Bye bye property, hello shares

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The New South Wales government is going to cut land tax for the next 20 years for new build-to-rent housing projects designed to give tenants long-term leases of five years or more. The developers who make these apartments will see a 50% cut in their land tax slug as a reward for making properties that are more tenant-friendly.

This move could help young people build some serious wealth.

Let me explain…

In Sydney, Mirvac has its first rent-to-build property at Sydney Olympic Park. In coming years, we’re bound to see a surge in properties targeting tenants who want a long lease. And while this is unusual for Australia, in other countries, especially where land/property prices are too high for average income residents, long-term leases have been popular for some time.

In the past, some money experts have argued that first homebuyers might be better off renting and putting their savings into the stock market or other assets.

The Reserve Bank has looked at how our houses have grown in price. Here are its conclusions:

  • The 1990s until the mid 2000s were marked by quite high housing price inflation, of 7.2% a year on average.
  • Annual housing price inflation over the past decade was lower than either of these periods, at a little over 5% on average.

In contrast, history says the stock market index (which you can now capture in something called an exchange traded fund or ETF and we’ll be spending a lot of time explaining things like this on Tilly Money) rises by 10% a year over a decade.

Let me create a simple example.

If someone was given $500,000 to either buy a home or go into the stock market with an ETF, then after say 20 years (a lot of people used to pay off their home over this time period), which investment would have been best?

On a 5% gain for a home, after 20 years, the property might be valued around $704,000. Meanwhile, the stock market investment adjusting for tax would be about $1 million.

Sure, you’d have to pay rent. But if your life didn’t have the benefit of a $500,000 gift, which I used in the above example, then you’d be paying interest on a home loan to be in that home.

The point is that access to long-term property leasing deals, which means you’re not being turfed out of your dig when the landlord wants to sell the apartment or wants to raise the rent too much, could make it possible to build some serious wealth by not owning a home.

The supply of long-term rental properties is a trend that governments right around the country could be set to encourage.

 

Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regard to your circumstances.

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