The below article is by Jarrod McCabe a director of Wakelin Property Advisory.
As Australia’s residential property market slows, some commentators are comparing returns on investment in shares versus property in the short term and are advising an “orderly retreat” from property. Motley Fool’s Brendon Lau is one of the latest.
“[T]here’s little doubt in my mind that shares will generate a superior return over property for the next year or so,” asserts Mr Lau.
Mr Lau might well be right. But short-term performance is a curious basis upon which to hang big investment decisions. Investment in property is not about timing the market, buying on a downturn and selling at the peak. It’s about playing the long game, and riding out any market fluctuations.
As a residential property investment advisory firm, we typically encourage our clients to buy, hold and never sell. And while the liquid nature of stocks and shares allow for more regular turnover than property, I think we can all agree that churning assets – be they shares or property – isn’t a recipe for superior returns.
Perhaps the concern with property relates to a ‘revision to mean’ argument: that property has performed well in recent years so must perform badly in coming years.
It is true that property has outperformed shares over the past 10 years. Australia’s share market has only recently returned to the record high it reached a decade ago, while well-selected property assets bought 10 years ago have more than doubled in value in that time. But this isn’t a flash in the pan. Property has performed well over decades.
Given the long-term nature of investment, the issue isn’t when you buy. It’s what you buy. Readers of Motley Fool look to identify superior companies. Similarly, with property, well-selected assets will outperform the wider market because they have the right supply/demand ratio: a mix of scarcity value and constant, multi-faceted demand.
In Melbourne (a market in which we operate and know especially well) and in Sydney, the demand factors that have contributed to house price growth in recent history remain: a rising population, a thriving, diverse economy, and low interest rates.
On the supply side, while oversupply is occurring in some areas, particularly the high-rise apartment sector, there is still a scarcity of the types of homes that meet the desires and needs of most Melburnians and Sydneysiders.
So we believe well-selected properties in Melbourne and Sydney remain a robust option for investment.
A retreat from residential property into just shares over the next 12 months might well lead to greater gains in the short term, but could also result in less capital appreciation in the long term. Less diversification in an investment portfolio entails greater risk.
Jarrod McCabe is a director of Wakelin Property Advisory, an independent buyer’s agent specialising in acquiring residential property for investors. wakelin.com.au
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The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.