ANZ Bank’s Australian boss has caused quite a stir in the media recently with comments regarding housing as an investment vehicle.
But rather than supporting the notion of property investment, Phil Chronican has come out in opposition of what is arguably one of the biggest lending cash cows for the banking sector.
In a Sydney Morning Herald article, Mr Chronican concedes the popularity of property investment in Australia, saying that real estate accounts for around 60 per cent of total household wealth in this country, compared with just 25 per cent in the US.
He attributes this reliance on bricks and mortar as a wealth creation tool to the past 15 to 20 years of considerable capital gains in the sector as well as attractive tax incentives achieved through negatively gearing property investments.
But he voices concerns regarding the longevity of such impressive capital growth, suggesting that property has had its day in the sun and is unlikely to increase in value so substantially in the future.
“There is no doubt the capital gains made by most people in the property market over the past 15 to 20 years has created an unsustainable perception of housing as an attractive investment vehicle,” Chronican says.
He argues that housing is a relatively more expensive and complicated asset to invest in compared to other commodities given the “significant upfront costs” involved such as capital improvement, maintenance and development where required.
“Then there are the risks of movements in prices and interest rates. Rental yields are roughly 3.5 per cent gross, before outgoings, depreciation and any periods without tenants. Then there is the cost and inconvenience of finding tenants and collecting rents on time,” he says.
However the one important point Chronican fails to acknowledge is that property investment, when done sensibly and correctly, is not about speculation or short term rental yields – as he suggests. Rather, it’s about long term capital growth and compounding.
No other investment vehicle allows you to leverage to the degree that property does, allowing you to use the magic of compounding to grow your wealth.
While most other assets require you to sell in order to realise a profit, with housing you are better off keeping your properties and borrowing against the equity in them to buy more and generate an income. By doing so, you will avoid selling costs and taxes such as stamp duty and capital gains tax.
Then of course there are the tax advantages of negative gearing that Chronican points out. And while investment should never be about dodging taxes, it doesn’t hurt to have legal loopholes that allow you to make the most of your investment income and spend your before tax dollars prior to the government taking their share.
Chronican says the only way housing makes sense as an investment is if the capital gains are sufficiently material to offset the disadvantages. I would argue that the evidence suggests they most certainly are!
When you consider that well located property doubles in value every seven to ten years and attracts above average returns of around 15 per cent (10 per cent capital growth and 5 per cent rental yields per annum), the so-called disadvantages Chronican points out – that can be avoided by investing for the long term rather than speculating – seem quite insignificant.
And as for his argument that we are unlikely to see the significant capital growth achieved over the last two decades “any time soon”, I would suggest that anyone who has invested over a number of property cycles understands that housing prices go up, down and flatline as a matter of course, due to the broader economic influences of the day.
The current slow down does not in any way reflect what will happen to property prices over the longer term. In fact over the long term, property prices have offered more certainty and less risk than the share market because housing is an essential commodity.
Chronican himself says he is not suggesting we should all jump the property ship, but he cautions that investors need to carefully assess the going yield and capital gains on any potential purchase to ensure it adds up. To me, this is simply common sense and should be part of your homework when it comes to any investment you intend to buy.
Even though he seems determined to sway investors away from property due to what he sees as inherent risks and ongoing affordability issues, Chronican says our housing market is not set to collapse in a heap any time soon.
“Housing markets collapse when demand collapses. It is the same steep supply curve working in reverse. The worst-affected areas of the US market were those where overbuilding was the greatest. That is not the case for Australia’s capital city markets. Population growth means we continue to have strong demand for new housing.”
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