Is Australian property investment ripe for innovation?

Something is changing in the way households build wealth.

McKinsey Global Institute’s latest Global Balance Sheet report finds that equities are becoming increasingly important in global wealth creation, while property has lost some of its dominance.

Australia, however, stood out in its 2025 data. Household real estate wealth increased by more than 10 percentage points of GDP, and Australian real estate was worth around 4.5 times GDP, well above its long-term average.

But that was 2025.

The Australian property market now looks rather different. Cotality reports national dwelling values have fallen for six consecutive months and are 5.2 per cent below their March peak. Sydney is already 8.6 per cent below its February peak. Over the past year Sydney has fallen 7 per cent and Melbourne 6.2 per cent, while Perth remains 10.1 per cent higher and Darwin 11.9 per cent higher.

Tax settings are changing too. Cotality points to less favourable negative gearing and capital gains tax arrangements as one factor behind weaker investor demand, alongside higher interest rates, affordability pressures and weak sentiment.

So could we be approaching a more fundamental change in how Australians invest?

Shares have changed but housing hasn’t. Think about how Australians invest in shares today.

An investor no longer needs to decide whether to buy BHP, Commonwealth Bank or Woolworths. The extraordinary growth of exchange traded funds (ETFs) means that with one investment, someone can own a small part of hundreds or even thousands of companies.

Diversification that once required considerable wealth and expertise is now available to almost anyone.

Housing hasn’t experienced the same transformation.

Volatility comparisons

An Australian wanting exposure to residential property generally cannot invest $100,000 across Sydney, Melbourne, Brisbane and Perth, diversify between houses and apartments, and then rebalance that portfolio as circumstances change.

Instead, they usually buy one property.

That difference is easily missed when we compare the performance of housing and shares.

Take volatility, for example.

Using monthly returns over the past decade, annualised volatility in Australia’s national dwelling index has been around 3 per cent. On the same basis, volatility in the ASX 200 has been about 14 per cent.

Shares therefore look almost five times as volatile as housing.

But there is an important asymmetry in that comparison. The ASX 200 and the national housing index are both highly diversified indices. Yet investors can readily buy exposure approximating the former through an ETF. They cannot readily buy the latter.

Over the past decade, Cotality reports dwelling values rising 105 per cent in Brisbane and 104 per cent in Adelaide, compared with only 24 per cent in Melbourne. Regional Tasmania increased 119 per cent, while Darwin rose just 34 per cent.

The current downturn provides an even more immediate example. Sydney, Melbourne and Canberra are falling on an annual basis while several other markets are still recording gains.

The national index averages these experiences. A property investor cannot.

Housing has had one enormous advantage.

There is, however, a reason Australians have been prepared to accept this concentration: property offers households access to something extraordinarily powerful — leverage.

Consider an investor with $200,000.

Put it into an ETF and, without borrowing, they have a $200,000 investment. Use it as a 20 per cent deposit on a $1 million property and they control a $1 million asset.

If the property rises 10 per cent, the $100,000 capital gain represents 50 per cent of the investor’s original equity, before financing costs, taxes and expenses.

Of course, leverage works both ways. A 10 per cent decline also removes $100,000, or half the initial equity.

We tend to describe those two transactions very differently. Borrow $800,000 to make a $1 million financial-market investment and we would immediately describe it as leveraged investing. Do it with residential property and we call it a mortgage.

Investment flexibility

For decades, rising property prices, relatively accessible debt and favourable tax treatment made that model enormously attractive.

But what happens if some of those conditions change?

Are attitudes changing too?

Recent research by Macquarie University’s Elizabeth Sheedy, Syed Shah and Terry Pan published in Housing Studies provides another piece of the puzzle. Their research finds that while home ownership remains an important aspiration for most younger Australians, there is also a group that deliberately delays or rejects it, placing greater weight on flexibility and expressing concerns about debt and the risks associated with property.

Importantly, their study does not establish that these people are taking their prospective housing deposits and putting them into shares.

But it raises an interesting question when combined with the global trend identified by MGI.

If Australians become less attracted to investment property, do they simply switch to ETFs and other financial assets?

Or should the bigger innovation occur within housing itself?

Shared-equity models are beginning to challenge the assumption that housing must always be financed through the traditional combination of a deposit and a large mortgage. But they are only one part of the puzzle.

Australian residential property remains difficult to divide, diversify, trade and hedge.

We have become accustomed to the idea that someone with $10,000 should not have to choose one company in which to invest. Yet someone wanting exposure to residential housing generally still needs hundreds of thousands of dollars and must make an enormous bet on one property and one location.

That is a curious outcome for an asset class worth trillions of dollars.