In these uncertain times of slow property markets and crashing share prices, are you still tossing up best place to park your hard earned money for maximum chances of capital growth? You may be surprised by the latest thinking on the matter.
According to the latest Russell Investments/ASX Long-Term Investing report, property still trumps Australian shares when it comes to each asset class’s performance over the last 10 and 20 years – after costs are taken into account, but before tax.
Over the last 20 years, residential investment property scored a return of 9% p.a., with Australian shares coming in second at 8.7% p.a. The 10-year story is similar, with property scoring 8%, and Australian shares 6.1%.
Even after tax is taken into account, property beats Australian shares over the last 10 years, with its returns at the lowest and highest marginal tax rates coming in at 7.2% and 5.8% respectively. This beats Australian shares into second place by some margin, with its scores at the lowest and highest tax rates coming in at 6.5% and 4.6%.
But the 20-year, after-tax, picture sees the tide turn in favour of Aussie shares, says the report. It came up with lowest and highest tax rate returns of 9% and 7% respectively for Aussie shares, while property came in second at 8.1% and 6.6%.
“Once gearing is incorporated (i.e. borrowing money to invest), residential property continues to outperform Australian shares at both the lowest and highest marginal tax rates over 10 years. In contrast, when extending the data period, Australian shares outperform residential investment property over 20 years once gearing is incorporated,” says the report. “These results are similar to the analysis without gearing.”
But the report doesn’t dismiss the long-term performance of residential property outright. It clubs both property and Australian shares into what it calls the “growth assets” class, stating that growth assets “delivered superior returns compared to more conservative asset classes such as cash and fixed income, over the 10 and 20 year periods to 31 December 2011”.
Nonetheless, the 20-year results will no doubt please the Australian Securities Exchange (ASX), who commissioned the report. According to ASX business development manager Jonathan Morgan, it “highlights the desirability for investors of keeping a long-term perspective”, adding that it also offers “practical examples on the benefits of many exchange traded investments compared to other categories”.
In news that may come as a surprise to investors who have been keeping an eye on the ASX’s recent headline-grabbing drops, Russell's director of consulting and advisory services Greg Liddell stated that “the investment fundamentals of residential property are becoming less attractive compared to listed shares”.
"The main risks for residential property relate to relatively high valuations and the prospect of further deleveraging by Australian households,” he said. “Low rental yields will make it difficult for residential property to outperform listed shares as an investment over the next decade."
Safe as houses?
So is property still a safe bet? Rich Harvey, managing director of propertybuyer.com.au, believes so.
“A lot of sentiment in the share market can be driven by fear or greed,” he told Your Investment Property. “People buy property because they need a roof over their head. It is always going to be a pretty stable investment.”
Harvey added that stock holders have little individual control over their investments: “You can’t renovate shares, unless you’re the manager or director of a company. With property, you can change the nature of the asset if you want.”
Heavily leveraged equity investors also run the risk of being margin called if stock suddenly decreases in value.
“Say you’ve got $100,000 in shares with a 70% loan to value ratio and that ratio goes down to 50%, you’ve got to stump up another $20,000 and you’ll either give them the cash for it, or they will sell down part of your portfolio to pay for it. You can lose 20% of your portfolio quite quickly,” said Harvey. “Meanwhile, during the GFC, RP Data estimated that national median house prices only declined about 3.7% from peak to trough. You don’t get the dramatic swings and roundabouts [with property] that you get with shares.”
And, while global events can have an instant and dramatic effect on the value of a share portfolio, Harvey noted that it’s important to keep a level head when estimating the impact of global events on your property holdings.
“If there is a Greek debt default, how does that really affect the fact that you have got a two-bedroom apartment in Surry Hills? What’s the real impact?” he asked. “While there has been economic uncertainty and people have remained in their jobs, they have been paying down their debts and mortgages and increasing the savings ratio.”
And if you’re truly concerned, he suggested taking some precautionary measures to get you through the hard times.
“Create a line of credit and get a buffer in place,” he said. “Factor in repayments at 2% higher than you’re currently paying, so that if something changes you won’t be caught short… and hold on and ride out the rough times. We’re not going to be in a great depression forever, we go through cycles.”
What are your thoughts on the property vs shares debate? Have your say by commenting below, or joining the conversation on our property investment forum.
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