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ANZ looks at comparative asset performance

November 2, 2011

Asset Returns: Past, Present and Future is another fascinating report from the economics team at the ANZ. It reviews comparative after-tax and after-cost returns for the main asset classes over the last 24 years, and provides some predictions for the future.

The main finding is that residential property was the standout asset over the last 24 years, outstripping shares, government bonds, commercial property and term deposits. 

Due to the cost advantages of buying a home over investing in one (the main one being the absence of capital gains tax on the family home when it is sold), the report found that the return on owning your home (12% return per annum) was superior to investing (9.6% return per annum).

Whilst this difference in return is no doubt true when comparing identical properties, one should remember that in reality investors and home-owners tend to buy different types of properties. In order to meet the need for accommodation, and to be near family and friends, it is often the case that a home is purchased in an area with low capital growth. A good investment property should always be in a prime area – i.e. a capital city inner suburb – where the high land value and scarcity of supply drives superior capital growth. In this more usual scenario, the greater comparative returns on investment property should more than outweighs the higher holding costs and taxes.

Nevertheless, the report supports the notion that it is invariably a good idea to buy your home, which we agree with. The report also highlights that, over the last 24 years, property has combined a good return with low price volatility i.e. you’re less likely to lose your money than in equities. So it wins on the peace of mind index too! (And that’s not even mentioning the value property investors place on owning a tangible asset where they have a high degree of control)

Looking forward over 10 years

The report goes on to say that, for the next ten years, the total return (factoring in capital growth and income yield) for equities will marginally outperform property 9% to 8% per annum, based on ANZ modelling. Naturally, predictions of future performance have to be weighed carefully. Further, ANZ’s model is quite complex, but in short, the results are highly dependent on their assumptions, with small – and reasonable – changes in those assumptions seeing property out-perform equities again.

The authors predict only 5% capital growth per annum for property, due to low affordability capping growth at the expected growth in average household incomes. This is not an unreasonable assumption for the general property market.  But we expect stronger growth where supply is constrained i.e. scarce property – e.g. Victorian, Edwardian, and Art Deco architecture – in inner city prime suburbs.

In the final analysis, the most sensible conclusion to draw from the research is the wisdom of diversification: buy a home, buy an investment property, and have a portfolio of shares.

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