Residential property investment is popular with Australians: this popularity is based on the ‘urban myths’ that –
- property prices increase consistently (that ‘you can’t go wrong with bricks and mortar’); and
- residential property prices are not volatile (as are share prices).
An article published by Research house CoreLogic RP Data1 in February 2016 was recently brought to our attention: its title is ‘Property prices double every decade?’ The article is of interest to us from a couple of points of view: firstly, the report focuses on capital city data; secondly, it covers ten-year terms; and finally, it contains a graph that demonstrates that there is in fact, volatility in residential property prices. As we were about to publish this article, this firm released its January 2017 commentary on Capital City Residential Property prices (in which they included reference to the change in prices for the 2016 calendar year. We have appended the latest commentary at the end of the February 2016 article, linked above).
Residential property investment: the capital city focus
Reflecting on the expression that there are ‘lies, damn lies – and statistics’; and on the sceptical view that you can make statistics reflect any view you want to spin, we would be interested to see some research data to cover some of the following ‘variants’ to what was covered in the article, such as –
- does residential property investment in popular tourist areas perform similarly to those in the capital cities;
- which regional cities in the less tourist-oriented locations, perform similarly to capital cities;
- is there a significant difference in investment outcomes between styles of residential property; and
- is there a level of gearing used to acquire residential property that ‘almost certainly’ assures a successful investment outcome?
[We note that the table published by CoreLogic RP Data showing the January 2017prices change data, includes a row for non-capital city residential property investment value changes.]
Residential property investment: the ten-year consideration
Property is categorised as a growth asset: and it is considered a high-risk asset (for reasons that are mentioned later in this post). The selection of a ten-year period to test the contention that residential property values double every ten years, is consistent with this categorisation: property – and shares (which are also in this risk category) – needs to be evaluated over a seven- to ten-year term to be considered an ‘investment’. (Acquisition and disposal of these asset classes in shorter periods, are more speculative/ trading actions, than investments.)
We ‘tested’ a couple of other ten-year periods within the timeframe of the first graph in the linked article and found similar outcomes: ten-year terms leading up to the GFC showed significantly better residential property investment performance than did any ten-year period that embraces the 2008 and 2009 years (at the depths of the GFC economic impacts). The ten-year period to January 2008 for instance, calculates to an approximate growth over the capital cities, of 159%; whilst the ten-year period ended January 2012, calculates at around 84% growth.
Residential property investment: the volatility factor
The graph referenced above (from the linked article) only deals with property values: it doesn’t deal with the other uncertainties that accompany residential property investment (or any property investment in fact), such as –
- Irregularity/ uncertainty of rental income: consider –
- Unavailability of suitable tenants
- Tenants unable to pay their rent, but also
- The benefit of a regular income if all goes well
- Property retention and maintenance/ upkeep costs: consider –
- Utility costs (Rates, water etc)/ Body Corporate fees and levies
- Insurances (landlord, property, public liability etc)
- Renovation and repairs (to maintain the property value as reflected in the graph)
- Interest on borrowings (which themselves can be volatile)
- Property zoning changes: consider –
- The positive of a change to your advantage; as opposed to
- The negative of a new roadway nearby (or some other infrastructure that impedes the use of your particular property)
- Taxation: consider –
- Advantages of the special property write-down deduction (for qualifying properties)
- Depreciation deduction; and
- Capital Gains Tax benefits.
Whilst the graph does show volatility in residential property values, the impact of the cashflow aspects will impact on the volatility: and there is a degree of frustration to be experienced in being ‘asset rich, but cashflow poor’.
Residential property investment: part of a diversified portfolio
Whether it is being considered as a personal investment, or perhaps to be part of the investment portfolio of a self-managed superannuation fund (or other entity), direct property should be a relevant portion only, of the portfolio – accompanied by a researched selection of assets that are strategically blended to ensure that the long-term financial goals and objectives of the investor/ trustee are targeted to best effect.
ContinuumFP has published an article that details the features and characteristics of the primary investment asset classes: in the article ‘Investment Portfolio Diversification’ the investment risks of cashflow, liquidity, term and other characteristics are presented: it is a useful reminder that risk can be either/ both a negative and an opportunity. To benefit most from an investment portfolio, these characteristics (of each of the asset classes) need to be understood and calculated in to investment decisions.
‘Investors Love Property’ is the title of another article in the ContinuumFP website article Library that expresses some thoughts on the inclusion of property in diversified investment portfolios. The message is consistent, that all of the characteristics of the asset under consideration, need to be calculated into the determination of what is/ is not included in the portfolio.
Residential property investment: making the decision to invest
Continuum Financial Planners Pty Ltd team of experienced financial advisers is well positioned and credentialed to assist you in making the correct decision about embracing residential property as part of your investment portfolio. Our relationship with a range of professionals in the property investment area, place us well to coordinate the implementation of your investment decision – and to do so, reassuring you that the correct decision is being made.
1CoreLogic is described on its website, as ‘…the leading provider of property data, analytics and related services to consumers, investors, real estate, mortgage, finance, banking, building services, insurance, developers, wealth management and government.’
[This article was posted in February 2017]