When it comes to choosing where to put your savings it’s all about getting the right mix, writes Barbara Drury.
Which is the better investment, property or super? It’s a perennial question and one that’s likely to spark heated debate at weekend barbecues.
At first glance it’s hard to go past property, especially in the sizzling hot Sydney and Melbourne markets. But that’s only part of the picture.
According to ANZ Research, prices were up 17.7 per cent in Sydney in the year to September and 15.6 per cent in Melbourne. But prices went backwards in Perth, Adelaide and Darwin. And that’s the thing with property, location is everything.
By comparison, the median balanced super fund returned 5.9 per cent over the same period. Balanced funds hold a diversified portfolio of shares, property, cash and fixed-interest investments.
“Don’t look to the past couple of years to provide an indication of what price growth will be over the next few years,” says ANZ senior property economist David Cannington.
“Nationally, we think by the end of 2016 (house) prices will increase in the range of 2 to 5 per cent year-on-year,” says Cannington.
Price isn’t everything
While watching the weekend property auction results is a national sport, prices can be misleading. Not only do they fail to reveal hidden costs such as spending on rates, maintenance and renovations, they ignore tax. For investors, rather than owner-occupiers, tax can be a game changer.
According to a report by ASX and Russell Investments, over the past decade Australian residential property returned just 4.9 per cent a year after tax for people on the highest marginal rate. After-tax returns were better (6.2 per cent) for low-income earners and investors who held property inside a self-managed super fund.
The after-tax return for the top 50 balanced super funds was 5.6 per cent over the same period.
That’s right, over the long-term, all things being equal, slow and steady super can keep up the pace.
Let’s look closer
That’s not where the comparison should end though. The right investment for you will also depend on your age, overall financial position and your medium and long-range goals.
If retirement is still a distant mirage you may not want to tie up all your wealth in super where it can’t be touched for decades.
Say, for example, you lose your job or need cash for the deposit on a home. You might have $1 million in super but not be able to access it.
“We all need to build up pockets of money outside super,” says Rainmaker executive director of research Alex Dunnin. He says that one of the most tax-advantaged investments outside super is negatively-geared property.
A property is said to be negatively geared when the interest on your investment loan and other costs exceed your rental return. When this happens you can claim a tax deduction for your net rental loss.
However, the scales tip in favour of super the closer you get to retirement. Once you’re in your 50s there are a number of tax-effective strategies that can provide a last-minute boost to your retirement savings.
The truth is that super and property do different things.
Super generates a steady rate of return over the long run with the sole purpose of providing income in retirement. A fully paid-off home provides security in retirement. Investment property offers income in retirement and more flexibility while you are still working.
For example, you could use the rental income to pay down your investment loan or home mortgage. Or you could sell to release cash for other purposes such as the purchase of a home.
So which is it to be, property or super? “The question is not whether you should invest in super or negatively geared housing but what the mix should be”, says Dunnin.