The following article is posted to examine what has made the property asset class so favoured in the Australian investment landscape, what makes a good decision about including property as part of your assets (investment portfolio); and where a prospective property buyer might turn for assistance in making a property acquisition.
Is the Property asset class an Investment; or a Lifestyle holding?
One of the significant changes coming over the next decade is likely to be a re-alignment of the love-affair that Australians have with the property asset class. This statement shouldn’t signal alarm for anybody, just a realisation that the fundamentals of the market are changing – but more importantly, the emotional driver is diminishing in strength.
Financial Planners and investment advisers have long been aware that the inclusion of property in a diversified investment portfolio (whether by way of direct ownership, through a ‘REIT’ – or companies with significant exposure to that market) is important but for different reasons from those held by most investors. Both positions can be reconciled in a universal striving for wealth management efficiency.
Since the early 1950’s, home ownership – and property ownership generally – has been a dream of most Australian families. A reasonable guess as to why that is the case is that the Great Depression of the early-1930s, followed by World War II, left a population who were looking for security and stability. Establishing a home that secured a roof over the head and a sense of security in which to establish and raise a family, was a sure way to achieve those goals.
The ‘portfolio strategist’ view:
The property asset class has an identifiable value, there is market liquidity and it provides opportunity for capital gain. Where property is available for rent, it generates an income stream with some taxation advantages. As an asset class, property should be considered a long-term proposition.
As an investment this all makes sense – BUT is the acquisition of a home, truly an investment? There have been many sophisticated investors in the past who have espoused making ‘better use’ of available financial resources than tying them up in home ownership, claiming that to be an inefficient use of capital.
We don’t seek to make a case either way in respect of home ownership: what we are seeking to point out is that, like any other Growth asset it is the length of time that the asset is held (time in the market) that is at least as important as the timing of entering the property market (timing the market). A difficult truth in relation to property ownership is that the Australian financial system is so wedded to the concept of security based on property that it is difficult to make any financial headway without first establishing equity in a home property.
Property can be both an Investment and a Lifestyle asset!
On this basis potential property owners should not be alarmed when they read headlines about property values having dropped by record percentages over a twelve month period; nor that affordability of Australian homes is one of the lowest in the developed world as we know it: if, as for any long-term investment they –
- Determine to acquire property on the basis of strategic reasoning;
- Assess their ability to meet all related ongoing financial commitments;
- Select the property to suit their strategic needs; and
- Take appropriate advice about the status and condition of the target property,
then their purchase shouldn’t be delayed other than for valid ‘local conditions’.
The property purchase decision…
Markets are a reflection of projected economic demand and supply. Demand for the property asset class is driven by a combination of some fundamental considerations, not the least of which, is buyer emotion. Supply is usually driven by the desire to profit as a developer; making opportunity to satisfy demand.
Unfortunately, because of a number of factors (not excluding opportunism), at various times in the market supply exceeds demand. This can give rise to a financial market condition described as ‘buyer’s market’ – one where prices become extraordinarily low. One of the reasons that causes supply to outstrip demand is mistiming: developers read the behaviour pattern of buyers and forecast that it will continue uninterrupted. If at some stage the ‘investors’ emotional view mellows, their demand will wain.
In this article we suggest that with the passage of time, families are not so concerned about a home providing security and stability – these important ingredients for a stable family existence can be satisfied without the seemingly insurmountable financial burden of home ownership.
When there is a ‘property bubble’ there are a number of ways it can be deflated to improve affordability:
- Prices fall;
- Income (wages) increase; and/ or
- Inflation realigns price and value, and
if a home owner retains the property for a long enough period, meeting all financial commitments to ensure no risk of ‘forced sale’ arises, then all of their other strategic reasoning should be met by the ‘investment’. [Refer the above comment about ‘time in the market’.]
Having made a decision that an investment in the property asset class might suit their purposes, there are a number of calls the prospective investor should consider:
- A referred ‘local’ Real Estate agent;
- A Conveyancing Legal practitioner;
- A mortgage broker; and
- A Financial Planner.
We recommend using a local real estate person as they are more likely to be able to alert the buyer as to any local issues that might impact on the long-term utility for purpose of the property – and will generally work for you to ensure best fit as to property at price. The choice of other advisers is not so locally significant (other perhaps, than for convenience).
A legal practitioner will be able to help with a number of items, including terms of contracting, title impediments – and proper settlement for clear title. A mortgage broker, particularly if worked in conjunction with a financial planner, will ensure that the finance you need is secured under the best terms and conditions that suit your overall needs – and that it is available in a timely way.
The role of the financial planner will be to ensure that the affordability aspects of the acquisition have been adequately considered, that adequate income protection is in place – and that the investment allocation to the property asset class relative to other investment holdings, are appropriate to the financial arrangements being made in your individual circumstances.
Consulting with trusted advisers to finance property acquisitions.
The practical aspects of building and pest inspections shouldn’t be overlooked of course – and either the real estate agent or the Solicitor will probably be able to advise in respect of these matters. Rather than just wish prospective property purchasers ‘good luck’ with their process, we commend them to seeking the advice of trusted professionals in the above fields and being strict in implementing their purchase and financial strategies.
Getting the financial arrangements right at first instance can save a lot of cost and emotional stress, avoiding untimely refinance arrangements at a later date. Working with both a reputable mortgage broker, guided as to appropriate criteria by a trusted and experienced financial planner should ensure a pleasant foray into the property ownership market.
Continuum Financial Planners Pty Ltd has published its ‘client value proposition‘ showing that we are well connected to a range of advisers in the service areas discussed above – and that we are comfortable to work with the different professionals and other service providers to attain the best outcome in your best interests. To arrange a meeting with one of our experienced advisers, call 07-34213456; or complete the form at our Contact Us page – and be assured of prompt and courteous attention: remember our promise – ‘we listen, we understand; and we have solutions’ that we deliver in personalised, professional wealth management advice.
[This post was originally published in June 2012: it has been updated, refreshed and re-published in August 2014; June 2022.]