Property vs. Shares – what does the Russell / ASX Report tell us?

Each year consultants Russell Investments and the ASX publish a report detailing returns for various asset classes, such as cash, bonds, international and Australian equities and residential investment property. The 2016 report updates returns for the 10 and 20 years up to December 2015. (You can see my commentary on their 2015 Report in my July 2015 Newsletter).

Highlights of this year’s report which, as expected, differs a little from the previous years’ reports include:

  • While pre-tax returns from Australian shares and residential investment property have been broadly similar over longer time periods, residential property has edged ahead in recent years.
  • Over the 10 years to December 2015 pre-tax returns for Australian shares returned an average of 5.5% (down from 9.2% p.a. in the 10 years to December 2013) and residential investment property returned an average of 8.0% (up from 6.1% in the 10 years to December 2013).
  • The numbers over 20 years slightly favour residential property with a gain of 10.5% per annum versus 8.7% per annum for Australian shares.
  • International shares (hedged for currency risk) outperformed Australian shares over the past 10 years with pre-tax returns of 6.2%. (down from 7.8% in the 10 years to December 2014).
  • Currency hedged overseas shares outperformed unhedged overseas shares over the past 10 years.
  • The returns across all asset classes are slightly less favourable for most investors once tax is taken into account.
  • Dividend imputation and the tax deductibility of expenses related to residential investment property benefit these types of investments as compared with cash, bonds and global equities.
  • The Report’s Executive Summary has a note of caution regarding Australian residential property investment stating that “In the coming years, investors are unlikely to be able to depend on this asset class to provide stable positive returns”. That’s just one opinion but does highlight that past performance isn’t always a good guide to future performance so some caution is justified.

 

Residential Property Prices double every 10 years – right?

There is a widespread view that residential property prices double about every decade, which would represent a compound growth rate of 7.2% p.a. Unfortunately, data compiled by property researchers CoreLogic is consistent with what the ASX/Russell research shows i.e. it shows that this isn’t generally true even if some suburbs have seen such stellar growth in values.

CoreLogic, part of the largest property data and analytics company in the world, report that:

“A decade ago, the national median house price was recorded at $330,000 and the median unit price was $310,000.  Ten years later, the median selling prices were recorded at $499,000 and $445,000 respectively.  Based on these figures, selling prices nationally have increased by 51% for houses over the decade and by 44% for units.  Clearly, based on broad averages, in most areas of the country median prices have not doubled over the past decade”.

“Prices have gone closest to doubling over the decade in Sydney, Melbourne and Darwin while in Perth and Hobart the total change for houses and units has been well below 50%”.

You can see more detailed information by clicking on the link below and it does show that the median house price of 51% of Melbourne suburbs doubled over the decade to June 2016 and 44% of Sydney suburbs. Next best was Darwin at 19% and in other capital cities it was less than 5%.

http://www.corelogic.com.au/news/how-many-suburbs-have-seen-median-prices-double-over-the-past-decade

Finally we have clarity around the Superannuation contribution rules

After extensive consultation and debate, the Federal Government has clarified what is happening to superannuation contribution rules from next financial year (the rules applicable to this financial year have not changed). While not legislated as yet, these rules are expected to be passed by Parliament.

Importantly, until June 30, 2017 you have the opportunity to make super contributions under the current caps for both concessional and non-concessional contributions. For the current 2016/2017 year, the concessional (before-tax) cap is $30,000 for Australians aged 48 years or younger on June 30, 2016, and $35,000 for Australians aged 49 years or older on June 30, 2016. Self employed people and employees receiving employer contributions and able to use salary sacrifice should consider fully using these caps if their personal circumstances allow.

The non concessional (NCC cap) remains at $180,000 for the 2016/2017 year and if you are eligible to take advantage of the bring-forward rule, and have the funds available, the opportunity exists to make up to $540,000 in NCCs but only this financial year i.e. in the 2016/2017 year only.  The new $1.6 million super balance threshold (pension transfer balance cap) that will take effect from July 1, 2017 does not restrict your ability to make contributions this financial year.

From July 1, 2017, the annual NCC cap drops to $100,000 and any bring forward triggered during the 2015/2016 or 2016/2017 year that is not fully utilised before June 30, 2017, will be reassessed as at July 1, 2017, reflecting the reduced $100,000 annual cap. The transitional bring-forward cap will be a combination of the current $180,000 NCC cap and the lower NCC cap of $100,000 that will take effect from July 1, 2017.

From July 1, 2017, you can make no more than $300,000 in NCCs in one year using the bring forward provisions and assuming you meet the other rules, such as being under the age of 65,  not having previously triggered the bring forward provisions and having less than $1.6 million in your super account.  Note, the new $1.6m cap applies to an individual so a couple effectively has a combined cap of $3.2 million so strategies to fully utilise both individual caps will be important to wealthier couples.

Assets limits for Centrelink Age Pensioners from 1 January 2017

From 1 January 2017 the Federal Government is tightening the rules around eligibility for the Age Pension. The changes to asset test thresholds will adversely impact people with higher levels of assets currently receiving part Age Pensions. An estimated 91,300 will lose all pension payments (though they will receive a Commonwealth Seniors Health Care Card) and others will receive lower pensions.

No pension will be payable if assets exceed the following:

  1. Single, home owner $ 542,500
  2. Single, non-home owner $742,500
  3. Home owner Couple (combined) $816,000
  4. Non-home owner Couple (combined) $1,016,000

Note: Lower assets limits apply to pensioners living overseas.

Can you jump from a plane with no parachute & survive? Yes you can!!

Not for me – financial advisers generally try to reduce risks rather than look for them – but I can’t help but marvel at those who have the courage (madness?) to try something like this:

http://surprise.ly/v/?PK0Hl0kWELE:0:0:0:100

This newsletter contains general advice. It does not take into account your individual objectives, financial situation or needs. You should consider talking to a financial adviser before making a financial decision.

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