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Super v property

Published 24 August 2018

When it comes to choosing where to put your savings it’s all about getting the right mix, writes Tiffany Hutton.

Which is the better investment: super or property?

A few years ago, when capital-city real estate prices were rising at dizzying speeds – especially in Sydney and Melbourne – property seemed like the obvious answer.

House prices nationwide were down 1 per cent in the year to June, 2018, reflecting the first trip into negative territory since 2012, according to ANZ economists Daniel Gradwell and Joanne Masters in their report, Australian Housing Update: coming back to earth.

The report predicts housing prices will decline by 4 per cent in 2018 and a further 2 per cent in 2019. Sydney and Melbourne are expected to be the primary drivers of this fall, as their high prices and highly leveraged households will be sensitive to tighter credit conditions and rising interest rates.

“We forecast both cities will see price falls of around 10 per cent peak-to-trough, with Sydney faring slightly worse than its southern peer,” they state in their report.

Bearing in mind these changes, it’s worth taking a closer look at both investment options, starting with super.

What’s so good about super?

Super funds aim to generate a steady return over a relatively long period of time, to provide a solid income stream in retirement. Although super may lack the glamour of real estate, funds have generally performed strongly over the past decade, with yearly returns of 5.9 per cent for the median balanced fund. That’s well above the annual rate of inflation.

Super contributions (in addition to the super guarantee), pays off in the long run, helping to ensure a comfortable life when it comes time to access your super. And if you start boosting your super account early in your career, you’ll be harnessing the power of compound interest, greatly increasing your savings.

Super also offers significant tax benefits, which the government implemented to encourage us all to invest in it. Although some of the initial tax advantages have since been dialled back, super is still a tax-effective way to save for your retirement throughout your working life.

Bear in mind that you can’t usually access your super until your reach your preservation age (55 to 60) – although from July 1, 2018 the first home super saver scheme will allow first home buyers to withdraw some of their voluntary super contributions  to buy their first home.

Hot property?

“We all need to build up pockets of money outside super,” says Rainmaker executive director of research Alex Dunnin. And one of the investments outside super with the most tax benefits is negatively geared property.

Negative gearing is when the costs of owning an investment property (including the interest paid on your investment loan plus some other costs) are greater than the property’s rental returns, and you can claim a tax deduction for that net loss. This can be particularly useful for high-income earners.

According to the 2017 Russell Investments/ASX Long Term Investing Report, in the 10 years to 2016 Australian residential property returned 5.8 per cent per year after tax for people on the highest marginal tax rate.

But what about the falling property prices?

ANZ senior economist Daniel Gradwell says that despite the current weakness in the property market persisting longer than expected, the fundamentals of the Australian economy are still good, and property is still a sound long-term investment.

“Now is always a better time to buy than five or 10 years down the track,” he explains, “when you’re investing for the long term and you select your property carefully. I definitely wouldn’t be turning away from the property market just because we’re going through the softer part of the cycle.”

Different strategies work for different people

The truth is that super and property offer different advantages to different investors, even when they offer similar returns.

In the end, your best investment strategy depends on your circumstances – your age, your overall financial position and your financial goals.

If you’re in the early years of your career, putting more money into your super can help to ensure that your eventual retirement will be what you want it to be. At the same time, you don’t want all your money tied up in one place where you can’t access it until you reach your preservation age.

An investment property offers the potential advantages of negative gearing and long-term capital gains. And if you hold onto the property for long enough it is likely to become positively geared, which means it is actually providing you with income.

Heads or tails?

So, which will it be, super or property?

“The question isn’t whether you should invest in super or negatively geared housing, but what the mix should be,” Dunnin summarises.

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