A potential pitfall for investors is to underestimate their exposure to residential real estate by not taking their own homes into account.
Recently-released ABS statistics show that Australians held $5.7 trillion in “land and dwellings” in the June quarter against $4.2 trillion in “financial assets” (such as bonds, shares, term deposits, cash and managed investment funds – held outside and inside super). These figures include any borrowing such as home and investment mortgages.
And of the directly-held property of Australian households, residential property, both private homes and investments, make up 95 per cent of their real estate in terms of value. As well, there is the indirect exposure to residential property of many investors through their Australian bank shares.
Most of us have closely followed the sharp rise in Sydney and Melbourne residential property prices in recent years as the Reserve Bank as successively cut the official interest rate.
It has been virtually impossible for some time now to pick up a newspaper or watch the television news in Sydney and Melbourne in particular without coverage of the intensive competition between property buyers.
And the cutting of the official cash rate to a record low five months ago truly intensified this competition, propelling prices even higher.
As debate increases about which way residential property prices may now move, it is worthwhile considering a few points from an investor’s perspective.
With average residential property rental yields having fallen to very low levels as residential prices have jumped, investors will have to rely more on capital gains to achieve satisfactory returns. However, this may be a tough ask in markets that have risen so sharply.
Whenever property prices or share prices have been rapidly rising, many investors inevitably overlook the attributes of having an appropriately-diversified portfolio. A classically-diversified portfolio spreads its risks and opportunities in local shares, overseas shares, fixed interest and property.
Obviously, the appropriate diversification of investors’ investment portfolios should much depend on their personal circumstances.
Written by Robin Bowerman, Principal, Market Strategy and Communications at Vanguard Australia.