It may come as no surprise to anyone that I’m an advocate of Australian residential property as an investment asset class.
As a long-term investor, a Qualified Property Investment Advisor (QPIA), and a licenced Buyers Agent, it’s pretty clear that I hold a bias towards property, isn’t it?
Don’t get my wrong, I see the merit of investing into shares as well. In fact, I believe that both asset classes have their pros and cons with most investors benefiting from investing in both in some way.
Growth history
The Australian property market – just like our share market – has a strong record of growth.
In fact, from 1980 to 2022, Sydney house prices have delivered a 7.9 per cent compounded average annual growth rate.
Now those statistics are certainly hard to ignore.
Underpinning this growth is the fact that property serves as shelter, which is a basic human need.
We all need somewhere to live, and with around 70 per cent of dwellings owned by owner-occupiers, there is always plentiful demand from buyers.
As such, banks are very comfortable lending against property, and the ability to apply leverage to hold a larger asset base can often be greater with property than other asset classes.
With the above in mind, it is clear that quality properties located in high-end suburbs in major capital cities can deliver strong capital growth outcomes – the evidence is clear.
Hence, Australian residential property should be viewed as a growth asset.
It’s growth, not yield, that matters
While Australian residential property can be viewed as an asset class that can deliver strong capital growth, it actually delivers pretty average returns in terms of income in my experience.
Typical gross yields range from around three to four per cent across the major capital cities and, once running expenses are deducted, net yields can drop to two to three per cent, which is hardly anything to get excited about.
But that’s ok, it’s the capital growth that builds meaningful wealth over time, not the rental income. The rental income merely helps the investor hold the asset for the long term. It’s simply an enabler of the plan.
Therefore, I think a property investment strategy that focusses primarily on yield or cashflow can be a mistake.
Many investors, investment advisors and buyers’ agents promote high yield investment strategies that often involve promises of be able to ‘quit your job and live off your rental income’. In my experience, few investors successfully execute this strategy, leaving the vast majority holding poor performing properties.
The truth of the matter is that high yield properties are often located in lower socio-economic suburbs on city fringes or in small regional towns that lack diversified economies.
Yields are therefore high because the purchasing price points are low, which is fundamentally driven by the lack of buyer demand in the suburb because most of its residents are on lower incomes.
We all know that it is demand from buyers, and especially aspirational ones, that applies property price pressure – especially in desirable suburbs where there is always an excess of people wanting to own property versus the supply of dwellings available.
Conversely, though, properties supposedly offering very high rental yields because of their cheap buy-in prices, usually deliver sub-optimum capital growth rates over long run periods.
Investors holding such properties often fail to benefit from the key attribute of the asset class, capital growth.
Consider a property that provides you positive cashflow of $35 per week after all holding costs (and before tax). With limited capital growth over the long term, is this $35 going to assist you to build a substantial wealth base? I think not.
You see, with residential property you can usually choose growth or cash flow, because you can’t have both.
That’s why you should run a mile from anyone who says you can have positive cash flow and above average long-term capital growth because it simply doesn’t exist.
Given property is a growth asset, I will always recommend that my clients adopt a capital growth strategy when they are in their wealth-building years.
Indeed, if you are not investing in Australian residential property for growth, you are not fully benefiting from the strength of it a superior asset class.