It’s an age-old debate.
Tomato v BBQ Sauce.
Holden v Ford.
Salt v Chicken Salt.
Ali vs Frazier.
Deep breath… I am sure to make some enemies with this month’s blog.
(But first the disclaimer)
It goes without saying so I will say it again, I am not an economist, I am biased and I love property. The following musings are not financial advice and are general comments.
Ok, moving on.
PROPERTY V SHARES?
How would you even measure it? For no particular reason I have selected 4 ways to compare asset classes. They are Returns, Risk, Tax and Leverage. There are many more. These 4 are top of mind for many investors I speak to.
Well, it may surprise you to learn that the returns over a very long time are almost the same. We have data going back to 1926 - which leaves us a tad shy of 100 yrs of data.
This graph compiling 90+ years shows clearly that both Property AND Shares are the best 2 performing investments long term. Cash and Bonds are the other two measured and may be lower risk but the rewards are lower too. Capital gains AND rent AND dividends are included so the above graph shows total returns.
I like that way of measuring.
Actually even thought the article is a few yrs old it is still a great read if you want to think through cash v bonds v property v shares. To read the original article visit here.
So far we don’t have a clear winner. If anything Shares is very slightly ahead. Stick with me.
The total value of Australian residential real estate is somewhere between $6.9 and $7.4 TRILLION dollars. That is more than 3x the size of ALL super funds and 4x the size of ALL Stock on the ASX. A very. Big. Number.
Interestingly, investors own 27% of the number of dwellings but only 24% of the value of Australian Real Estate. This means 76% of all housing value is owned by people in the form of their own home. That’s right, 3/4 of all housing stock is lived in by owners.
Furthermore, the total debt on housing is only 30%. That means the majority of housing is owned outright (no mortgage) and the majority of housing is being lived in by locals as a family home.
What does this mean for investors? It makes housing more STABLE than other asset classes like shares.
Shares grow, we know that, but the ride is a lot bumpier short term. Just look at the red sawtooth pattern on the graph above - imagine owning a million dollars of shares during one of those downward slides that can last a year or more at a time.
The stability of property markets is such a big deal that the RBA has entire conferences on this very topic. It isn’t sexy. It doesn’t get months of media obsession. But the take-home message is this - the government KNOWS property crashes are bad for the nation’s economy, so must be avoided or managed through careful policymaking. For those who want to read the original proceedings paper from the conference go here.
We see this in action through RBA interest rates (which have just fallen) We also saw in May just after the election APRA dropped the “assessment rate” which was a further tinkering with the rules to bring buyers back into the market.
Take home message? The govt. can and will continue to meddle but they tend to do so very carefully to prevent a major crash, which they know could cripple the wider economy.
In my mind the RISK round has property winning (but remember I am biased and a global black swan event can still hit our property market too).
Without writing a long and boring post on tax here are my very short observations….
At the time of writing both shares and property still qualify for 50% deductions in tax for capital gains over assets held longer than 12 months. This encourages longer-term ownership of both.
At the time of writing both property and shares had different tax treatment. Shares can access franking, which is a cool way of getting a rebate for tax already paid by a company. Property can access negative gearing. This is a cool way of offsetting short term losses against your wage income tax and improving cashflow thus “forced saving” them back into your property portfolio.
I think you can make a case that any of these tax laws could change at some point given how close the recent federal election was.
I think you can also make a case that either franking or negative gearing is more useful depending on your life situation.
(for what it is worth I have always said you invest for profit first and tax a very distant 2nd)
Property v Shares? Perhaps the jury is still out.
The biggest difference in the practical application of investing in Shares v Property for most normal people is this: it is easier to borrow more money at lower rates to buy property. This is a big deal. What it means is you can access more individual assets, or one more valuable asset with your limited cash. You can commonly borrow around 80% of the value of a property and just put 20% up as deposit.
This increases returns.
The increased exposure to the market also increases risk.
Please be aware of both.
Leverage is like a sharp knife. It can do both good and bad depending on who is holding it.
For younger investors with good jobs and income to service loans but limited capital this can accelerate a wealth building plan. Of course it also makes it important to get the asset selection right.
Simply saving your way to wealth is very safe but it takes a long time and in a low interest rate environment the returns are very low.
Which brings us to (some kind of) conclusion.
The single biggest challenge isn’t a question of property v shares. The issue is time.
In the end all investing is about time. Investing a little of your hard earned money (earned via your time) somewhere thus generating a return with a goal to rescue some of your own time (later).
To me the leverage of finance and being able to invest in assets worth several times my current savings balance (with manageable risks) is attractive - so that is what I chose to focus on.
Either way, focus and experience will make you better. Get better at investing in any asset class and your returns will improve.
Property v Shares? It’s your call.