Property… The long view

Written by Mark Thomas

27 August, 2019

Property has earned its place as a long term holding in your SMSF or private investment portfolio that also holds shares and bonds.

Over the long term we see that the national price for property values tends to rise or go through flat periods, but there is not too much falling in aggregate.

Since 1926 the difference between returns from Australian share and Australian residential property is 0.3 per cent per annum in favour of shares.  This does not include the higher leverage available in property nor the tax benefits of franking credits from shares.

As a point of context residential property is a $6.5 trillion asset class, roughly four times the value of the Australian share market and more than twice the value of all superannuation funds in Australia.

Shorter term property values have been flat to slightly down nationally over the last two years with a 15 per cent fall in Sydney prices (peak to trough) offsetting by other states.

    *A $6.5 trillion asset class  (four times the size of Australian equities)

    Property has a low relationship (correlation of price movements) with other major investments like shares and government bonds, as shown in the following table. Not surprising is the negative relationship of property with interest rates, for example as interest rates drop property prices rise and vice versa.  Interest rates are currently low and may drop more to new all time lows.

    Ten year government bonds (ACGS 10Y) show a negative correlation to property as does the official cash rate or money in your bank account (RBA Comm).

    As a point of context residential property is a $6.5 trillion asset class, roughly four times the value of the Australian share market and more than twice the value of all superannuation funds in Australia.

    * Table based on 12 month quarterly rolling data Mar 2000 – Dec 2018 

    A correlation of 1.00 means the relationship is exactly the same.  A correlation of -1.00 means that they are exactly the opposite.

    Ten year government bonds (ACGS 10Y) show a negative correlation to property as does the official cash rate or money in your bank account (RBA Comm).

    When we look at a chart of these returns there is a broad relationship of shares and property moving up and down together, but there are periods when they deviate for years.

    In fact, versus the other major investments, residential property has fared very well in terms of risk and return. Modelling demonstrates higher allocations to residential property increases returns and reduces volatility and variance in a portfolio of major investments (see chart).

    * Portfolio Asset Allocation Comparison – Based on 12 month quarterly rolling data Mar 2000 – Dec 2018.  ASX 300 Accum Index, RBA Cash Rate, A-REIT Index, SPP, MSCI Index, ACGS 10Y Generic, RBA Commodity Price Index.

     

    So when building a portfolio for the long term it makes a lot of sense to hold Australian residential property as a core asset. While history seldom repeats there are patterns and relationships that do repeat over longer periods of time.