Why do Australian investors love property so intensely?
That Australian investors love property as an asset class is not a revelation: the reason that it persists is only surprising to some –
Is property the saviour that many seem to think?
The following quotes are taken from a flyer recently distributed by a local real estate agent…
‘Every year, consumers are hurt in property – …’
‘It is simple (but not easy) to stay safe when dealing in property.’
‘Safety should be the number one consideration when making any property decision. If in doubt, do not proceed.’
… to be fair, the flyer went on to set out some rules for real estate investment safety.
If these warnings are seen to be necessary from an agent, then shouldn’t the ‘retail investor’ be all the more cautious when contemplating the wonders of the residential property market?
The reasons Australian investors love property…
Apart from realising the dream to own their own homes, Australians are often attracted to property because of their perceptions. The most compelling perception is that of security: the comfort of living in their family home as a child translates to an interest in acquiring a property of their own.
The next perception is the belief that property values only ever increase: this is often induced by the discussion they have with property owners who have been invested long-term in the market (or who have bought at the right stage of the cycle to realise a capital gain in the shorter-term).
Another perception that Australian investors have, is that the value of property doesn’t fluctuate as vigorously as do other investment assets, particularly shares in listed companies: and this of course comes about because the property market is not as liquid as is the share market and so prices are not as easily obtained on an ongoing basis.
Whilst these and a range of other features lead some investors to love property; and whilst they are valid in many circumstances, there are also a range of reasons why property investment (in particular, direct property investment) is not suitable for all.
Investment advice, generally – and for Property in particular
Real Estate Agents are not governed by regulations that apply to the financial planning industry – and yet clients call on them to provide financial advice and rely on it oblivious to the fact that there is no recourse if the investment strategy wasn’t appropriate to their circumstances.
As with all investment asset classes there are risks involved. The particular risks that challenge investors generally include: to capital; to income; and economic and market forces. What are the pitfalls of investment in real estate without adequate consideration of the risk-smoothing afforded in a diversified portfolio? We can summarise them as follows:-
- Capital risk: affected by supply and demand, credit availability, location and property damage. Subject to timing, this could seriously impact the seller’s ability to realise the required price;
- Income risks: affected by the ability to keep the property tenanted (by tenants who pay in full, on a timely basis);
- Economic risks: legislative issues affecting property ownership (including changes to tax ‘breaks’ applicable at time of acquisition); and
- Liquidity risk: possibility that at a time of need, the property may not be able to be sold within a reasonable time and at a fair (expected) price,
..to name the most obvious – and it is the latter of these that is most concerning when the portfolio is not sufficiently diversified to include cash and other liquid assets.
Continuum Financial Planners Pty Ltd has a team of advisers who understand that investors love property: we believe that there is reason to include property into a diversified investment portfolio, but like all other assets to be included, should be modified by the level of risk to be taken by the investor; the particular risk features of the overall assets to be held; any gearing to be associated with the investment – and of course, the overall objectives of the investor and the investment timeframe anticipated.