The Fallacy of Rising Property Values

Andrew Bonnici • March 16, 2022

The Fallacy of Rising Property Values 

Property Values Boom 

Wow, 2021 was a hell of a year for property prices in Australia. According to Core Logic the national median property price rose 22%. In Melbourne approximately 30% of suburbs now have a median price over $1m. Homeowners are feeling pretty good about property values. Unlike those yet to enter the market.


First home buyers are rueing the market and the record low interest rates that are fuelling price growth. Thankfully for them, there are indications that the rate of growth is slowing.


Clearly many homeowners are sitting on substantial equity gains within their property. With interest rates at all-time lows now may be as good a time as any to tap into that equity. 


Property is an Emotional Thing 

Property ownership means different things to different people, but few deny there is an emotional side to it. We all get a little excited when our property increases in value. We want to know what the house down the road sold for…...even if we have no plans of selling ours anytime soon.


The reasons we feel better are varied. We might feel safer, we might feel that the wolf is further from the door, we might even feel vindicated for taking on the responsibility of a mortgage. But the main reason is we just feel wealthier. 

 

But does the value of the home we live in really matter?

I’m not so sure. 


In fact, I would argue that the value of the family home doesn’t matter too much at all on a day-to-day basis. 


Most of us are going to need somewhere to live and most of us still prefer to own rather than rent. Owning a residential property offers us a sense of security that renting can’t. So, if you like the house and neighbourhood you live in whether its worth $800k or $1.1m doesn’t really matter. It’s not like you can sell a bedroom if you are short of cash one month. 

 

Strictly speaking our home isn’t an asset.

People often suggest their home is their largest asset. Again, not so sure. 


I would argue that our home isn’t an asset at all……it’s the equity we hold within it that’s the asset.


The only way to make that asset matter is to use it to create further wealth. After all you can have a pile of a cash sitting under your bed but if your not doing anything with it, it’s just gathering dust.

 

How do we use this equity?

Equity matters because we can use it in several ways to better our financial position both now and in the future. Some of the ways we can use it include the following.

 

Downsizing The Property

An obvious way to use the built-up equity within the home is to downsize it in the future.


The Downsizer Superannuation Contribution rules make this a great long term strategy goal. Think about it. You sell the family home tax free; you buy something smaller and put the remainder into superannuation……again tax free…….the assets you buy with the contribution are concessionally taxed ( i.e., minimally taxed ) while in super…… until you start a superannuation pension when suddenly no tax is paid on the earnings at all and the pension you draw is tax free. Everybody 50 years and older should have their head completely around the strategy of downsizing.


Property investment

The most common way Australians have been using their equity is by tapping into it to fund a deposit on an investment property. Not exactly a secret to anybody at this stage. As prices seem to be levelling this might start to wane. Possibly.


Share Investment

In the current interest rate climate, using home equity to purchase a portfolio of blue-chip shares is almost a no brainer. Australian shares are currently kicking out an income stream of roughly 4%.  According to Canstar you can still get 3-year fixed rates for under 4 % while some variable rates are closer to 2%. It’s almost a free hit. The obvious strategy is to redraw off the home, plonk some into the market, let it sit and use the dividend stream to help pay back the loan. Better still would be to reinvest the dividends and pay the interest cost back ourselves. 


Superannuation Contribution

Depending on personal circumstances an argument could be made for using some equity to make a concessional or even non-concessional contribution into super. For some individuals putting a contribution into superannuation and generating 7% per annum while paying down the loan they redrew at 3% could make sense. 


Inheritance

Parents love having equity in the family home as it is their way of looking after their children. They can leave the property to kids with the knowledge that they will be able to reap the benefits of the embedded equity. They may also see it as justification for spending the inheritance.


Reverse Mortgage or Aged Care Needs

If leaving an inheritance isn’t an issue or the superannuation has run out an individual can use their home as a basis for a reverse mortgage to help fund their retirement income. Why bother leaving equity in the home if you can use it for your enjoyment in your lifetime.


Additionally having equity within the family home will be beneficial and provide options if Aged Care Accommodation becomes an issue later in life.


Debt Repayment

Redrawing off the mortgage to pay off more expensive debt should be obvious to everybody.


Use it or…...Waste it?

We might feel richer because our home has increased in value, but property values alone can be a touch misleading. Property values increased across Australia. Sure, some cities and areas moved more than others but largely everybody’s property increased in value. 


Generally, the pecking order of suburbs doesn’t change much. The flow on effect of this is our relative wealth might not have improved as much as we think. But, the extra equity we now hold, provides us with an opportunity to increase our personal net wealth.   


For those that have the desire to increase their net wealth, using the equity within their property is a valid strategy - and thanks to the historically low interest rates available right now it’s also an affordable strategy. 


If you would like to discuss any of the ideas raised within this blog I can be reached at andrew@endgameadvice.com.au 






This blog’s aim is to provide general information only. It should not be relied upon as personal financial advice. While all care was taken at the time of writing I make no representations as to the accuracy, completeness, suitability, or validity, of any information contained within.  Endgame Advice strongly recommends investors consult a financial adviser prior to making any investment decision.

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