Headlines change and cycles turn. Currently, residential property prices are falling. In this article we explore how our portfolio loans to borrowers, secured by property here in Australia can perform for investors.
Commentating on movements in property prices is Australia’s national sport, or obsession. It can be forgotten that it is a market, and markets can rise, pause, and fall. We Australians love property. It is where we live, where we raise our families, and for many of us it is the single largest store of wealth we will ever hold. So it is no surprise that when property dominates the news, it dominates the conversation around our dinner tables too.
Lately there has been plenty to talk about. Changes to the capital gains tax discount and negative gearing have shifted the calculus for many investors, and softer prices across parts of the market have added to the sense of uncertainty.
A market taking a breath
It helps to take a step back. Over the long run, Australian residential property has delivered considerable growth, so much so that it now sits at the centre of the national conversation about housing affordability and productivity. That growth has real consequences, and they are not all comfortable ones. It is part of why home ownership feels further out of reach for younger Australians, and part of why so much household capital is tied up in a single asset class.
It also helps to remember that periods of adjustment are a normal feature of the property market. Over the past few decades we have watched the market pause, respond to a particular driver such as interest rates, tax settings or credit conditions, and then in time return to business. A market taking a breath is often part of how it works, and it says very little about the fundamentals.
We are often asked about the performance of the property market and the performance of our portfolios. As our Chief Executive Chris Andrews explained recently on Business Now:
“What we’re actually finding at La Trobe Financial is we’ve got volumes up 50% year on year. So we are seeing really good, strong quality assets coming into the business.” Chris Andrews, Chief Executive Officer, La Trobe Financial.
That stands in contrast to the wider banking system, where mortgage applications have softened in recent reporting. The strength we are seeing tells us that quality borrowers are still active, and that demand for well-structured property lending continues.
Investing in credit: what falling property prices mean for your account
Changes in residential property prices do not translate directly into changes in the value of an investment in the La Trobe Financial 12 Month Investment Account. Widely diversified, incredibly granular, and with a strong margin for safety, the 12 Month Investment Account has a long track record of resilience across different market settings.
An investment in the 12 Month Investment Account when it launched in October 2002 has never experienced a loss of capital, at any time. Not even a single negative month. The chart below shows the dollar stable price of the 12 Month Investment Account compared with the volatility of Australian house prices, clear evidence that despite changes in property values and prices, a well-managed mortgage credit strategy can support resilient capital preservation.
Chart 1: One dollar invested in the 12 Month Investment Account since October 2002, shown against monthly movements in the national house price index. Source: Cotality, La Trobe Financial.
The illustration above is about return of capital. Now also consider the return on your capital. The chart below follows an investment made in the 12 Month Investment Account in 2002 with the monthly income reinvested. That investor has received income every single month since, and compounding returns, with incredibly low volatility.
La Trobe Financial Asset Management Limited ACN 007 332 363 Australian Financial Services Licence No. 222213 Australian Credit Licence No. 222213 is the responsible entity of the La Trobe Australian Credit Fund ARSN 088 178 321.
Any Financial product advice is general only and has been prepared without considering your objectives, financial situation or needs. You should, before investing or continuing to invest in the La Trobe Australian Credit Fund, consider the appropriateness of the advice having regard to your objectives, financial situation or needs and consider the Product Disclosure Statement for the fund.
Past performance is not a reliable indicator of future performance.
