Is it time to diversify beyond property? – Simon Arraj

Investors have piled into property, despite relatively low yields, lured by strong capital gains and a tax structure which favours property investments. Investors paid a record $9.87 billion in interest repayments in the September quarter, almost double the $5.43 billion in the September 2022 quarter while mortgage repayments struck a record $13.62 billion, up from $9.43 billion two years earlier.

In the September quarter, net wealth rose for the eighth consecutive quarter, to a record $16.88 trillion, according to recent figures released by the Australian Bureau of Statistics (ABS). That was 9.9 per cent or $1.5 trillion higher than a year ago, with residential property the largest driver of gains.

ABS head of finance statistics Mish Tan said while the increase in house prices was the biggest driver of the overall increase, there was growth across all asset classes.

“Household wealth continues to be supported by rising house prices despite recent moderation in growth. Strong performances in domestic and overseas share markets contributed to the growth in household superannuation balances this quarter,” Dr Tan said. 

As of September 30, 2024, household wealth was heavily concentrated in property assets, increasing to $11.36 trillion. This accounted for 67% of total household wealth, nearing an all-time high in proportion. Households also held a record $1.78 trillion in cash and deposits (10.5% of total net worth), and much of that was held in savings accounts yielding less than 5%.

Time to question property allocations

With such a high proportion of wealth dedicated to property and with Australian households among the most indebted in the world, it’s time for households to consider reducing their overweight exposure to direct property.

The Sydney and Melbourne housing markets have experienced slight declines. In December 2024, Sydney’s property values decreased by 0.6%, while Melbourne saw a 0.7% drop. Further falls are expected in 2025, especially if the central bank keeps interest rates on hold in the first half of this year.

Looking ahead, forecasts for 2025 suggest modest growth. Economists from Westpac and AMP anticipate a 3% increase in national home prices by the end of the year, following an initial easing in early 2025. However, projections for Melbourne vary, with SQM Research predicting a decline between 1% and 5%, while Domain forecasts a 3% to 5% growth in house prices.

There are alternative investments into which Australian households could diversify that could fortify their wealth. One such asset class is private credit.

At its core, private credit operates on a simple principle: a private credit manager pools capital from investors and lends it to businesses. These loans generate returns through interest payments made by borrowers. The interest rate charged on these loans is determined by the private credit manager based on a variety of factors, including the borrower’s creditworthiness, the loan’s purpose, level of gearing and prevailing market conditions.

An allocation to private credit can potentially offer investors attractive returns of between 8% to 12% per annum and a consistent income stream. Also very important is that private credit returns are not closely correlated with either bond, share or property markets, so the asset class offers a powerful source of portfolio diversification and stability.

However, higher returns often come with higher risks. If an investment seems too good to be true, it probably is. Always conduct thorough due diligence before investing in private credit, or any other asset class to make sure you fully understand where your money is invested.