You want to be unpopular at an Australian barbecue? Just tell people that their property obsession is nuts. Want to get lots of hate mail? Do it in an article for a national masthead.
Maybe I'm a glutton for punishment, but my conscience won't let the property boom continue unchecked without me speaking up to tell those contemplating an investment property that they're probably about to make a mistake.
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And let's get this out of the way -Â I'm a shares guy, I work for a company that sells memberships for advice on shares. Does that make me conflicted? Maybe. Does that mean I'm wrong about property? I doubt it. And I'm on record as doubting plenty of ASX-listed companies, too - so I'm not here to say that all shares are better than all property. But feel free to take what comes next with a grain of salt -Â I reckon it's still a pretty strong case.
Before I get to the heart of the problem, though, let me say clearly that I'm not in the property "bubble"Â camp. A bubble, by definition, ends with a bang. It's not impossible that happens with Australian housing, but I don't expect it.
Instead, my case is a simple one -Â that property investors buying in most parts of Australia today will end up earning decidedly sub-par returns.
Why? Stick with me as I run through six key reasons my colleague Andrew Page and I think property is likely to be a dud investment for today's buyers:
1. Second incomes have boosted prices
When you add a second income to a household, that's all "new"Â money that doesn't have to go to paying the bills that the first income is already covering. So, while most people don't specifically realise it, most second incomes have gone to pay off inflated house prices. Unless you send the kids down the salt mines, you can't repeat that trick.
2. Interest rates are at post-World War II lows
Lower rates have meant that for the same monthly repayment, you can afford a more expensive house. So can everyone else. Up go house prices. But rates can't keep falling - at least not far and not for much longer. Another tailwind that's come to a sudden stop.
3. We can't keep forking out more money
Over the past couple of decades, homebuyers have been paying ever-higher proportions of their take-home pay towards their mortgage. That's OK for a while, but good luck trying to buy dinner when you're paying 101 per cent of your income each month for the roof over your head. Yes, that's an extreme scenario to make a point, but the rubber band can only stretch so far.
4. Rental yields are awful
Many landlords of properties within 10 or 15 kilometres of the CBDs of Sydney, Melbourne and Brisbane (in particular) are receiving a gross rental of maybe 2 or 2.5 per cent, based on the prices of the properties they own. That's awful. And if you're thinking "yeah, but I'll make it up on capital gains", see points one and two, above.
5. There's a building boom
"They're not making any more land", say the bulls. That's spot on, but they're sure as hell making more units. And more units, and more units. Some are saying that'll precipitate a crash, but even if it doesn't, that's going to put -Â to use the pollies favourite phrase -Â 'downward pressure' on prices.
6. Negative gearing stops working if prices don't go up
Yes, negative gearing has some tax benefits - but it's a tax deduction because you're losing money. You can cop some short-term cash flow losses if the capital gains make it all worthwhile, but if they don't come in sufficient size, then you're still in the hole.
Good luck trying to buy dinner when you're paying 101 per cent of your income each month for the roof over your head.
Foolish takeaway
There are always exceptions to prove any rule, but it's hard to escape the likelihood that current property prices leave little room for either significant income or decent capital gains for buyers in the market, today.
And if we're right, the paltry returns will leave many investors well short of their financial dreams - and possibly nursing a long-term mortgage repayment schedule that isn't close to covered by the rent. Owning your own home might be the great Australian dream, but be careful that buying an investment property doesn't become the great Australian disappointment.
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Scott Phillips is the Motley Fool's director of research. You can follow Scott on Twitter @TMFScottP. The Motley Fool's purpose is to educate, amuse and enrich investors.
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