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Job seeker tip

Safe as HousesSafe as Houses

“I want to know my assets are growing. I don’t want to lose money. That’s why I’m nervous about the share market, and prefer property."

This is what Michael, a senior professional, told us last week.

If you’re like Michael, regardless of whether you are focused on tax-effective investing or planning for retirement, you will find some helpful insights and tips below to help you make better financial choices.

Is it a good move to buy or invest in property?

Most of us have heard urgent conversations about not missing the boat, particularly with housing supply shortages making Australia one of the least affordable housing markets in the world*.

A recent investor survey reflects these anecdotes. According to Investor Pulse, 83% of investors believe house prices will rise over the next 12 months. Of those, 56 per cent considered a 5 per cent rise likely, while 44 per cent thought 10 per cent more likely. And most investors believed the main reason property prices would continue to rise is high levels of immigration combined with a shortage of housing stock.^

There are many real estate and property investing professionals promoting optimistic prospects for house prices. There are a number of less visible analysts and economists warning that house prices are significantly above their long-term trend and that there are potential threats that could cause a price correction - despite supply issues. We only need to look at the UK experience where a supply shortage coexisted with investors suffering significant house price falls.*

So who's right? Well, no one really knows - and it's worth being wary of those in the market with strong views or a vested interest either way.

We don't believe you can reliably forecast the performance of any asset class, let alone one as complex as housing. Instead, we prefer to offer an objective framework to help you make decisions about investing in property.

Our clients who are assessing the relative benefits of investing in property to achieve their lifestyle and financial goals have found this approach valuable.

Here are the key steps in our approach:

What is the primary purpose of your property purchase - lifestyle or investment? These objectives are very different, with lifestyle choices often conflicting with the characteristics of an efficient investment property.
What are the potential tax benefits and costs of buying property? How attractive are these for you? An important tip: tax deductibility does not equal good investment - and should never be a driver for your investment decisions. From a tax perspective, you need to assess both benefits and costs - including potential land tax, capital gains tax and the impact of rental income on your overall income tax liability.
What is the likely impact on your cashflow and your personal wealth of buying property? How does it stack up against alternative uses of your money? When some property owners calculate their returns, they do little more than subtract the price they paid from the price they received. However, an experienced investor will consider other issues including transaction costs to buy and sell, interest, tax, insurance, repairs and renovations; and for an investment property, agent's fees and periods where the property is untenanted.
How attractive is my likely risk and return from property over time? A tip: a slight change in the variables underlying your projections can vary the outcome by a large amount - we recommend creating a range of scenarios using various growth assumptions - including zero.

* 'Safe as Houses?' The Weekend AFR, 27-28 February 2010

^ 'Bubble Trouble for the RBA', The Age, 4 February 2010. (Investor Pulse is a joint venture between marketing research group Colmar Brunton and Business Day.)

Like to know more?

Book your place in one of our seminars. Simply register here.

How's your fiscal fitness?

Read our tips on financial fitness in the Sydney Morning Herald

We enjoyed contributing some big ticket ideas on improving financial fitness for the Sydney Morning Herald recently. To read the article, click here.