The latest Long Term Investing report from fund manager Russell Investments shows that Investing in property over the last two decades has delivered strong compared with shares and other asset classes, according to property commentator Michael Grochowski.
Analysing the report Grochowski notes that taxation policies have been a key factor in the sector’s long-running attractiveness. Over the past 10 years to December 2011 residential investment property has outperformed all other asset classes at the lowest and highest tax rate at 7.2% p.a. and 5.8% p.a. respectively.
Viewed over a 20-year period, Australian shares returned 9% p.a. and 7% p.a. at both the lowest and highest marginal tax rates respectively, with residential investment property achieving the second highest return of 8.1% p.a. and 6.6% p.a. at the lowest and highest marginal tax rates respectively.
Grochowski says that cash had the lowest returns under both tax regimes of all asset classes over 20 years.
Calculations by Russell Investments, and quoted by Grochowski in a commentary to property investors last week, showed that over the 20-year period the effective tax rate for top marginal tax payers is most favourable for Australian shares at 20%, with residential investment property at 26% and Australian REITs and 23%.
In comparison, says Grochowski, the effective tax rate for overseas shares is 28%, it rises to 36% for global REITS and is at 49% for cash and bonds.
Grochowski notes that the impact of personal taxation on residential investment property has also been less significant as a result of the tax deductibility of expenses relating to residential investment property.
“All three asset classes (Australian shares, residential investment property and Australian REITS) also provide tax deferral benefits and qualify individual and superannuation investors for a capital gains tax discount on liquidation, which contributes to their after-tax attractiveness relative to bonds and cash,” Grochowski notes, quoting the report.
Michael Grochowski makes the point that for investors residential property is no longer a risk free asset class or a sure bet for future growth. The main risks for residential property relate to relatively high valuations and the prospect of further deleveraging by Australian households, says Grochowski.
In concluding his remarks of the report, Michael Grochowski referred to last year’s Prime Minister’s Economic Forum in Brisbane, where Westpac boss Gail Kelly said compound growth in house prices were over for good and Australia would not see another housing boom.