Recently the Australian Financial Review (AFR) conducted an enlightening interview with one of Australia's top economic experts, Mr Jeremy Lawson.
The interview – in part at least – focussed on Lawson's view of the Australian housing market, which he described as 20% to 30% overvalued. He largely blamed the dire situation on the low interest rate environment coupled with a lack of adequate policy intervention to rein in house prices.
Lawson also declared during the interview that his biggest fear for the Australian economy is a sharp slow-down in Chinese growth.
While buying a home to live in is often a personal decision and made based on qualitative as well as quantitative factors, investing in property should obviously be made based on the expected financial return and after taking into account the risks involved.
Although property investment may often involve a lower risk of permanent capital loss, it certainly is still risky – particularly if the property is significantly overvalued when purchased. Given the low rental yields currently being achieved by many individual property investors, it's fair to say their expectation for above average capital growth is high.
To my mind, the equity market offers a much more appealing risk-reward scenario. Firstly, reliable, fully franked yields above those being achieved from property can be attained at a potentially lower risk to single property investment. For example investors need look no further than stocks such as Telstra Corporation Ltd (ASX: TLS) with a grossed up 7.4% dividend yield. Secondly, even large blue-chip stocks such as Telstra should achieve capital gains rates at least in line with the property market over the long term.
