Considerable care needed before investing in property: IBISWorld's Phil Ruthven

Phil Ruthven, chairman of IBISWorld, says it is getting very tricky for Australian investors, with over $3.7 trillion in super and other financial assets, to know which asset classes are the best in terms of short or long-term yield and capital appreciation. Or safest, regardless of yield.

The asset classes he considered were:

• liquids (cash, short term, long bonds)
• shares (local or foreign).
• property (owner-occupied and investment dwellings, commercial)
• commodities and collectables (gold, other metals, collectables)

"Residential property values also move around, but over the medium to longer term provided capital growth of a fairly safe 5.25% per annum," Ruthven outlined in the latest Cuffelinks posting.

"However prices can go negative.

"Australia already has some of the world’s most over-valued residential prices (over 3.5 times average household income), kept high by record low mortgage rates at under 5% compared with the very long term average of nearer 7.5%.

"So considerable care is needed as we head into the third decade of this 21st Century when it comes to looking for a lot of capital gain as distinct from low net rental returns in investment residential property."

Overall with other asset classes he concluded that returns are not as good as they have been over recent decades, whether they be liquids, property, commodities or shares, where rising price to earning ratios are lowering yields in response to record low interest rates.

"Then again we aren’t experiencing another GFC either which would be a much greater worry," wrote Ruthven.

"Some forecasters are predicting apocalyptic troubles arising from world debt levels, but not this author, as yet.

"Government indebtedness is not yet back to the immediate post WWII levels (with some exceptions such as Greece and Japan).

"Yes, household debt is huge in many countries, especially Australia, but still manageable in terms of debt servicing costs as our RBA reminds us from time to time, while warning us of stupid dwelling prices and the long term dangers involved."