Property vs Shares: Which is the better investment?

Following a record year for the Australian share market, the corona virus has all but wiped out the gains made in the previous year, with economists clueless as to when the decline will settle.

Meanwhile, after a rough couple of years, the Australian property market has made a decent recovery over the past few months. While property prices around the nation could also experience a sharp slowdown amid the pandemic, some have tipped this slowdown to precede a price boom.

But that’s what’s happening at the time of writing. Thirty years ago, shares may have offered a better return than property or vice versa.

So in 10, 20 or 30 years from now, which strategy is going to net you more cash? Let’s start with a quick and simple introduction to both types of investment, should you be unfamiliar with them.

How does property investment work?

It may seem like an obvious or easy question but it’s worth breaking down to understand the differences in risk between property investment and investing in shares.

Property investment is generally considered a safer and more traditional way of growing your wealth in Australia.

Although buying a home takes a large amount of capital, through the deposit required, there’s the potential to reap a constant income from rent, given the house is occupied of course.

In addition to this, making principal repayments off your mortgage over time will grant you equity in your home, which could potentially be used to purchase more homes and expand your investment portfolio.

Value can also be added to a home through renovations and even the simple passing of time, and investors could reap considerable tax benefits.

Many first-time or inexperienced investors also value the tangibility of  an asset they can see and touch.

Despite these positives, there’s something worth mentioning: being a property owner can be hard. 

There’s often a huge amount of costs through mortgage repayments, expenses and maintenance.

Your rental income may not cover all of these and not having a tenant could easily put you in serious financial strife.

The tangibility of a home also makes it a non-liquid asset – you generally can’t quickly sell it if you need cash and you also can’t sell part of it, it’s all or nothing.

How does investing in shares work?

The buying and selling of shares, bonds and exchange-traded funds (ETFs) are done through the Australian Stock Exchange (ASX), via a broker or online broking service. This can also be done via purchasing units in managed Funds

A broker/ Fund Manager does the trading for you, and you can advise them what you wish to buy or sell, or they can make recommendations to you.

They’ll also charge you ‘brokerage’ or Management Fees which is either a set dollar amount or a percentage of the value of your assets.

Buying shares makes you a part-owner of a company, otherwise known as a shareholder, and some companies will pay you dividends and afford you other benefits.

Like any market, there are buyers and sellers and sell orders going through brokers, whose job it is to match orders and get the best possible price for buyer and seller.

The price at which you want to buy the shares is known as the bid price, and the price at which a seller wants to sell the shares is known as the offer price.

Investors typically make money by buying stock and that stock rising in price; they can then choose to either sell this stock and take the cash, or hold onto the stock if they think it will continue to rise.

It’s often said that time in the market is more important than timing the market when it comes to investing in shares. The theory goes that if you’re investing for the long-term, it doesn’t matter too much whether the market is crashing or rising.

What investment has performed better historically?

It can be difficult to define which investment strategy has performed better historically as it’s easy to pick a time-frame that suits your argument – both investments have experienced booms and busts.

For the sake of this article, we’ve decided to assess these two different types of assets on the performance over the last two decades.

A report from the ASX found from the 20 years to December 2017, residential investment property saw better gross returns

Australian shares averaged returns of 8.8% p.a. over the 20 years, while Australian residential property averaged 10.2% p.a. Of course, keep in mind this period encompassed the GFC and a historic boom in Australian property prices.

Which is the better investment?

So we come to the ultimate showdown – what’s the better investment between property and shares?

For property

  1. You get to use other people’s money via leveraging the asset
  2. There are the tax benefits associated with negative gearing.
  3. There will be increased demand for Rental property over the coming years

For shares

  1. Shares are easier to buy and sell and they generate higher income and returns.
  2. Property is as expensive as it has ever been on a relative basis compared to shares
  3. The average rental yield of a residential property in Sydney or Melbourne currently stands at 2.7%. while the dividend yield of the Australian share market is currently 5.0%, almost double.
  4. Shares do not require as high as an initial investment whereas property investment usually requires a large amount of money to start with
  5. There is added diversification and liquidity of share trading over property investment.

So Which is better?

The simple and perhaps frustrating answer is that it’s completely dependent on your situation and both are a valid and legitimate way to grow wealth.

For those that don’t have a lot of capital, the share market is a great way to get in with a small amount of money and earn some valuable experience.

You can also get access to your funds quickly if you need too and have the ability to diversify across a number of sectors. However, it’s extremely volatile and your whole portfolio could be reduced in a matter of days.

Property investment requires a large amount of capital and can take a long time to provide returns.

However, it’s often considered to be a safer investment than shares and you can use equity to build your portfolio without more capital needed.