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Stick to quality

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by Peter Switzer

Beware the doomsday merchants; they could prove very costly! I was just thinking about this when I saw real estate prices in Australia rose by 13.6 per cent last year.

In case you missed it, there have been two takes on what our house prices have done. The Australian Bureau of Statistics house price index rose by 5.2 per cent in the December quarter and that means a 13.6 per cent rise on a year ago.

However, this data could overstate true price growth. The RP Data-Rismark index, which is tracked by the Reserve Bank, rose 2.1 per cent in the quarter and 11.1 per cent for the year.

So even if we take the lower 11.1 per cent figure, it shows what good quality assets can do virtually while you are sleeping.

Price drop

Real estate experts think double-digit price rises could happen for a couple of more years but that could then be followed by a series of years of lower prices.

I know my old mate Steve Keen thinks we will see a 40 per cent fall in real estate prices but he does put in the timeline rider that this could happen over the next 10 to 15 years! This sounds very dramatic but is it that bad?

Number cruncher

Let’s imagine your house rises six per cent a year for 15 years before Steve’s house price crunch happens. Using the rule of 72, which says divide the percentage return in to the number 72 to find out how long it takes your investment to double in value, then we find it goes up 100 per cent in 12 years. Your $400,000 home becomes $800,000 and then falls to $480,000. It’s bad news but it’s not disastrous if you are not selling your home.

On the other hand, if your home grows by 12 per cent a year, then it takes six years for your house to double in value. In 12 years your home could be worth $1.6 million and if a 40 per cent price fall came along you would be back to just under a million dollars!

Still, that’s not bad for a house you bought for $400,000 only 12 years before.

Home lessons

The lesson with real estate is to make sure you can service your debt and buy the worst house in the best street in suburbs where other buyers or tenants want to live. Just like you should be an expert on the shares/companies you buy, you should be a property expert when investing in housing.

This asset is capital gains tax free and this makes it a great investment option. By adding renovations you can enhance the capital gain and set yourself up for life. On the other hand, you could become a landlord and build up a portfolio of great properties and once again the tax system can help you achieve this goal.

Rising market

On my show on Sky News Business Channel, Tony Brennan, the chief equity strategist from Deutsche Bank reasserted his belief that the S&P/ASX 200 will head up to around 6000 this year. Given we are at 4,605, that would mean a 30 per cent gain this year and that is without dividends added into the equation!

Now this might not happen but if it did, it puts Keen’s 40 per cent fall in real estate prices into context. Sure a property or stock market crash can hurt you in the short-term but if you hold great assets — property and shares — then time is ultimately on your side.

The top 20 stocks are a good collection of quality assets. These have beaten the S&P/ASX index over the past five years by 17 per cent, with the index up 20 per cent compared to 37 per cent for blue chippers.

The simple message is — stick to quality and generally time will do the rest.

For advice you can trust, contact Switzer Financial Services.

Important information:This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.

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Published on: Wednesday, February 03, 2010