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Cautious investors returning to property

SHARES versus property? It is a perennial topic of debate among Australian investors.

For most of the 1990s, the pendulum seemed to be swinging towards shares. Low inflation reduced the growth in housing values, while the number of Australians owning shares rose to record levels.

That may now be reversing, with many investors stung by the collapse of dot.com stocks, the volatility in some blue chip shares, like AMP and Telstra, and the decline in interest rates.

What does history tell us about the returns from property compared to shares? And do the numbers tell the full story?

Over the past 15 years, the average annual growth rate in Perth median house prices was 8.3 per cent, according to the Real Institute of WA. Over the same period, the average inflation rate was just 3.8 per cent.

More recently, the growth in property values has not been so impressive. Over the past five years, median Perth property values rose by 3.8 per cent a year compared with inflation of 1.5 per cent/year.

A more meaningful way of measuring returns is to include not just growth in capital values, but also net rental income after adjusting for outgoings such as council rates, land tax and so on.

The Real Estate Institute of Australia commissions the University of Western Sydney to calculate these returns for each capital city.

For a three-bedroom house in Perth, the average annual return since 1982 has been 14.3 per cent. For a two-bedroom flat, the average return since 1987 has been 13.2 per cent.

These returns are very similar to the pre-tax returns from Australian shares. The All Ordinaries Accumulation Index, which takes account of capital growth plus dividends from Australia’s top 300 stocks, has returned 13.8 per cent/year since 1985.

However the after-tax figures would be very different, primarily because the dividend imputation system makes dividends largely,

or in some cases completely, tax free.

Most dividends include 34 per cent franking credits, which reflects the fact that the company has already paid income tax on its profits. (The company tax rate drops from 34 per cent to 30 per cent on July 1.) The franking credits can be used by shareholders to offset tax payable on other income.

This benefit far outweighs the limited tax concessions applicable to property investment.

Another crucial factor investors need to assess is the extent to which renovations have contributed to the growth in property values. This has been particularly important in older suburbs like Subiaco and Nedlands.

The Reserve Bank of Australia has calculated that alterations and additions account for between 35 and 40 per cent of total spending on houses and other dwellings.

Spending money (or personal time) on maintenance is part and parcel of owning residential property. Investors in shares do not have to worry about such expenses.

Yet another consideration is the extent to which individual properties or shares vary from the average (above or below).

REIWA has found there is a widening variation in capital growth rates in the Perth property market.

A third of the market consistently achieves very high growth in values, of 10 per cent or more, according to REIWA. Another third of all suburbs usually record growth that is up to 2 per cent more than the inflation rate, while the final third has growth that is usually around the inflation rate.

REIWA points out that suburbs with high growth rates are not always at the top end of the market. The latest figures to March 2001 show that Coolbellup, Carlisle, Embleton and Mt Helena (where median house prices are $160,000 or less) were among the top 10 suburbs for capital growth.

The varied growth rates of individual properties and individual shares mean that people should carefully research both markets before investing their hard-earned money.

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