With home prices increasing exponentially due to low-interest rates and with many of the big banks increasing the cost of borrowing, home ownership seems to be out of reach for many Australians. The average property price in Sydney is $1.3 million and even securing a 10% deposit requires at least $130,000 in order to secure a loan. Therefore, this leaves Australians with two options to either:
- Start saving to build their deposit requirement or
- To look for alternate ways to build wealth over time.
The following article will outline some of the benefits and risks of investing in ETFs which can still offer you exposure to the property market. This way you can compare these with some of the advantages and disadvantages of investing in property outlined below.
What are ETFs?
An ETF is a form of investment that investors can buy and sell on an exchange in the same way they can with a direct share. In Australia, these products are usually passively managed, and the value of the ETF will rise and fall in accordance with the index it tracks. ETFs have had positive performance in Australia and grew by 30.4% in 2020.
What are the benefits of ETFs?
There are a range of benefits of investing in ETFs. One of the most important advantages for investors is that ETFs are highly diverse. Investing in just one ETF has the potential to give you exposure to a range of companies and sectors on both national and international markets. Another benefit of ETFs is that they trade in a similar way to stocks and therefore are accessible to a range of investors, particularly those who are just starting on their investment journey. In conjunction with this, ETFs can also have lower fees in comparison to other investments such as managed funds as they are passively managed instead of actively managed. ETFs can also help to reduce the hassle that some individuals may associate with investing as there is the capacity for dividends to be automatically reinvested into a particular holding, therefore helping to boost your wealth over time.
ETFs have had their strongest growth in over a decade, growing by 79% over the last year. The ETF market in Australia is currently worth approximately $102 billion, with a potential to reach $595 billion due to the aggressive global expansion that has occurred.
What are the benefits of property?
In saying this, there are also a range of benefits associated with investing in property. Investing in property can lead to capital growth as the value of the property increases over time and can also provide an additional income stream from the rental income received from tenants when the property is leased out.
When making your decision, it is a good idea to conduct some comparisons based on your current level of wealth and whether you are planning to invest in ETFs or the property market. Similar to the performance of the ASX, the Sydney house market has also rebounded well from the drops in March 2020 with Sydney’s housing prices increasing 30.4% over the last year.
What are some of the risks to consider with each investment?
There are a range of risks that investors need to take into consideration before investing. The first is that ETFs are exposed to market conditions which means that an ETF may deviate from the return of the index or benchmark that it is seeking be track. Other risks include regulatory risk whereby governments may introduce regulatory or tax changes which can have implications on the value of your investment. ETFs are also susceptible to liquidity risk in the event the underlying asset of the ETF becomes illiquid, the ETF may also be illiquid and therefore difficult to trade.
The main disadvantage of investing in property is that it is not a liquid investment and something that investors should hold over a long period of time. Unlike ETFs that can generally be liquidated at any time, property takes longer to sell as there are a range of legal processes that take place including conveyancing and registration. Getting into the housing market is also difficult unless investors have the value of the property in cash upfront or have adequate savings for a deposit. In addition to this, there is also the risk that your cash inflows decline in the event your property is vacant and you cannot find a tenant to pay rent.
There is a common myth that properties will double in value every 7 to 10 years. However, research shows that the growth rate for a well-located property in Sydney is approximately 7% p.a. So, although some properties may increase two-fold, this is not the case for every property and therefore, it is important that investors make a calculated and informed decision based on all the risks and benefits.
Before making any decisions, it is important to consider all the benefits, risks and costs associated with any investment. If you are seeking guidance and wish to discuss the best options available to you, please click here to organise a complimentary 20-minute phone call with an EPG Wealth adviser.
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