There are some great debates in Australian society that seem to never end. Aussies Rules vs Rugby League. The eternal Sydney vs Melbourne stoush. And of course the age-old conundrum of whether to invest in shares or property.
Historic returns
The obvious place to start is returns. The US National Bureau of Economic Research has published a fascinating paper called The rate of return on everything.2 According to their long-term figures, the real (after-inflation) return on Australian shares beats residential property by around 1%.3
Since 1980, that margin has increased to 1.5% but, broadly speaking, returns on shares and property are in the range of 7-8.5%.4 That’s significantly better than the returns from cash and that’s after inflation. So, there’s no need to die in a ditch over which side is best when looking at past returns.
Future returns
Long-term returns are valuable data, but you’re not investing in the past. Let’s think about the likely returns from these two major asset classes into the future.
Property – where have all the people gone?
There are two big forces affecting property for the foreseeable future, due to the current impacts of COVID-19 on Australia and the rest of the world.
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Unemployment has gone up, which means fewer new buyers pushing up prices and more people selling under mortgage pressure – thus pushing prices down.
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Immigration has crashed. In June, the Government suggested immigration could fall by 85% this financial year. That’s over 200,0005 fewer people looking for a home.
Shares – you win some, you lose some
Whilst residential property in some areas has been negatively impacted by COVID-19, the share market has not been left untouched. High unemployment, low consumer confidence and a low growth economy are hardly the recipe for a booming stock market. There are whole sectors of the market likely to be in the doldrums for months, maybe years. The prospects for tourism, travel, entertainment and international education appear downbeat.
However, there are companies who are prospering in the current economic conditions – no matter how uncertain they appear. Tech stocks have generally been strong since COVID-19. For instance, between 1 February 2020 and 28 September 2020, Amazon’s share price was up around 78.9%.6
Amazon isn’t an outlier.
The share prices of a number of other tech stocks including Google, Facebook, Microsoft and Netflix have also boomed since COVID-19 began as many investors seem to have taken a view that we’ve become so used to the conveniences of ‘on-demand’ life that we’ll be using these companies’ services even more in the years ahead.
Still, there’s no clear winner on historical returns from property vs shares and it’s equally hard to predict which of the two major growth asset classes will outperform in a COVID-19 world. Again, the point to stress is that both are likely to do better than cash (interest rates are low – and staying low in Australia, judging by Reserve Bank of Australia comments).7
We should not forget that COVID-19 is unlikely to be with us forever. A successful vaccine or more effective treatment should enable societies and economies to gradually return to normal life, and that ought to translate to better outlooks for businesses, including those listed on stock markets.
Volatility
Many people invest in property because it’s perceived to be less risky. The key word here is “perceived.” Unlike shares, which are priced second-by-second on stock exchanges, residential property generally only gets priced in two ways.
Firstly, by a valuer, including a bank when you apply for a mortgage. Secondly, when a property goes on the market for sale. The absence of constant pricing creates the impression of less risk compared to shares.
However, investors should remember that all assets have risks. During the GFC, for example, sophisticated economies like the US, the UK, Ireland and Spain all recorded significant residential property losses.
Debt – a borrower be
One of the keys to success in the Australian property markets is debt. Indeed, some commentators believe the reason many Australians profit from the sale of their property is due to purchasing the property with a large amount of debt, the investment discipline of paying a regular mortgage and a growing population, meaning, there has been increasing demand.
Many share investors use debt too – often via margin lending. But banks will typically underwrite a much larger percentage of your investment when you’re buying property rather than shares. That’s great from a return point of view – but it is an added risk.
Housework
One other difference between shares and property investing is the amount of effort involved. By choosing to invest in managed funds, you can invest in shares using a very hands-off approach. To successfully invest in residential property, you must manage:
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tenants
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maintenance and renovations
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mortgages, leases, buying and selling.
All this work requires skills not all investors have (or creates costs if outsourced to property managers or real estate agents). In short — unless you’re a trader, as opposed to a buy-and-hold investor — property investing requires more work than long-term equity-investing.
Conclusion
The historical returns on shares and residential property are both attractive and broadly similar so returns are probably not the deciding factor. While property has more risk than many believe, shares are more volatile. Property investment typically requires more debt than equity investing and is more admin heavy. This needs to be considered when calculating the real cost of the investment and when seeking to maximise returns.
The decision to buy property or shares seems to be less about returns and more about individual attitudes to things like risk, debt and involvement with your investment. Those are very personal decisions and a chat to a financial adviser on (08) 8723 9822 about your lifestyle goals will probably improve your decision-making when it comes to shares vs property.
Source : MLC Insights October 2020
1The rate of return of everything, 1870-2015. Oscar Jorda, Katharina Knoll, Dimitry Kuvshinov, Moritz Schularick, Alan M Taylor. NBER Working Paper Series, National Bureau of Economic Research. Published December 2017, revised May 2019. https://www.nber.org/papers/w24112.pdf. Accessed 18 August 2020
2 Ibid
3 Ibid
4 Ibid
5 What an 85pc fall in migration means for the economy and housing. John Kehoe, May 1, 2020 https://www.afr.com/policy/economy/later-migration-plunge-to-hurt-economy-and-housing-20200501-p54p2g. Accessed 18 August 2020.
6 Amazon’s share price performance on Barchart. https://www.barchart.com/stocks/quotes/AMZN/performance. Accessed 29 August 2020.
7 Interest rates to stay low but unlikely to go ‘negative’ says RBA boss Philip Lowe. By business reporter Nassim Khadem, Tuesday 26 November 2019. https://www.abc.net.au/news/2019-11-26/interest-rates-to-stay-low-but-unlikely-to-go-negative-says-rba/11739728. Accessed 17 August 2020.
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