Low supply, strong demand and high interest rates mean that it is harder than ever for Australians to buy property in the current market.
High property prices mean many buyers, particularly first-home buyers, need a six-figure deposit at a time when their borrowing capacity is at an all-time low.
And even for investors, the low borrowing capacity / high interest rate combination means expanding a portfolio isn’t as straightforward as it was only a few years ago when rates were at an all-time low.
At the same time, living costs have surged and nearly all household bills have risen significantly, so money is tighter still.
Interestingly, the Australian reports that at a time when housing has become harder to own, it has become easier than ever to pump up another major life asset: superannuation.
From 1 July 2024, the compulsory employer’s superannuation guarantee contribution increased from 11% to 11.5% of an employee’s annual salary.
At the same time, the concessional contributions cap increased from $27,500 to $30,000 per year and the non-concessional contributions cap increased from $110,000 per year to $120,000.
This change also affects the bring-forward rule which increased to up to $360,000 depending on your super balance.
The bring-forward rule allows you to boost your retirement in super’s tax-friendly environment by using up to three years’ worth of after-tax contributions in a single year and increasing your potential to benefit from the power of compound interest.
But, to qualify you must be under 75 years of age and have a super balance must be less than $1.78 million.
If your super balance is less than $1.66 million, you can contribute $360,000 and if your super balance is $1.66 million or more, but less than $1.78 million, then you can bring forward two years of caps to a maximum of $240,000.
But while siphoning money into building your superannuation might seem easier and more tax-effective right now, the reality is that in order to get a financially comfortable future or better financial freedom, you need to build both.
First, let's briefly list the benefits of each:
The benefits of property investment
1. Capital growth
As I’ve said many times before, cash flow keeps you in the game, while capital growth gets you out of the rat race in the long term.
Australian property markets, particularly in major cities, have historically shown strong capital appreciation over time.
Investors can benefit from long-term increases in property value, generating significant returns when selling.
2. Rental income
Property investment provides a steady stream of income through rent.
In high-demand areas, rental yields can be strong, offering regular cash flow to cover mortgage payments and other expenses.
Alternatively, investors can benefit from negative gearing where their income loss can be deducted from their annual income tax bill.
3. Tax benefits
Investors in Australia can take advantage of tax deductions, including negative gearing (where rental income is less than the cost of holding the property), depreciation of assets, and expenses like property management fees and loan interest.
4. Leverage
Property allows investors to use borrowed money (through a mortgage) to purchase a larger asset.
This means you can control a substantial investment with less upfront capital, amplifying potential returns.
5. Long-term stability
The Australian property market has been relatively stable compared to other investment vehicles like stocks, which can be highly volatile.
Property tends to have less price fluctuation in the short term, offering more predictability.
6. Hedge against inflation
Property generally rises in value over time, often keeping pace with or exceeding inflation.
As inflation increases, so do property values and rents, providing a hedge against rising living costs.
7. Control
Investors have a greater degree of control over property compared to other investments.
You can renovate or improve the property to increase its value or rental income, refinance loans for better terms, or choose your tenants.
8. Wealth building for future generations
Property investment can be a long-term strategy for building wealth.
By accumulating a portfolio of income-generating properties, investors can create a significant asset base to pass on to future generations.
The benefits of adding money to your superannuation
1. Tax benefits
Superannuation contributions are typically taxed at a lower rate than regular income.
Salary sacrifice contributions (concessional contributions), depending on your income, are taxed at 15%, which is lower than most individuals’ marginal tax rates.
This can result in significant tax savings and make superannuation a tax-effective way to save for retirement.
2. Compound growth
Superannuation benefits from compound interest, meaning your returns generate further returns over time.
The earlier and more you contribute, the more your savings compound, allowing your super balance to grow significantly by the time you retire.
3. Boost retirement savings
By adding extra money to your superannuation, you can significantly increase your retirement savings.
This can help you achieve financial security and a more comfortable lifestyle in retirement, ensuring you have enough funds to cover living expenses, healthcare, and travel.
4. A tax-free retirement income
After reaching preservation age (typically 60 years and older), your superannuation withdrawals become tax-free in retirement.
This means any income or lump sum drawn from your super fund will not be subject to income tax, allowing you to maximize your post-retirement income.
A larger superannuation balance can also reduce your reliance on the government-age pension, giving you greater financial independence in your retirement years.
5. Long-term investment strategy
Superannuation funds are invested in a diversified range of assets, including stocks, bonds, and property, which are professionally managed.
By contributing more to your super, you benefit from long-term investment returns without needing to manage investments yourself.
Property investment vs super: the returns
According to research from Chant West, an investor would have made a higher cumulative return on their super over the 10 years if they had invested in the median high-growth option as opposed to the average property returns.
Chant West defines high growth as an allocation of 81 to 95% in growth assets and the remainder in defensive assets, whereas all growth refers to a 96% to 100% allocation of growth assets.
In comparison, Australian house values rose 84.3% over the past decade, according to CoreLogic figures.
Australian unit values managed just a third of super’s return, at 50.4% in 10 years, an important figure for first-home buyers considering apartments as an entry-level option.
But, the gap between super and property is much smaller for investors who bought some of Australia’s premium (or as I call it investment-grade) property markets.
For example, an investor who purchased a house in Sydney’s northern beaches area a decade ago would have made a median return of 145.9%.
Similarly, properties in Sydney’s high-demand areas such as the eastern suburbs, inner west, north Sydney, Hornsby and Baulkham Hills and Hawkesbury are all up around 130%, or more in some cases.
The lesson: It’s not possible to compare superannuation fund returns and property investment returns directly because they are so diverse. And, of course, those who invest in property have the benefit of leverage, magnifying their returns.
But what is clear is that investment-grade properties could well generate significantly better returns than a top-performing superannuation fund.
But this isn’t new information, as I always say, less than 4% of the properties currently on the market are what I call “investment grade”.
These investment-grade properties appeal to a wide range of affluent owner-occupiers, are in the right location and are close to lifestyle amenities, and they’re the most likely to generate capital growth.
Property investment vs super: why you need to build both
At retirement, superannuation and owner-occupied housing are two tax-free assets that you can own.
While investment properties count towards an individual income asset text, their home isn’t.
While a well-managed superannuation fund is an excellent way to build a financially stress-free future, it will not generate money later in life when you’re not working.
There is also the risk of your nest egg decreasing, potentially leaving retirees at risk of running out of money.
But, superannuation combined with an income-generating investment property portfolio is a much stronger financially stress-free alternative.
Ultimately, building both property investments and superannuation provides a balanced approach to wealth creation and long-term financial security.
Each asset class has unique advantages and combining them allows you to benefit from both.
By investing in both asset classes, you can spread your risk.
Property can provide capital growth and rental income, while superannuation offers a diversified portfolio managed for long-term growth, tax advantages, and compounding interest.
A balance of the two can provide stability and can help protect an individual’s financial future, even during market fluctuations.
A final note…
Together, a property investment portfolio and superannuation fund help to secure a comfortable retirement with diversified income sources.
But, when it comes to property investment, not just anything will do.
Remember, the location of your property does 80% of the heavy lifting of its value, but there will always be some areas more desirable than others, even in the same suburb.
Then owning the right property in that location is just as important.
Investment-grade, or A-grade properties are not necessarily located in the most expensive suburbs and don’t all come with a multimillion-dollar price tag, but there will always be a depth of buyers regardless of market conditions.
In general, when looking for a property, it’s very rare to find the “ideal” property, so buyers usually need to make some compromises.
When they stumble across an investment-grade property, they rarely need to make any or many compromises as it tends to “tick all the boxes”.
On the other hand, with a B-grade property, they have to compromise on a number of factors such as living on the wrong side of the street, or maybe not having a north-facing orientation; while many compromises are made when purchasing a C-great property like living on a busy through road or having an impractical floor plan.
So be careful … don’t get stuck with an underperforming property in the wrong segment of the housing market, because if history repeats itself, and it most likely will, you could end up with a dud property that you will regret owning and have difficulty selling if you need to.
Disclaimer
The following article is general information only and should not be acted on without first seeking advice from a licensed financial planner who will take your specific circumstances into account when giving specific advice.
