Household savings directed towards real estate reaches 15-year high

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It appears an increasing number of people are viewing real estate as the best place to invest their money, with new research revealing the amount of household savings directed towards real estate is at its highest level in more than a decade.

According to the latest St George-Melbourne Institute Household conditions index, the September quarter saw Australian households direct 25.9% of their savings towards real estate, the highest proportion recorded since the index was founded in 2001.

The increase in popularity of real estate as a location for household savings has coincided with a decrease in the popularity of deposit accounts.

“When households were asked how they would invest any potential new savings, 28.2% of respondents said they would direct these towards real estate compared to 27.0% of households who preferred bank deposits,” St.George Bank head of retail Neelam Tandon said.

“It also signals that Aussie households could be looking at investing, or directing to super rather than a mortgage, given households who are saving to buy or put a deposit on a house fell 2.1 percentage points to 13.8% over the quarter,” Tandon said.

For Multifocus Properties & Finance chief executive officer Philippe Brach, it’s understandable that people are turning to real estate as an investment location for their savings.

“Over the long term it makes sense,” Brach said.

“Shane Oliver from AMP Capital did some research looking at returns from investing in property or shares compared to cash or bonds in Australia since 1926 and he found that over that time property and shares have delivered returns of around 10% per annum compared to cash or bonds at around 4.5%.”

While the returns may be greater in real estate than a savings account, Brach said potential investors do need to understand the challenges that come with real estate.

“You do have to appreciate that there are different risks that come with different investments and you need to make sure you’re comfortable with those,” he said.

“One thing I wouldn’t do is direct all my savings to property or shares or any other single investment type.”

St. George Bank chief economist Hans Kunnen believes the rise in real estate’s popularity may have to do with the current low interest rate environment, something Brach agrees with.

“For sure, when things get cheaper it’s only normal that they become more popular.

“What’s happening with interest rates at the moment is a great incentive for people, but we need to make sure people realise this is unusual and on average interest rates are closer to 7%.

“People need to consider what they are comfortable with. A property at the moment might be cash-flow positive by $50 or $60 at the moment, but if rates move towards where they normally are it might become cash-flow negative by the same amount and it’s important that people know if they can support that.”
 

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