For as long as people have been securing their financial futures, a debate has raged about what type of investment offers the best long-term returns.
BY MICHAEL YARDNEY
Well, a recent study by ANZ Research called Asset Returns: Past, Present and Future has provided some clear answers – residential property has outperformed all other asset classes over the past 24 years.
It was a very detailed study comparing a range of assets going back to 1987 and different levels of leverages and returns were then risk-adjusted in order to paint an objective picture.
ANZ compared the after-tax and after-cost returns of owner-occupied housing, investor housing, commercial property, equities (the ASX 200), government bonds and term deposits.
The best performing asset:
The key finding was that the highest performing investment over the past 24 years was owner-occupied residential property.
The report showed that even when costs and taxes were factored in, owner-occupied housing generated the highest average annual total return of 12 per cent per annum. In second place was investment housing, which delivered an average annual return of 9.6 per cent over the past 24 years.
Over the same period the share market averaged 8.9 per cent for a higher level of risk due to its higher volatility; with commercial property, bank term deposits and government bonds providing lesser returns.
The following chart from the ANZ shows the compound annual growth rate of the various asset classes over the past 24 years.
What about costs?
A common criticism of simple return models is that housing attracts a number of costs that other assets do not. Things like maintenance costs, stamp duty and agents commissions (on sale and rent).
In this detailed study the ANZ have accounted for these costs as realistically as possible. ANZ also included tax with a marginal income tax rate of 45 per cent being assumed, as well as capital gains tax and stamp duty.
A gearing level of 50 per cent was assumed for all assets, except for term deposits and government bonds and returns were measured based on the return on equity.
This is one of the most detailed comparative analyses I’ve read. However I believe the results for property would have been even better if a higher gearing ratio had been assumed. If you think about it, most property investors have a higher loan-to-value ratio than 50 per cent.
And of course the increased returns to property owners who renovate or improve their properties weren’t accounted for in this analysis.
You know what they say…past returns are no guarantee of future returns.
In fact the ANZ believes equities will have the highest returns over the next decade as the growth in value of residential properties tracks the growth in wages.
Michael Yardney is the director of Metropole Property Investment Strategists who create wealth for their clients through independent, unbiased property advice and advocacy. He is a best-selling author, one of Australia’s leading experts in wealth creation through property and writes the Property Investment Update blog