The cult of property ownership: there is another way

Borrowing to invest has amplified the wealth of property investors over many decades. But negative annual returns have become more frequent from residential property over the last 15 years. 

$18-billion-dollar portfolio manager Dushko Bajic, First Sentier Investors’ Head of Australian Equities Growth, believes holding investments for the long term is the key to unlocking the benefits of compound growth. 

He looks higher up the risk spectrum at assets that may offer greater reward when geared.

Australians generally do very well from property ownership – an asset class that has marched north in value for decades, with few notable sell offs. 

In fact, it has been such a positive experience for so many of us that it has led to social inequality and a generational divide on a grand scale – the ‘haves’ and ‘have nots’, largely fuelled by inheritance and the bank of Mum and Dad. 

Residential property as an asset class has done well but the way most people have approached their investment – by buying and holding – has probably contributed as much to this prosperous outcome as the asset itself.  

How so? Compound returns. 

Periods of ownership that are long term – many years, often decades – funded by a substantial amount of long-term debt allows for the patient compounding of returns to work their magic on a magnified asset exposure. 

Though unconfirmed, Albert Einstein is alleged to have said compound interest is the eighth wonder of the world. He who understands it, earns it … he who doesn’t … pays it. 

What drives long-term holding periods? Certainly, the underlying use of residential property as shelter is a key driver, so too is the long-term debt that funds it. 

While, no doubt, few periods of negative rolling one year returns over the past 50 years add to the “cult of residential property ownership”, the more recent experience has been less positive. 

Between 1970-2007, there were only 3 periods where the one-year rolling return was negative when measured on a quarterly basis (in the years of 1982, 1992 and 1996). 

Over the last 15 years however, the story is different. Between 2008-2024, there were 16 instances of one-year rolling negative returns when measured on a quarterly basis. 

Negative returns have become more frequent, but our obsession with property stands strong. 

What else may contribute to these relatively long and slow-moving cycles of ownership, funding and price performance? 

The answer may lie in human psychology and behaviour. Imagine walking into your home each night from work and observing on the letterbox your house/unit number. Instead of it being fixed, imagine that it is a digital board flashing with the value of your abode determined by a live auction each day. 

How would that make you feel? Worse-still, what might it make you do? Panic-sell when the price is down and cop the stamp duty hit on re-entry? Stay out of the market waiting to buy back in on the dip – except there’s rarely a dip? Soon enough you’ve switched from earning compounding returns to incurring the opportunity cost of compounding returns. 

Best leave it to the usual lifecycle events that create housing churn – births, deaths, marriages and their unwind.  

What about those who don’t have enough for a deposit, but do have some assets you could invest and have a high-risk tolerance? What about those who are sceptical about house prices being bulletproof but want to try and keep up with them just in case they keep going? How might you try and level the playing field?

If you have some experience with stocks and the share market you might turn to margin loans – it may work, but single stock volatility is high. 

So too is the cost of debt, and that margin loan repayment can really bite, always at the most inopportune time of course – when the price is down, a lot. 

An Australian equities geared share fund or ETF managed by an experienced investment team can spread the money carefully across selected stocks. 

You can choose whatever amount you would like to invest and magnify that claim on assets by the gearing. 

You can earn any dividend and franking benefits on the money invested and the money borrowed. 

The risks and benefits are spread across stocks linked to the same underlying Australian economy that is also driving that property market. 

Moreover, ASX listed companies can grow beyond our border, with 55% of revenues coming from offshore markets. But beware, these investments are liquid, and you can see their value rise or fall each day, if you wish. 

Perhaps try not to look or act too often, maybe it’s better to stay in there for long haul and leave it to births, deaths, marriages and their unwind.