Most of us have grown up familiar with the phrase “safe as houses”. However with unusually high real estate returns over recent years, many independent economists are now suggesting houses may not be quite so safe anymore.
Over the last 20 years, Australian residential real estate has been in a boom period. Prices have increased by a far greater rate than their historical average. Other indicators such as price to wages ratio and price to rents ratio have also increased markedly during this time.
As a result, many independent economists are predicting that those trends are not sustainable, and there has to be a correction at some point.
Back in 2009, high profile academic Steve Keen famously lost a bet when he wrongly predicted a house price correction that year. Consequently he had to walk from Canberra to the top of Mt Kosciuszko!
Steve was very much a voice in the wilderness then, but in recent years as property prices have gone up even further, more and more independent economists have reached the conclusion that property prices are overvalued.
Are they right?
What will happen to real estate values in the coming years?
At ICT Wealth we don’t claim to know. But the increasing weight of independent opinion suggests real estate is now a more risky investment than it used to be. There is much more uncertainty about future real estate returns than in years gone by.
What can you do to reduce that risk?
If you have a high proportion of your assets in property, and want to continue building wealth over the medium to long term, property market risk can be reduced by diversifying into other asset types.
For people with multiple investment properties this could potentially be achieved by selling part of your portfolio and investing the proceeds into assets such as shares, bonds, or managed funds.
Putting more money into superannuation can also provide additional asset diversification. (As long as you don’t then create an SMSF to invest your super into even more property!)
If you have built up equity in your home and want to use it to create additional wealth, borrowing to invest in a portfolio of shares or managed funds may be an effective way to do this. The tax benefits are similar to an investment property, but you get much better asset diversification and the ability to buy/sell in smaller chunks.
The suitability or otherwise of these strategies will vary between individuals, and can be complex from a tax point of view. So be sure to get good financial advice customised to your own specific situation.
Of course if high property returns continue on without a correction for some time, then reducing your property exposure now could also reduce future returns.
However it is important to be aware that maintaining a high exposure to property comes with risk. “Safe as houses” is a historical saying. It is not a future guarantee.