Property versus shares: why I’ll pick property, every time

Returns from property have beaten shares comfortably this century — and there are other reasons why real estate is a favourite.

It’s not much fun being an investor right now.

Both shares and property – our two most popular places to invest – are being clobbered as interest rates rise and asset values sink.

Property price falls of 15 per cent nationally are tipped as rates rise hard and fast. Not a good feeling if you’ve recently spent $700,000 or so on real estate and find you’ve lost $100,000 in a flash.

Stockmarkets also aren’t enjoying the rate rises, which squeeze company profits and make shares less attractive because decent risk-free returns are now available elsewhere.

Most investors’ losses on share portfolios are much smaller than their property losses, but if given a choice between investing in both, I would choose property every time.

As interest rates rise, property prices could fall by 15 per cent. Picture: iStock

Real estate investors face more ongoing costs, from property management fees to repairs and maintenance. I’ve personally paid more than $3000 in two years to fix dodgy pipes and a broken oven in an investment property that’s only four years old, not something I ever had to do for Woolworths or CommBank shares.

However, investing is about making money, and even with the extra holding costs, the long-term gains of Australian real estate investment has left shares out in the cold in the past two decades.

Last week I examined the stock market’s performance over the past 15 years, and discovered that Aussie shares are trading 1.5 per cent below their pre-GFC peak in 2007 – lagging behind many countries.

This capital loss over one-and-a-half decades occurred while the national median house price more than doubled from $427,000 to $1.01 million.

I also compared investment returns over the past 20 years, and found a similar outperformance by property.

Stockbrokers often remind investors that shares pay dividends, which typically average around 4 per cent a year and should be included when measuring total returns. If dividends were reinvested over the past 15 years, your share portfolio should have doubled.

Almost matching that, property produces rental income – about 3 per cent for houses and 4 per cent for units.

A big plus of property is that it’s easy to borrow against. Whether it’s your own home or an investment property, banks are happy to lend against the equity, so many investors effectively need no cash deposit to expand their portfolio.

You can borrow against shares to buy shares using margin loans, but these have higher interest rates and can suddenly demand more funds from you – or sell your shares to recoup it – if the market crashes.

Investors everywhere are being hurt by poor returns right now. Picture: iStock

Property prices are less volatile than shares, and allow investors to win big by buying big assets worth hundreds of thousands of dollars each. Sadly, investors can also lose big – as many may discover in the months ahead.

This super-sized investing also has limitations because investors must fork out hundreds of thousands of dollars to buy just one property, compared with the $1000 minimum spend they might make to buy an exchange traded fund that owns portions of every top company in Australia.

Fortunately, there’s a growing group of property investment options that don’t require huge deposits and bulging bank balances. Real estate investment trusts have been around for years in Australia and offshore, while newer fractional investing platforms allow investors to buy pieces of property.

Real estate investment delivers tax benefits such as depreciation and negative gearing, but the rules can change with the stroke of a Treasurer’s pen.

Whether you pick property or shares for your next investment, expect weakness ahead, but know that over the long term they should reward you.

Originally published as Property versus shares: why I’ll pick property, every time