Is Real Estate a better investment than the index in Australia?

[Alchemisst]

Due to all the tax breaks etc property receives as well as the leverage and the fact that property doesn't seem like it will ever crash here, mainly due to those factors, is property the best investment here? Different to other countries such as the US? The US has also had the better stock market returns maybe that's why index seems a better option there?

[deborah]

Problem is that you need to be careful where you buy. Relatives live in Perth, and the property they bought there years and years ago briefly got back to the price they bought it for at the peak a year ago. Same thing happened in Canberra in the 90s. Regional areas are often a problem too, but capital cities are generally expected to do well.

[mjr]

"All the tax breaks" ???

People carry on about negative gearing as being a tax break.

You need to be losing money to be able to use negative gearing.  No thanks.

You can gear shares (positively or negatively) just like property.

Property includes such joys as land tax and stamp duty which shares don't have.  Property also includes tenants and maintenance.

Property has pretty low yields and can't be incrementally sold, meaning you can expect a big hit in capital gains tax when you get your money out.

In most articles which claim that property gives better returns in Australia than equities, it usually boils down to the fact that property is typically leveraged much more than shares are.  That's just the nature of the illiquidity of the asset class.

[jaysee]

Based on long-term historical data, I used to think Australian housing was in a bubble, but then prices just continued climbing.

Now that I’m seeing house and apartment prices stubbornly continue to rise even despite interest rate hikes, and on a global scale, I’m beginning to suspect that house price increases are not being driven by supply shortages, by Australia being a particularly attractive place to live, or by anything particular to Australia at all, but rather by currency devaluation globally.

As a renter with no property this makes me feel nervous and I wonder if I should buy at least a small apartment.

Houses or apartments may not outperform stocks financially, with all the additional costs involved (maintenance, strata fees, etc). But what may happen is that the *housing component* of living costs may inflate drastically, to the point that stocks fail to keep up.

This could lead to a dystopian future in which millionaires on paper, who would otherwise be well off, are forced to live in share houses or even tents, because their assets and/or earned income don't appreciate as fast as their housing costs.

San Francisco was an early example of this, but now it seems to be the trend in all major cities, and actually all major developed-economy cities in the world (possibly excluding New Zealand for now).

It's not that those who own their home will be in a great position either; they'll have much of their wealth trapped in an illiquid, expensive-to-maintain asset without which they would be homeless. But at least they'll have a home. For the millionaires-on-paper, their fortunes won't mean much because they can't afford shelter.

I'm extremely reluctant to purchase property, because of all the costs and inconveniences, but I'm feeling like I will be eventually forced to, as someone who values shelter and personal safety over a nice looking spreadsheet.

[Alchemisst]

"All the tax breaks" ???

People carry on about negative gearing as being a tax break.

You need to be losing money to be able to use negative gearing.  No thanks.

You can gear shares (positively or negatively) just like property.

Property includes such joys as land tax and stamp duty which shares don't have.  Property also includes tenants and maintenance.

Property has pretty low yields and can't be incrementally sold, meaning you can expect a big hit in capital gains tax when you get your money out.

In most articles which claim that property gives better returns in Australia than equities, it usually boils down to the fact that property is typically leveraged much more than shares are.  That's just the nature of the illiquidity of the asset class.

Yes the leverage is one of the main factors, you can leverage shares but its much more expensive than mortgage interest rates.

[Gremlin]

Yes the leverage is one of the main factors, you can leverage shares but its much more expensive than mortgage interest rates.

I've seen this written a few times in various places, but I don't believe it to be true.

If you take out a loan secured against your PPOR for the purpose of buying shares, then you can leverage shares at mortgage interest rates.  The security of the loan is what typically determines the interest rate, whilst the purpose of the loan is what typically determines deductibility.

I'm not saying you SHOULD do this, just saying that it can be done.  Best to get your accountant to give it the once over before embarking on something like this, because you can't fix it once it's in place if done incorrectly.  There's also different downside risk to a margin loan that may or may not meet people's risk appetites.

[Alchemisst]

That still requires owning a property in the first place

[Model96]

Houses in my area in coastal Sydney appreciated $1000 per week from the late seventies up to the new millenium. For the past 15 years they have been appreciating $2000 per week. My house's value doubled from 2001 to 2010, then tripled again from 2010 to now.
Don't know how that compares with the index, but I remember my Uncle being amazed he sold his house in 1984 for triple what paid in 1977!
I had just started full time work, so that convinced me to save then borrow and invest in real estate…..which seems a good idea now but it was pretty daunting putting my name to a 17% pa interest rate loan😂

[theninthwall]

Problem is that you need to be careful where you buy. Relatives live in Perth, and the property they bought there years and years ago briefly got back to the price they bought it for at the peak a year ago. Same thing happened in Canberra in the 90s. Regional areas are often a problem too, but capital cities are generally expected to do well.

This is me. I bought a two bed unit in Perth, close to the city and river in 2007. It was my hometown and I never thought I would leave, but in 2012 I moved away. Since then it has been rented out on and off, I have moved back for periods here and there.
I bought it for $336k, when Perth was the second-most expensive city in the nation for housing due to the mining boom. My parents went halves initially and then I bought out their half a year later for the equivalent of $350k.
Now here we are in 2023, and it's maybe worth $370-380k. All the while I've had to pay strata fees, property management fees and so on. The only reason I keep it is because my wife and I intend on moving back to Perth one day and I view it as a fallback position for us. I'm probably more emotionally attached than anything, and it's the only real estate we have in our portfolio.
Now of course, investing in the ASX at 2007 wouldn't have done a whole lot better, but just about anywhere else would have doubled my return. It's all crystal ball stuff, especially as my financial upbringing involved such lessons as 'the stock market is a gamble', but it certainly hurts to have invested in real estate 16 years ago, doing all the right things I was told as a young person to do, and not have seen some of the doubling and tripling that other people were lucky enough to have.
OK rant done! :)

[jaysee]

Had some further thoughts.

It's easy to talk about buying a home in the 70s/80s and having it triple in value. But over a 40 year period, that's actually not much growth (3% per year on average, if my math is right - original price * 1.03^40). 3% per year is not enough to beat inflation, and this is before maintenance costs and taking into account all the idiosyncratic risks.

I feel emotionally raw sometimes that I never bought into the housing boom, but the rational side of me, just purely looking at the numbers, makes me feel more like a winner. I'm a millionaire in my 30s and all my wealth is highly liquid, diversified and globally accessible. I could move to another country tomorrow and more or less have the same net worth.

Additionally, I think real estate hides a lot of costs – especially maintenance and various kinds of opportunity costs. So it's easy for real estate owners to feel like they made a better choice and to appear that way to others. Obviously most people will prefer to talk about their wins and successes, very few people (especially online) will brag about how much money they lost.

So at the end of the day I find myself feeling like Mark LaMonica from Morningstar...

My name is Mark LaMonica. I am 44 years old. And I am a renter. And I am not ashamed at all saying that. I am lucky enough to have the means to purchase a home. I choose not to because I think my financial assets can better support the life I want to lead in different ways.

[Model96]

One of the houses I was was talking about did an easy 10% p.a. for 45 years, not including any rental income👍

[jaysee]

Sorry I think I misread your message... actually I should've read that the price tripled between 1977 and 1984.

However I still would have questions.

* How much was spent maintaining the house?
* Was the house in a desirable location at the time?
* How much was spent on transaction fees, e.g. real estate agents, taxes, etc?

[theninthwall]

One of the houses I was was talking about did an easy 10% p.a. for 45 years, not including any rental income👍

So assuming the house was $10,000 45 years ago and is now worth $728,000, do you think it will be worth $53m in another 45 years?

I think once the era of high interest rates in the eighties ended, house prices took a while to catch up in the hangover period and the people who bought at this time have benefited enormously from real estate. Add in the the huge number of boomers who were reaching their prime home-buying years. Their mortgages became cheaper and the house prices rose at the same time. These are the people who are the parents of millenials right now, telling them to buy houses because "renting is throwing money away..."

House prices cannot continue to outpace the slowdown in wage growth in Australia. There's going to have to be a reckoning with housing affordability at some point.

I really liked that article from Mark LaMonica above. I think all he is doing is telling people to do the numbers - which so many fail to do because of the romanticised nature of buying a house in Australia. There are alternatives to buying a home, the maths doesn't lie.

[Model96]

Sorry I think I misread your message... actually I should've read that the price tripled between 1977 and 1984.

However I still would have questions.

* How much was spent maintaining the house?
* Was the house in a desirable location at the time?
* How much was spent on transaction fees, e.g. real estate agents, taxes, etc?

The Sydney house got a full renovation at the mid point, worth about a fifth of the home value. The reno and other expenses seemed tiny compared to the final sale price.

One of the houses I was was talking about did an easy 10% p.a. for 45 years, not including any rental income👍

So assuming the house was $10,000 45 years ago and is now worth $728,000, do you think it will be worth $53m in another 45 years?

I think once the era of high interest rates in the eighties ended, house prices took a while to catch up in the hangover period and the people who bought at this time have benefited enormously from real estate. Add in the the huge number of boomers who were reaching their prime home-buying years. Their mortgages became cheaper and the house prices rose at the same time. These are the people who are the parents of millenials right now, telling them to buy houses because "renting is throwing money away..."

House prices cannot continue to outpace the slowdown in wage growth in Australia. There's going to have to be a reckoning with housing affordability at some point.

I really liked that article from Mark LaMonica above. I think all he is doing is telling people to do the numbers - which so many fail to do because of the romanticised nature of buying a house in Australia. There are alternatives to buying a home, the maths doesn't lie.

I'm just sharing my experience, not telling any one what to do or what is best.
I can say Sydney Real Estate has been a great investment for the last 100 years, if you keep your purchase for a generation or more. Your home can be a great low tax investment, just like your Superannuation can be, as long as you take a long term view.
Going back to an even earlier generation. In 1960, a brand new semi detached home was the same price as a new family car at $2000. A bit less than twenty years later, that same house was worth twenty times that much. Forty years after that again, it was worth well over 40 times more. Crazy when it's put that way, but it is fact in Sydney, where everyone wants to come and live…..it is simple supply and demand.
Property may not be the best investment, but I think it should be a large part of any investment strategy!