Aussies love a good investment. In fact we’re some of the most heavily invested people in the world – mostly through superannuation. The strange part about our investing is that many Aussies are slightly terrified about the stock market and the way it swings up and down from day to day. For that reason we’ve seen a boom in property investing and the spruikers to match.
But if you’re sick of getting 2% interest on your cash and want to invest it, should it be in shares or property? Welcome to the debate…
Let’s start with returns (Source: Russell Investments report from June 2014).
Over the last 10 years, before tax and after fees:
Australian shares returned 9.2%p.a.
Australian residential properties returned 6.1%p.a.
Over the last 20 years:
Australian shares returned 8.7%p.a.
Australian residential properties returned 9.9%p.a.
Winner: Well that depends on your timeframe. Property did perform better over the longer term, partially because the high entry and exit costs (agents fees, stamp duty, land tax etc.) are spread out over a longer time frame. Shares had a more stable return over the long term.
Costs to get in and out
Shares: Unless you’re an expert with research on a wide range of companies you’ll need the help of a financial adviser or stockbroker. This cost for this ranges but usually falls between $1,500-$3,000 and there are ongoing fees as well. Once you know what you’re doing buy/sell and brokerage costs are usually less than 0.3%. So, on a $500,000 investment, you’ll probably pay $4,500 upfront and an ongoing fee of $3,000-$5,000.
Property: Again, it’s wise to consult an expert so allow $3,000 for some property advice. Beyond that you’ll have stamp duty and agent’s fees. Stamp duty in WA for a $500,000 investment property will be a tick over $18,000 and agents fees are likely to be $2,500p.a. When it comes to sell you’ll be putting up another 1.5-2% ($7,500-$10,000) in sales commissions as well.
Winner: Shares. Far easier to get into and out of.
Shares: If you’ve got someone else managing it, then your time cost is very little. You’ll have 6-12 monthly review meetings and you might need to trade a few shares in or out. If you’re in a managed fund then it’s mostly done for you and you (with your adviser’s help) need to review the fund itself.
Property: Again, if someone else is managing it then your time cost shouldn’t be too bad. That said, if you have some rogue tenants, a lazy property manager or an older property in need of work then it can be quite costly for time.
Winner: Shares. A good adviser will mean minimal work for you.
Shares: Shares can be borrowed against using a margin loan, to a maximum LVR of 75%. Margin loans are complex financial loans that have an ever changing LVR (as the stock market moves up and down). If there are dramatic movements in the market you can fall outside the safe LVR levels and be forced to either sell down or put more money in – not a good situation at all.
Property: Property can be borrowed to a maximum LVR of 95% depending on your financial situation. It’ll cost you in Lender’s Mortgage Insurance, but it can be done. These loans are fairly standard and not subject to any kind of margin call.
Winner: Property. Higher borrowing capacity and no margin calls.
Shares: If you’ve sought advice and put together a well-diversified portfolio of shares then you should significantly limit your specific risk. If you’ve gone out and bought all BHP, then your specific risk is very, very high. A well diversified portfolio can filter out the majority of specific risk as you’re invested across many different companies in different industries with different management styles etc.
Property: Specific risk is very high. Buying one property has a lot of risks that specifically relate to that property. What if you can’t find a tenant? What if you’ve bought in a bad suburb? What if the government repurchase your house to build an airport (The Castle anyone?) and you have to start again? What if your tenants completely trash the place?
Winner: Shares. A well diversified portfolio will keep performing regardless of little hiccups within the portfolio.
Shares: Every day the share market opens at 10am and closes at 4pm Sydney time. For those 6 hours (plus 10 minutes closing time) the market is a free for all with over 500,000 transactions taking place every day. Each trade attracts a small brokerage fee of around $20 and can be placed in a matter of seconds. With so much trading going on and an endless stream of information, the stock market is highly volatile.
Property: Buying or selling a house can take weeks, if not months (and for an unfortunate few, more than a year). It’s an expensive transaction (as mentioned earlier) and one that you carefully think through. Compared to the 500,000 share transactions each day on the stock market, there are roughly 500,000 houses sold each year in Australia. For these reasons the property market moves much slower than the stock market, giving it a much lower volatility.
Winner: Property. Even though it has no impact on average return, property will generally be much more stable than shares over the short term.
So who wins overall? Well that depends entirely on your own situation, where you’re at, what timeframe you’ve got and what you want the investment to achieve. There’s no one size fits all.
As for me, I’d rather own the business than own the property it occupies, so I’m in favour of shares. Does that mean I would warn clients off from investing property? Absolutely not. I think both investments generate a good return and both have their merits.