a third of our population require a strong property market to maintain employment and level of income. We have a vested interest in ensuring that it’s all going well.  
  • Leverage – these days you can put a 5% deposit on a house and the bank will lend you the other 95% – this will multiply your wealth in a market that is moving. You need a much bigger deposit if you wanted to borrow to purchase shares – there is a perceived stablity in the market by lenders which is lacking in shares.  
  • Favourable tax laws – our tax laws are supportive of purchasing property. For most of us, our principle place of residence will be our greatest outlay in life and is also capital gains tax free. Not only that, but is exempt from the pension means test and there are incentives for over 65’s to downsize and add to their super. Investors can take advantage of negative gearing tax offsets. 
  • An ever increasing rental yield (in most cases) – the amount that you paid to purchase the property won’t change, but the rental return will! Rental returns normally grow in line with capital growth and property growth outperforms inflation.

David Johnston – The Property Planner’s Golden nugget:  All of the mortgage strategies that can be executed to enable us to buy property and hold property can create hundreds, thousands and even millions in wealth. Because we can optimize our tax deductions, plan for asset purpose changes, manage risk, select principle and interest or interest only and 30 year loan terms. The flexibility afforded and variety of mortgage strategies to put in place are a key driver for why property is a good investment class in Australia. 

Cate Bakos – The Property Buyer’s Golden nugget: Consider diversification, particularly if you have multiple properties in your portfolio.  Be thinking about what other asset classes you can invest in, don’t put yourself in a position where you have limited liquidity or where you are exposed with all your eggs in the one asset class.  

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