The Changing Landscape of Property Investing

Historically, real estate has been an effective investment option that has delivered stable returns and long-term price appreciation. However, like any asset, it’s important to reassess costs and benefits as circumstances change. Recent rises in interest rates, legislative changes and general increases in costs, should be viewed as an opportunity to reassess the attractiveness of property relative to other investment vehicles.

What’s changed?

1. Interest Rates: Since May 2022, official interest rates have risen steeply from 0.10% to 4.35%. Data from the Australian Bureau of Statistics estimates that the average Australian mortgage is approximately $600,000, which means the rate rise has added as much as $25,000 in annual interest costs to a mortgage of that size. For investors, this increased interest expense directly reduces the returns generated by property investments. At the same time, returns offered by high interest savings accounts and term deposits have increased markedly which has increased their relative attractiveness (particularly given they’re government guaranteed).
2. Legislative changes: For Victorian investors, the State Government has introduced a COVID Debt Repayment Plan which will see a new surcharge apply for individuals. This equates to $975 plus 0.1 per cent of the land value for all investment properties with a land value above $300,000. In other jurisdictions like the ACT, stamp duty is being progressively replaced with higher land taxes. It’s important to consider how your state’s local legislation applies to your circumstances.

How does property stack up?

Property has performed strongly across Australia. The latest data from the Australian Bureau of Statistics shows that in the 10 years ending December 2021, Australian property values increased at a rate of 6.35% per annum. Further, CoreLogic estimates the current yield on Australian properties in capital cities to be 3.60% per annum.

As a comparison, the Australian share market (measured by the ASX200) has provided capital growth of 4.61% per annum over the same period, plus a current yield of 3.90%. This does not include franking credits. For many investors, including retirees, franking credits can add to their return.

Looking at the numbers collectively, the gross return on property (9.95%) appears slightly ahead of Australian Shares (8.51%). However, for investors a net (after-cost) return is crucial. Property investors are often subject to costs that are unique to property and/or subject to annual increases. So, when assessing the performance of an existing property or before investing in a property, it’s important to factor in the following costs:

How else does investing in property and shares differ?  

For investors looking to prudently grow their capital, shares and property are often considered as possible investment vehicles due to the similar return profiles offered (strong levels of capital growth complemented by income generation).

Beyond returns, the characteristics of property and shares should also be factored before investment. Some key differences include:

Overview

Ultimately, the decision between property and shares depends on individual circumstances and preferences. It is also important to assess your financial situation more broadly before making a decision. For those who already own property via their homes, investing in other asset classes such as shares can help to diversify your overall wealth. For individuals who are employed within or exposed to the property industry (such as builders, suppliers, mortgage brokers, real estate agents), it may also be appropriate to diversify using other asset classes.

Whether you already own or are considering an investment property, an Evans and Partners financial adviser can help assess your financial situation and determine how best to achieve your objectives with the right investment mix.