Is Real Estate a better investment than the index in Australia?

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alex123711
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Is Real Estate a better investment than the index in Australia?

Post by alex123711 »

Due to all the tax breaks etc property receives as well as the leverage and the fact that property doesn't seem like it will ever crash here, mainly due to those factors, is property the best investment here? Different to other countries such as the US? The US has also had the better stock market returns maybe that's why index seems a better option there?
ScubaHogg
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Re: Is Real Estate a better investment than the index in Australia?

Post by ScubaHogg »

alex123711 wrote: Sat Jun 10, 2023 7:36 am … the fact that property doesn't seem like it will ever crash here…
So many people have been burned with such beliefs. Everything can go down. And likely will at some point.
“Conventional Treasury rates are risk free only in the sense that they guarantee nominal principal. But their real rate of return is uncertain until after the fact.” -Risk Less and Prosper
lostcoast2023
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Re: Is Real Estate a better investment than the index in Australia?

Post by lostcoast2023 »

What do you mean by investing in real estate? Buying a home instead of renting? Buying rental properties? AirBnBs?
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asset_chaos
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Re: Is Real Estate a better investment than the index in Australia?

Post by asset_chaos »

Real estate investing is like a sport or religion to Australians. Having lived in Australia for several decades, but not having been born here, perhaps I can see the difference more clearly, but I think most Australians are willfully blind to the risks of real estate and delude themselves about how safe it is. Sure, the tax breaks are real but under fire, e.g. Victoria just raised taxes on investment real estate. There is political risk. The leverage advantage is real---in times past you could get 20:1, though now it's more like 5:1---still much more than you can get on margin for stock investment and the loan is much less likely to be called too. But that's due to the biggest delusion about real estate, that it never decreases in value. That's a mark-to-market illusion due to the fact that people don't get a bid on their house every day. Real estate does decrease in value, even if the long-term trend for the land value is up. There is market risk. And leverage works both ways making the investment riskier. I concede the choice is personal to increase portfolio risk through leverage, but investments are risky enough for me.

But the biggest risk I see to real estate investing is that it's almost impossible for an individual to reduce their risks by assembling a diversified portfolio of real estate. Almost every individual investor has at most a few properties, almost always in the same real estate market and almost always the same type of property.

As about 6 or 7 percent of the total value of ASX listed stocks are real estate investment trusts anyway, I would say between that and my personal home, I've got more than enough Australian real estate already. Personally I ponder more the question of how can I diversify such a large chunk of my personal net worth being in Australian real estate. And I answer that question by having globally diversified stocks.
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alex123711
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Re: Is Real Estate a better investment than the index in Australia?

Post by alex123711 »

lostcoast2023 wrote: Sat Jun 10, 2023 11:30 am What do you mean by investing in real estate? Buying a home instead of renting? Buying rental properties? AirBnBs?
All of the above
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alex123711
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Re: Is Real Estate a better investment than the index in Australia?

Post by alex123711 »

asset_chaos wrote: Sat Jun 10, 2023 6:50 pm Real estate investing is like a sport or religion to Australians. Having lived in Australia for several decades, but not having been born here, perhaps I can see the difference more clearly, but I think most Australians are willfully blind to the risks of real estate and delude themselves about how safe it is. Sure, the tax breaks are real but under fire, e.g. Victoria just raised taxes on investment real estate. There is political risk. The leverage advantage is real---in times past you could get 20:1, though now it's more like 5:1---still much more than you can get on margin for stock investment and the loan is much less likely to be called too. But that's due to the biggest delusion about real estate, that it never decreases in value. That's a mark-to-market illusion due to the fact that people don't get a bid on their house every day. Real estate does decrease in value, even if the long-term trend for the land value is up. There is market risk. And leverage works both ways making the investment riskier. I concede the choice is personal to increase portfolio risk through leverage, but investments are risky enough for me.

But the biggest risk I see to real estate investing is that it's almost impossible for an individual to reduce their risks by assembling a diversified portfolio of real estate. Almost every individual investor has at most a few properties, almost always in the same real estate market and almost always the same type of property.

As about 6 or 7 percent of the total value of ASX listed stocks are real estate investment trusts anyway, I would say between that and my personal home, I've got more than enough Australian real estate already. Personally I ponder more the question of how can I diversify such a large chunk of my personal net worth being in Australian real estate. And I answer that question by having globally diversified stocks.
Yeah I have the similiar thoughts, however I feel property here has been overvalued for a very long time, but still rises. I feel like no one would ever let a property crash occur on their watch, they would pull all the strings to avoid it
pseudoiterative
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Re: Is Real Estate a better investment than the index in Australia?

Post by pseudoiterative »

alex123711 wrote: Sat Jun 10, 2023 11:50 pm I feel like no one would ever let a property crash occur on their watch, they would pull all the strings to avoid it
Pulling strings to influence how the economy and markets are operating and achieving the outcome that you want can be very difficult -- even if the powers that be are competent, well-advised, and trying to make good long term decisions, which may not always be the case.

Government wants some outcome, pulls a string, a few years later that string-pulling results in roughly the opposite outcome.

One example is the recent wave of building company insolvencies (ABC podcast link). This is an example of federal-government string pulling to prop-up the construction industry during the pandemic, subsidies created a huge spike of demand for home renovation projects, which contributed to price increases for materials and labour, which now, a few years later, (alongside other causes of inflation) is causing many builders to go insolvent.
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Re: Is Real Estate a better investment than the index in Australia?

Post by Valuethinker »

alex123711 wrote: Sat Jun 10, 2023 11:50 pm
asset_chaos wrote: Sat Jun 10, 2023 6:50 pm Real estate investing is like a sport or religion to Australians. Having lived in Australia for several decades, but not having been born here, perhaps I can see the difference more clearly, but I think most Australians are willfully blind to the risks of real estate and delude themselves about how safe it is. Sure, the tax breaks are real but under fire, e.g. Victoria just raised taxes on investment real estate. There is political risk. The leverage advantage is real---in times past you could get 20:1, though now it's more like 5:1---still much more than you can get on margin for stock investment and the loan is much less likely to be called too. But that's due to the biggest delusion about real estate, that it never decreases in value. That's a mark-to-market illusion due to the fact that people don't get a bid on their house every day. Real estate does decrease in value, even if the long-term trend for the land value is up. There is market risk. And leverage works both ways making the investment riskier. I concede the choice is personal to increase portfolio risk through leverage, but investments are risky enough for me.

But the biggest risk I see to real estate investing is that it's almost impossible for an individual to reduce their risks by assembling a diversified portfolio of real estate. Almost every individual investor has at most a few properties, almost always in the same real estate market and almost always the same type of property.

As about 6 or 7 percent of the total value of ASX listed stocks are real estate investment trusts anyway, I would say between that and my personal home, I've got more than enough Australian real estate already. Personally I ponder more the question of how can I diversify such a large chunk of my personal net worth being in Australian real estate. And I answer that question by having globally diversified stocks.
Yeah I have the similiar thoughts, however I feel property here has been overvalued for a very long time, but still rises. I feel like no one would ever let a property crash occur on their watch, they would pull all the strings to avoid it
As I understand the picture Australia is on its 3rd great property boom. The first was in the 1890s early 1900s & built the inner suburbs of Sydney and Melbourne. The second was in the postwar years up to the 1970s. The third since the mid-late 1990s?

Remember to think in real prices not nominal. The property "crash" of Britain in the mid 1970s went almost unnoticed. Property prices were static for 2-3 years. But inflation was +20% pa so actually they fell by 40% from their late 60s peak. But no one noticed, much - no one had negative equity etc. A lot of the real estate crises of the 1970s took place that way.

Key source is Neil Monnery: Safe As Houses 8 Centuries of Housing Prices

Canada has followed a similar track to Australia since the Millennium. High immigration. A lot of foreign money coming into property. Huge booms in Vancouver, then Toronto, then in the post Covid surge everywhere in the country (Alberta booms and busts with the oil price - you see that with the Calgary market. Calgary is Brisbane or Perth and hasn't looked overvalued). Vancouver prices are surreal - the combination of geographic land constraints, tight zoning for Single Family Homes only + offshore money. The country is more exposed to residential property (relative to GDP) than the US was in 2006. As bad as any bubble state then-- some evidence of abusive lending practices etc.

What's interesting now is Canada seems to be in a slump, with prices down 10-15% in every major market. So maybe, finally, that bubble is going to pop. I have been calling that since early-mid 2000s, so like a stopped clock I shall be right some day ;-).

Australia's economy is even more dependent on commodity exports than Canada (Canada's largest export is oil from the tar sands of Alberta, its next largest is automotive, but that's also its biggest import - the production supply chain runs back and forth across the border). Australian economic growth, and perhaps housing prices, has synchronisation with that. But also export of capital (personal savings) from East Asia.

I would say:

- Australia will slump some day, and it may be as dramatic as a bubble burst (say prices down 40-50%)

- look for an administration which is relatively anti-immigration because that will remove one key factor driving demand. I do say relatively, compared to other countries Australia will no doubt remain quite liberal

- a disjuncture between rents flat & house prices rising will be a good sign of a late bubble phenomenon -- property yielding less and less as an investment. You definitely saw people in Vancouver and Toronto buying condos as investments at negative cash flow rental income - costs - mortgage interest & repayment. If yields (net rental income/ value) fall below mortgage rates, that's probably a good sign things are overvalued

- I've never managed to time these things. From a portfolio perspective, I think it's valuable to get the tax savings (which are in fact simply capitalised as higher housing prices) of owning your own home. That's a hedge against rising rents. Try not to own more of a house than you need - the modern North American McMansion is a ticket to high maintenance and property costs. Get rid of stuff instead - you can always buy it again

- diversify your equity portfolio globally. The financial services companies which make up much of the Australian index are heavily geared into the housing market. The Big 5 Canadian banks have been phenomenal investments over the last 30 years, and the fundamental of all lending and consumer finance is property equity. You don't want to be long the ASX if there is a prolonged downturn in commodity prices (perhaps unlikely, given growth in SE Asia and India -- but commodity prices are always cyclical) and a housing bubble bust at the same time

- bonds are trickier because generally the AUD tracks commodity prices. So being hedged into AUD is not the end of the world. And I don't have much doubt about the Commonwealth's ability to repay its debts (I don't remember what happened in the 1930s, when I think some States, and maybe the Federal government, had to reschedule debt?). I believe Australia now issues inflation-linked bonds as well, and those should be considered - the usual response of an economy like Canada or Australia to economic troubles is to devalue, and that leads to higher inflation in import-dependent economies.
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Watty
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Re: Is Real Estate a better investment than the index in Australia?

Post by Watty »

alex123711 wrote: Sat Jun 10, 2023 7:36 am ....and the fact that property doesn't seem like it will ever crash here....
Statements like that are red flag that there is a bubble there.

I am in the US but I used to work with some people in Australia and we would sometimes talk about our local housing markets. I am not mistaken aren't most mortgages there variable rate loans that will change interest rates after a relatively short fixed rate period?

A quick Google shows that mortgage rates have recently increased from just above 2% to around 6% over the last year.

https://tradingeconomics.com/australia/mortgage-rate

That alone would scare me since it may force people to sell their homes in addition to making them less affordable for new buyers.

In the US mortgage rates have increased a similar amount but most people here buy houses with a fixed rate mortgage which is fixed for 15 or 30 years.

Bubbles often go on longer and get higher than people would think possible but that fuels final waves of buyers who were skeptical and start thinking that "Maybe this time it is different." and buy long after prices have increased to a lot.
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Re: Is Real Estate a better investment than the index in Australia?

Post by Valuethinker »

Watty wrote: Mon Jun 12, 2023 7:29 am
alex123711 wrote: Sat Jun 10, 2023 7:36 am ....and the fact that property doesn't seem like it will ever crash here....
Statements like that are red flag that there is a bubble there.

I am in the US but I used to work with some people in Australia and we would sometimes talk about our local housing markets. I am not mistaken aren't most mortgages there variable rate loans that will change interest rates after a relatively short fixed rate period?

A quick Google shows that mortgage rates have recently increased from just above 2% to around 6% over the last year.

https://tradingeconomics.com/australia/mortgage-rate

That alone would scare me since it may force people to sell their homes in addition to making them less affordable for new buyers.

In the US mortgage rates have increased a similar amount but most people here buy houses with a fixed rate mortgage which is fixed for 15 or 30 years.

Bubbles often go on longer and get higher than people would think possible but that fuels final waves of buyers who were skeptical and start thinking that "Maybe this time it is different." and buy long after prices have increased to a lot.
Along with the relevant Canadian markets (Vancouver and Toronto, primarily) and certain Asian housing markets (Hong Kong), homes in Melbourne and Sydney in particular have in recent decades scored very highly on different indices of "most overvalued" housing markets in the world.

There are a couple of similarities between Canada and Australia:

- housing markets are financed relatively short term compared to the USA - fixed interest rate deals in Canada seldom stretch more than 5 years, and these days I gather a lot of buyers were on floating rates.

- the influence of an influx of money out of East Asia (but not only) was palpable. Indeed Canadian govt investment schemes encouraged it for a long time. Thus Vancouver housing prices became inextricably tied to economic and financial conditions in HK and PRC rather than to Canada's domestic economy situation. Whether this will continue is an open question given greater restrictions there & evaporation of their residential property bubble (which has been estimated to be the largest financial bubble in history, in quantitative terms).

One should not ignore the predilection of the locals for leveraging real estate in this - Canadian personal debt to GDP is the highest in the G7 now, I believe. I certainly don't mean to imply that all immigration is bad or it is foreigners cheating local-born Canadians out of homes.

- Canadians and Australians are highly suburbanised. They mostly live in the the suburbs of a few big cities. More so than the USA, say. Depending on how you cut it, Greater Toronto Area is 1/4 of all Canadians (imagine NYC or Los Angeles w 75m people), Greater Vancouver another 10-15%. For all sorts of reasons the number 2/ 3 city, Montreal, did not show signs of bubble-like behaviour until relatively recently (the zoning insistence on single family homes is not as extreme and thus new supply has been somewhat elastic to demand). Sydney and Melbourne are similarly dominant (each 6m+ people in a country of c 25m?).
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