Should you Invest in Property or Superannuation?
One of the hot topics being discussed in recent weeks is the new superannuation "window" that the Government has put forward as part of 2006/07 budget. Up until 30 June 2007, you can put up to $1 million after-tax dollars in your superannuation fund, before a cap of $150,000 per year comes into effect.
Is this a good or bad thing to do? Where is it better to park our money for the future?
There is also a significant amount of press suggesting that property values might fall as people dispose of property and take advantage of the one-off benefits of investing in super.
The answer is not clear cut depending on your age and yes, you should always get professional advice on these types of matters. However, in the latest issue of the Residex Report I did explore the issue in general terms. I did make some assumptions about house price growth which was that housing presented a similar growth rate to that which has occurred over the very long term about 8%pa and rents remained at their current very low rate. I also assumed that an Investment in Superannuation would deliver a return of about 9%pa.
I consider the matter to be important enough that it appears in the report for all states, therefore regardless of which state you buy the report for, you will be able to read the article.
To sum up my basic findings:
We undertook test analysis of two scenarios:
1) making a $150,000 lump sum investment in super compared to
2) buying a $500,000 investment property with a $150,000 deposit. Yes, you were able to borrow funds, which is what would happen. The results of the test analysis clearly showed that the return on the property investment far exceeded the return on the superannuation investment.
Why?
In essence it is the capacity to borrow and receive tax benefits. With superannuation, you cannot borrow against your super funds currently and the tax benefits available in the superfund were not sufficient to offset the tax and leveraging advantage of the direct purchase.
Certainly, you need to consider the time period over which the decision is to be made (if you're only three years from retirement, the decision becomes more marginal. Over 15 years the differential was very significant. The direct house investment provided you with extra dollars after tax of more than $400,000.
There will be those that suggest that the outcome we found is not ideal and hence the tax benefits available in direct housing investment should be removed. After all, we have read that often enough. To those people I would say; the tax benefits are in reality a government subsidy to the least privileged of our community. Remove them (the tax benefits) and there will be less investment in housing and less available rental stock. The consequence will be the replacement of the subsidy with real (actual) dollars by way of rental increases and again the people in need in our society will be those who suffer most, not the better off apparently taking advantage of the tax benefits.
We all must remember there is nothing which forces any party to invest in housing and provide rental stock. It is a commercial decision driven by cold hard return on investment funds alternatives. Remove the tax benefits, returns go down and have to be made up to cause/encourage investment, hence my point.
The Market as at January 2007
The table below shows the latest median values, growth rates and rental yields for the month of January 2007.
Houses
Area |
Median Value |
Growth |
Rent Return |
Last 10 Years %pa |
Last Year |
January
2007 Quarter |
January
2007 Month |
ACT |
$401,500 |
11.33% |
6.05% |
1.65% |
1.27% |
4.87% |
Adelaide |
$301,500 |
10.26% |
6.91% |
1.73% |
0.54% |
4.52% |
SA Country |
$209,000 |
10.51% |
7.99% |
0.87% |
1.44% |
4.56% |
Brisbane |
$363,500 |
11.12% |
7.82% |
1.63% |
0.32% |
4.26% |
QLD Country |
$331,500 |
10.83% |
9.84% |
3.56% |
2.74% |
4.64% |
Darwin |
$363,500 |
8.88% |
20.49% |
6.36% |
-0.11% |
5.35% |
Northern Territory |
$333,000 |
8.32% |
17.97% |
5.63% |
0.45% |
5.62% |
Hobart |
$308,000 |
10.85% |
5.29% |
3.04% |
1.35% |
4.59% |
TAS Country |
$221,000 |
10.22% |
2.62% |
1.16% |
-1.68% |
4.38% |
Melbourne |
$392,000 |
11.21% |
8.89% |
2.35% |
1.41% |
3.68% |
VIC Country |
$243,500 |
10.22% |
1.10% |
2.58% |
1.98% |
4.54% |
Perth |
$503,000 |
15.63% |
26.76% |
1.89% |
0.95% |
2.80% |
WA Country |
$332,000 |
12.69% |
23.14% |
2.15% |
0.00% |
3.62% |
Sydney |
$540,500 |
8.92% |
1.40% |
-0.45% |
-1.29% |
3.55% |
NSW Country |
$311,000 |
9.33% |
3.43% |
3.05% |
0.42% |
4.04% |
Units
Area |
Median Value |
Growth |
Rent Return |
Last 10 Years %pa |
Last Year |
January
2007 Quarter |
January
2007 Month |
ACT |
$316,000 |
9.97% |
3.03% |
3.95% |
-0.28% |
5.25% |
Adelaide |
$223,500 |
10.05% |
4.70% |
0.64% |
1.68% |
4.96% |
SA Country |
$192,500 |
8.86% |
1.22% |
0.09% |
0.49% |
4.38% |
Brisbane |
$275,000 |
7.57% |
4.20% |
0.72% |
-1.23% |
4.96% |
QLD Country |
$299,500 |
8.20% |
4.42% |
-0.68% |
-1.13% |
4.32% |
Darwin |
$267,000 |
8.30% |
19.95% |
7.68% |
2.04% |
5.60% |
Northern Territory |
$252,000 |
7.40% |
18.81% |
5.83% |
1.96% |
5.77% |
Hobart |
$221,500 |
10.39% |
9.68% |
3.32% |
-0.86% |
5.28% |
TAS Country |
$176,500 |
9.44% |
5.31% |
0.92% |
-0.28% |
4.59% |
Melbourne |
$300,000 |
10.03% |
0.09% |
3.34% |
2.21% |
4.33% |
VIC Country |
$187,000 |
8.31% |
-4.90% |
-1.87% |
-0.99% |
4.70% |
Perth |
$370,000 |
13.27% |
27.85% |
0.31% |
-0.01% |
3.53% |
WA Country |
$270,000 |
8.79% |
14.92% |
-5.52% |
0.01% |
3.64% |
Sydney |
$372,500 |
7.23% |
-1.79% |
0.26% |
-0.50% |
4.55% |
NSW Country |
$261,000 |
7.93% |
-2.05% |
-2.70% |
-1.06% |
3.91% |
- Only West Australian and Northern Territory markets outperformed their ten-year growth averages.
- Perth has the second highest median house values, and, in our opinion, speculative buying in this market has driven prices beyond their actual value. This market may become unstable in 2007. While the market is slowing there is still growth and the Median Value of a house in Perth has broken through the $500,000 barrier.
- As seen in the Units table, the results for units generally mirror those for houses with the exception of the Queensland country market, which at $299,500 has the highest median unit value of any rural region. Demand for up-market unit style coastal accommodation has been fed by interstate migration with a high proportion of over fifty year olds arriving from NSW and Victoria.
- Overall, the market performed well in 2006 across Australia and there is evidence that the non-resource states are moving back into a period of growth. The resource states have presented exceptional returns over the past few years, but we should not expect this situation to continue into 2007. However, we equally should not expect large adjustments either as the mineral exports do not look as if they are going to falter this year.
Full analyses and statistics of all the state property markets are provided in each state's individual Residex Report. The December 2006 quarter editions of these reports have just been released.
John Edwards
Residex
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