Choosing betwixt property and shares

Last week's Asset Check prediction that the coming year should be another good one for investors brought queries about when and how this might change. Surely, one reader asked, if all investors are hunting for yield on investments, share and property assets will become over-priced causing a plunge in asset prices.
 
There's no denying this possibility, not least because asset prices have often fluctuated and will most likely continue to do so. There is now fear of a residential property boom after a steep price rise due to historically low interest rates. 
 
The Reserve Bank, with its warning to investors that house prices can fall as well as rise, is clearly concerned about a bubble, especially if the high dollar forces it to reduce the already low cash rate. With the shortage of supply in several key areas, the end of the housing boom could be some time off. 
 
As with the sharemarket, risks for property investors are increasing but the yields are lower and transaction costs higher. A newcomer to property investments needs to understand the risks, particularly in the apartment market with many projects due to be finished within two years. 
 
The future movement of share prices will be less affected by an increase in the supply of listed companies and more by movement of company profits and dividend payouts. A special reason for my confidence in good returns for share investors this year is the distinct possibility the company tax rate will fall by 1.5 per cent to 28.5 per cent next financial year. If this occurs, franking credits, which now refund company tax at a 30 per cent rate to shareholders, will become less valuable, refunding tax at 28.5 per cent. 
 
All the leading companies are aware of this possibility and several are increasing their dividends or planning special dividends to pass on to shareholders maximum value of their franking credits. In this environment, the odds are very high that 2014-15 will be a year of higher dividend payouts and this will underpin the strength of the market. 
 
After that, prospects for share prices will be less certain with the market depending on earnings growth to boost prices. In summary, while the hunt for yield has boosted share prices, failing a big rise in interest rates, the prospects for share investors remain good. This doesn't mean, however, that prices won't fall in future and investors need to be aware of this risk and be prepared to sit out downturns

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Daryl Dixon

Executive Chairman

Daryl Dixon is one of Australia’s foremost investment experts and a well known writer and consultant. He has provided trusted advice to thousands of personal clients over more than 25 years and is an acknowledged expert in the areas of tax, superannuation (including public sector superannuation), social security and investments.

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