Shares versus property: what is the winner as prices tumble?

The financial year is almost over and many investments face dark storm clouds, but there’s a way to navigate the uncertainty.

They’re Australia’s two most popular forms of investment, and they’re both looking shaky on their feet.

Residential real estate prices have started falling in several capital cities, and are tipped to drop everywhere as aggressive interest rates rises from the Reserve Bank of Australia dramatically raise borrowing costs and dent the appeal of owning property.

Australia’s stockmarket is also underwater, with share prices down 8 per cent this financial year amid turmoil on global financial markets caused by surging inflation and interest rates, supply chain squeezes, Russia’s war on Ukraine and other geopolitical worries.

There’s a good chance that both property prices and share prices could be significantly weaker 12 months from now, so how does an investor react? And how do you choose where to put your money?

The first answer, most experts will agree, is to stick with your long-term investment strategy and not be panicked by these short-term slumps.

Home loan interest rates could be falling again next year if the RBA’s rate-rise cycle works quickly, and that would remove a big barrier to property price growth.

Share prices will always be more volatile than real estate. Some analysts say shares may only drop another 5 per cent, while others think we’re in a longer-term tumble and prolonged bear market.

Choosing between property and shares can by tricky, but there’s a simple answer.

Some of the world’s biggest companies – and until recently market darlings – are already deep in bear territory. Since January:

• Amazon is down 33 per cent.

• Meta – formerly Facebook – is down 51 per cent.

• Tesla is down 39 per cent.

• Netflix is down 68 per cent.

Tech companies around the world have suffered, and if their share price pain spreads broadly through other sectors we could be looking at similar stock slump to the global financial crisis, when Aussie and US shares more than halved.

Few people are predicting another GFC, but markets are unpredictable.

It’s wise to remember when the GFC stockmarket rebound did happen, shares leapt almost 40 per cent in nine months, so trying to time buying and selling is dangerous.

Real estate values are much less volatile, although some forecasters are currently telling people to brace for property to drop up to 15 per cent as rate rises bite. I don’t necessarily believe them, just like I didn’t believe the forecasters who said in 2020 that real estate values would plunge 30 per cent.

They didn’t back then. They boomed instead, despite Covid, largely thanks to Aussies’ ongoing love of bricks and mortar.

Arguably there are more risks today because we no longer have the record low interest rates that made home loans ultra-affordable in the past couple of years. But once the rate rises come to a halt, demand for real estate should return.

To the question of whether to own property or shares: it’s best to have some of both, and focus on their long-term gains that have always outperformed cash and other conservative assets.

If I had to choose one of the two as a future winner, I’d choose property. Partly because of its less volatile nature, partly because it’s an asset that is easy and cheap to borrow against for further investment. And partly because of the vibe.