Why do Australian investors love property so intensely?
That Australian investors love property as an asset class is not a revelation but a given. The reason that this love of investing in property persists is only surprising to some. We start our analysis of this effect, with the question: Is property the financial haven that many seem to think?
Property has its place in an investment portfolio, but…
The following quotes are taken from a suburban real estate agent’s flyer in mid-2012 (an interesting source of such warnings) –
- ‘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.
Perhaps ‘retail investors’ should be all the more cautious when contemplating the financial benefits of the residential property market?
The reasons Australian investors love property…
Apart from realising the dream to own their own homes, Australians are attracted to property because of their own perceptions. The most compelling perception is that of security. The comfort of their childhood family home translates to a natural 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. Buying property at the right stage of ‘a cycle’ and realising an early capital gain can be quite enticing. (Property is generally a long-term investment because of its general lack of liquidity.)
Another perception that Australian investors have, is that property values don’t fluctuate as vigorously as do other investment assets. This perception comes about because other assets, like shares, are daily priced on an open market exchange basis. Property is only priced at a point of being sold under a long-negotiated contract. The actual price is much less transparent than even interest rates on bonds and/ or term deposits.
These, and a range of other features, lead some investors to love property, and validly so in many circumstances. There are also many 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. Still, some clients rely on them to provide financial advice, oblivious to the fact that there is no recourse for inappropriate advice.
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.
Financial planning advice for property investors
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. However, like all other assets to be included, the property allocation to a portfolio 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.
To arrange a meeting with one of our experienced wealth management advisers –
- phone our office on 07 3421 3456; or
- at your convenience, use our linked Book A Meeting facility.
