ASX ETFs provide investors several distinct advantages over direct real estate investments.
When interest rates rise, property prices are expected to decline. However, this relationship only factors in the demand side of the equation. House prices are also impacted by the supply of homes on the market. Over the past few years, the housing supply has significantly declined. A major cause has been a reduced level of turnover (i.e. longer home ownership).
The proportion of housing stock currently being transacted is roughly equivalent to the height of the 1990s recession, when interest rates were through the roof and unemployment was highest since the Great Depression. According to news.com.au, housing turnover was 4.6% in 2024, significantly down from the 2001 peak of 9.1%
Other factors that have limited housing supply over the past few years include strong immigration following the reopening of borders after COVID-19 and the impact of short-term rentals.
Unfortunately for aspiring property buyers, Australia's major property markets have become severely unaffordable. According to the Australian Institute, the size of the average home loan over the past 5 years has increased by more than $198,000 in Western Australia, South Australia, Queensland, and New South Wales.
While media commentary has focused on Sydney being the most expensive city in the world, all states have been affected. For example, according to the Australian Institute, the average new home loan in South Australia has increased 56% over the past five years from $372,000 to $580,000. Meanwhile, the average full-time wage in South Australia has only increased by 18%.
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The benefits of ASX ETF investing
With the housing shortage likely to continue, the outlook for owner-occupiers is likely to remain challenging. Fortunately, listed property, and in particular, ASX ETFs, provide several key advantages over direct real estate ownership.
The secular decline in brokerage fees means that investors can regularly make small contributions to build up their property exposure. This is a huge advantage over direct ownership, given the typical requirement for a 20% deposit for a property purchase.
ETFs also offer diversification within the property sector, including commercial property such as shopping malls, offices, warehousing, and healthcare clinics. By nature of being listed on the exchange, they offer liquidity. This allows investors to sell a portion of their investment at a very low cost compared to the fees charged by real estate agents.
Real estate ASX ETFs to consider
If you're interested in real estate exchange-traded funds (ETFs), there are several options available on the ASX.
The Vanguard Australian Properties Securities Index ETF (ASX: VAP) provides low-cost exposure to a mix of Australian real estate investment trusts (A-REITS). The VAP ETF contains 31 holdings from a range of property sectors, including residential, office, retail, and industrial. With a management expense ratio of just 0.23%, this ETF is an especially low-cost option.
The VanEck Australian Property ETF (ASX: MVA) is another option to consider. For a management expense of 0.35%, the MVA ETF contains 17 holdings and seeks to track the MVIS Australia A-REIT Index.
Finally, Australian investors looking for property exposure may wish to consider the VanEck FTSE International Property (Hedged) ETF (ASX: REIT). With 318 holdings, this ASX ETF is significantly more diversified than the VAP ETF and the MVA ETF. For a management expense of 0.20%, it invests in international property securities outside Australia with returns hedged into Australian dollars. This ETF is best suited for those looking to maximise diversification.
