Warning on residential property investments

 Returns on domestic residential property investment are going to plunge in the next few years as the sector begins to stagnate and investors must reduce their exposure to property before that happens, according to MLC Investment Management strategist Michael Karagianis.

Speaking at the MLC Investment Summit in Melbourne, Karagianis warned that housing prices were likely to drop by more than 10 per cent in the next two years followed by the sector stagnating for the next five to ten years, causing returns to drop as well. Housing was becoming too unaffordable and driving prices down because of the still high level of household debt, according to Karagianis.

Debt had risen almost four-fold since the late 1980s, he said.

"We need to spare a thought for the fact that most of our wealth is tied up in Australian households," he warned.

While Australia has $6.5 trillion in wealth, 62 per cent of that is in property, and only 22 per cent in superannuation, Karagianis said.

Investors had too many eggs in one basket that would not pay dividends, he said.

Returns would struggle to keep pace with inflation, and investment income from property was likely to be poor in the next five years compared with other asset classes, he said.

Most returns from housing has been from capital gains and not income over the last 20 years, he added.

"That's something investors need to be mindful of as we move into retirement, where income becomes the issue for us," Karagianis said. 

An increasing number of financial planners have begun adding listed domestic property back on to their approved product lists to provide an income stream for their retired clients.