A new report has revealed the surprisingly low ‘break-even’ capital gain required to generate a decent post-tax investment return in the current market.

The Australian Mortgage Industry Report released by J.P. Morgan last month has revealed that the housing market only needs modest growth to generate strong returns.

According to J.P. Morgan banking analyst Scott Manning, the capital gain required to incentivise investors to keep participating in the property market is “not as high as you would actually think”.

“The main reason is that the amount that you borrow on an investment loan is a fraction of the total investment property’s value. That debt is fixed in nominal terms. What you then have is an asset that is bigger than that and growing in real terms over time,” he said.

“Even if you’re only looking at capital growth in the order of 1.5 to 2 per cent per year, relative to the 5 to 7 per cent that we’ve seen historically, you are still going to get post-tax IRR of around 5 per cent.

“That is a post-tax return over the life of the investment of around 5 per cent, and that is still very attractive relative to a pre-tax return on a deposit at the moment of around 3 per cent, for example. Property is still seen as a better return prospect than deposits, even as people are expecting house price appreciation to not be as strong in the future.”

This article was originally published on Smart Property Investment.


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