Should you Invest in Property or Superannuation?

2007 has got off to a good start with higher auction clearance rates and most areas of Australia providing some level of growth. The Sydney market in our view is set for a period of strong growth but is still performing relatively poorly. We probably should not have any great expectations until after the election. Not withstanding this, all the data that we hold points to a market that is a new period of growth. The upward trends are undeniably evident.

As people keenly interested in what is happening in the property market, the impact of the new superannuation rules are important. We wonder if our markets are well enough informed, there is a significant amount of press suggesting exiting from the property market and moving into the superannuation market. Should they be doing this?

We thought we would give you some ammunition to fight this misinformation by undertaking a test analysis of two scenarios: 1) making a $150,000 lump sum investment in super compared to 2) buying a $500,000 investment property with a $150,000 deposit. Yes, you were able to borrow funds, which is what would happen. The results of the test analysis clearly showed that the return on the property investment far exceeded the return on the superannuation investment.

Why?

In essence it is the capacity to borrow and receive tax benefits. With superannuation you cannot borrow against your super funds currently and the tax benefits available in the superfund were not sufficient to offset the tax and leverage advantage of the direct purchase.

Certainly, you need to consider the time period over which the decision is to be made (if you\'re only three years from retirement, the decision becomes more marginal. Over 15 years and the differential was very significant. The direct house investment provided you with extra dollars after tax of more than $400,000.

There will be those that the outcome we found is not ideal and hence the tax benefits available in direct housing investment should be removed. After all, we have read that often enough. To those people I would say; the tax benefits are in reality a government subsidy to the least privileged of our community. Remove them (the tax benefits) and there will be less investment in housing and less available rental stock. The consequence will be the replacement of the subsidy with real (actual) dollars by way of rental increases and again the people in need in our society will be those who suffer most, not the better off apparently taking advantage of the tax benefits.

We all must remember there is nothing which forces any party to invest in housing and provide rental stock. It is a commercial decision driven by cold hard return on investment funds alternatives. Remove the tax benefits, returns go down and have to be made up to cause/encourage investment, hence my point.

John Edwards, Residex CEO