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PROPERTY AS AN ASSET CLASS



There are a variety of assets that can be selected for investment purposes however, property, specifically Australian residential property, represents a very strong asset class for investors.


Simply consider the below facts:

  1. The total value of Australian residential property reached 7.2bn

  2. 51.5% of household wealth is held in housing


It's safe to say that residential property underpins Australia’s wealth and the demand for further investment in it keeps coming.


Let's delve into the 5 main reasons why residential property is a strong asset class.


Stability

Residential property offers Australians the security of ‘bricks and mortar’, compared with the fluctuating values of shares and commodities, especially in uncertain economic times.


This is evident in the graph below, which measures the price movements of the ASX 200 and CoreLogic’s dwellings price index since 2005.


The Global Finance Crisis triggered stocks to plummet -54.5% between November 2019 and March 2009. During the same period, national property prices fell just -4.1%.

Property is an illiquid asset; it is also the last asset an owner-occupier will sell in times of financial distress. With a reputation for stability, Australian’s view property as a low-risk investment.



Leverage

While Australian residents love property as an asset class, so do the Australian banks. Most finance providers allow you to borrow up to 90% LVR (Loan to Value Ratio) to purchase residential property; this is the highest LVR than any other asset class.


This is because the banks view property as a safe and stable asset, as history has shown. This leverage, coupled with thorough research, allows investors to accelerate their wealth rapidly.


Tax Benefits

Australia has one of the best taxation systems in the world for property investors. There are a variety of tax-deductible expenses investors can claim to reduce their tax bills and improve cash flow.


Some include:

  • Claiming tax on depreciation

  • Negative gearing

  • Loan costs

  • Rental expenses


Using the BMT case study for a 3 bedroom house with a purchase price of $600,000, an investor would be able to claim $11,200 in depreciation in the first full financial year alone. In this example, the depreciation benefits resulted in positive cash flow after tax.


Capital Growth

Another reason adding to the strength of property as an asset class is the amount of capital growth and cash flow that a well-chosen property can generate.


The Australian housing market has grown rapidly over the last 25 years with median house values have increased 362%.


Australia’s ever-increasing population is constantly driving demand for property which has put pressure on house prices.

When comparing property and shares, it's widely considered that property is less volatile in terms of price fluctuation in times of economic uncertainty.


The Great Australian Dream

Owning a large home on a big block of land has been the staple ideology of financial freedom in Australia. While this idea is slowly deteriorating due to affordability issues, the desire for homeownership remains strong.


Our country still has one of the highest rates of homeownership in the world with almost 70% of our population owning a home.

Australian residential property, a strong performing asset with superior tax benefits, leverage and wealth creation – No wonder Australian’s love it.



James Allnutt – Property Investment Consultant

P: (02) 9939 3249

E: james@meridianaustralia.com.au


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References

[1] 6416.0 ABS Residential Property Price Indexes: Eight Capital Cities, December 2019

[2] CoreLogic Monthly Chart Pack, March 2020

[3] Aussie & CoreLogic 25 Years of House Trends, 2018

[4] BIS Oxford Economics, Meridian Australia

[5] ABS 4130.0 - Housing Occupancy and Costs, 2017-2018

[6] BMT - Property Investor Case Study

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