While there are alternative investment options out there (we’ve all sat in the back of an Uber, awkwardly agreeing with the wildly gesticulating driver who is explaining why his entire net worth is tied up in a new Lebanese cryptocurrency, and why you need to immediately do the same), most people who want to grow their money look to shares or property. There are benefits and drawbacks to investing in the property and equity market, and at any given time, one could be outperforming the other. However, there are general principles about each that you should understand before you decide where to park your life savings.
How does property investment work?
Property investment is pretty much as straightforward as it sounds. You buy property and rent it out, then all going to plan, its value flies up. When the time comes to sell, you make a hefty profit. Property investing is generally considered a safer and more traditional way to grow your wealth in Australia. When rental income works out to be more than what the property is costing in mortgage repayments and other expenses, you can pocket the remainder as income each month. Investors call these properties ‘positively geared’. When there is a deficit, and you need to make up the difference each month, this is known as ‘negative gearing.' This sounds worse than it is: many investors actually opt for this because of the various tax benefits.
Many first-time or inexperienced investors value the tangibility of a bricks and mortar home - an asset they can see and touch.
Despite these positives, it’s worth pointing out how tough owning property can be.
As a landlord, you have a responsibility to your tenants to ensure the property is liveable, and you also need to make sure it’s being looked after properly. You’ll likely either need to manage the property yourself, which can be very time consuming, or hire a property manager, an additional expense. It’s even worse should you not have a tenant: if your home goes unoccupied for an extended period, the lack of rental income could put you in serious risk of being unable to make the loan repayments.
Property is also a non-liquid asset, which means you generally can’t sell quickly if you need cash. You also can’t sell it fractionally, it’s all or nothing.
Property investing in 2023
After peaking in April 2022, property prices sharply declined throughout the rest of the year as interest rates increased. Many analysts predicted that the drop off would continue in 2023, with demand decreasing as the cost of borrowing increases. The market has held up far beyond expectations though, which CoreLogic attribute to unusually low levels of listings: Aussies elected against selling while prices were low. May 2023 saw CoreLogic’s Home Value Index increase 1.2%, the strongest growth since November 2021. While downside risk remains, property investors are likely to be encouraged by values holding up so strongly. It’s important also to remember to have perspective about any dips in the property market. If you zoom out far enough, the graph normally points up.
Rental rates rose 11.7% from April ‘22 to ‘23 according to another CoreLogic Index, the largest annual increase on record. In theory, this sounds like good news for investors; shouldn’t rents increasing translate to bigger returns? However, this doesn’t factor in mortgage repayments and other property related expenses, which grew at the same time, often outpacing rental rates. In fact, Simon Pressley of Propertyology says that the average investment property owner in Australia saw annual losses grow by more than $11,000 during this time. He has called for policy change to better support property investors, and has criticised the likes of the Queensland Government, who moved to cap rental increases at one a year.
“As with every other asset, the owner of rental accommodation has earned the right to charge whatever price they choose,” Mr Pressley said.
How does investing in shares work?
Equity markets can seem much more complicated than it is. Basically, one of the main ways businesses raise capital is to sell shares, which are effectively a tiny percentage of the company. Customers buy the share to own this small fraction, and the money goes to the company. Ideally, they make good use of this money, the value of the share goes up, and everyone wins. Once shares are issued, they can then be bought and sold on the second hand market, which dictates their value. If a share is in demand, its value goes up, whereas shares that many investors are selling lose value, like any commodity.
While many people buy shares for the potential capital gains, they can also generate income through dividends. Sometimes, companies will distribute a proportion of its profits to its shareholders. This payment is called a dividend. There is no obligation for companies to do this, but it can make shares more attractive to investors. However, if a company is distributing too much of its profits out as dividends, it might not be reinvesting the money into the business, which could mean its growth stagnates. Investors sometimes like to differentiate between dividend shares and growth shares.
The buying and selling of shares, bonds and exchange-traded funds (ETFs) are done through the Australian Securities Exchange (ASX), via a broker or online broking service.
A broker does the trading for you, and you can advise them what you wish to buy or sell, or they can make recommendations to you, provided they disclose any interest they have in it.
They’ll also charge you 'brokerage' which is either a set dollar amount or a percentage of the value of the trade. Bigger transactions are typically charged brokerage as a percentage of the value of the trade while smaller ones are charged the the set dollar amount. For example, for those trading Australian shares online and settling into a bank account of their choice, CommSec currently (at the time of writing) charges $19.95 for trades over $1,000 and up to $10,000, and $29.95 for trades over $10,000 and up to $25,000.
Like any market, there are buyers and sellers and sell orders going through brokers, whose job it is to match orders and get the best possible price for buyer and seller.
The price at which you want to buy the shares is known as the bid price, and the price at which a seller wants to sell the shares is known as the offer price.
Investing in shares in 2023
The ASX 200 is Australia’s leading share market index, and tracks the share price movements of the 200 largest companies listed on the exchange. While it only measures the performance of these companies, they make up a substantial portion of the market capitalization of the overall ASX. In early 2020, the ASX saw a huge drop as Covid and lockdowns hit. Since then, the market gradually regained traction, but continued to be volatile. As the RBA and other central banks responded to post pandemic inflation by hiking up interest rates throughout the second half of 2022 and the start of 2023, the ASX saw several dips. High costs of borrowing mean businesses are less likely to invest in research, development and expansion, so growth often stagnates.
As with property though, it’s important to keep perspective about the long term prospects during the peaks and troughs. In a December 2018 speech, Reserve Bank of Australia (RBA) head of domestic markets Marion Kohler pointed out that $100 invested in the Australia share market in 1900 would be worth an inflation-adjusted $100,000 today. That’s despite numerous notorious share market crashes over that time, including the Great Depression of the 1930s, the Tech Wreck of 2000 and the Global Financial Crisis (GFC) of 2007-2008.
Property investment vs the share market
Many people find the biggest hurdle to breaking into the property market, owner-occupied or investing, to be getting together a deposit. While some lenders might grant you a home loan with a deposit as small as 5% of the purchase price, a general rule of thumb is to aim for a 20% deposit to avoid paying Lenders Mortgage Insurance (LMI). The most recent ABS data suggests the mean property price in Australia was $896,000 in the March 2023 quarter, so a 20% deposit would be $179,200, which is prohibitively expensive for a lot of people.
On the other hand, it’s never been cheaper to invest in equity markets. Some investment apps allow trades as little as $100, with the only extra expense being brokerage fees, which are typically a small percentage of the sale price.
Unit cost means it’s generally far easier to diversify when investing in the stock market. The most expensive share prices on the ASX tend to be around $300 per share. If you invested $100,000 into the share market, you could spread your exposure across a wide range of companies and sectors. if you are looking to buy an investment property, $100,000 might just be your deposit. Over time, you might end up owning several investment properties, and diversify that way, but particularly for investors who are just starting out, the share market is the easiest way to ensure all your eggs aren’t in one basket.
Liquidity refers to how quickly and easily you can convert your investment into cash.
Real estate is generally considered illiquid, because of how long it can take to sell property. You need to find a buyer, go through negotiations, and then the process of conveyancing to officially transfer ownership. The sale process can take weeks or even months to complete, which limits your ability to access funds quickly.
On the other hand, the share market offers high liquidity. Stocks can be bought and sold on stock exchanges, providing investors with the ability to convert their investments into cash relatively quickly. With online trading platforms, you can execute trades within seconds, allowing you access to your funds whenever you need.
In property investment, volatility tends to be relatively lower compared to the share market. Property values typically experience more stable, long-term growth trends with less frequent and significant price fluctuations. Real estate markets can be influenced by factors like local supply and demand dynamics, economic conditions, and government policies, but generally exhibit more consistent growth.
The share market meanwhile is almost inherently volatile. Market sentiment, economic indicators, geopolitical events and company specific news can all cause sudden and substantial movements, upwards or downwards, to share prices. This can mean more opportunities for investors, but also more risk.
One of the major advantages of investing in property is you can borrow a far larger amount than you have saved to invest immediately. While it’s possible to take out a margin loan to invest in the share market, interest rates on margin loans are typically significantly higher than on home loans and the loan sizes tend to be much smaller than home loans.
After you’ve begun paying off the loan, you build up equity in your home, which could potentially be used to purchase more homes and expand your investment portfolio. While you might be able to borrow some money for your share market investments, you generally can’t leverage your existing assets to invest further to the same extent.
Both investment properties and shares have the potential to generate income. Neither rent nor dividends are guaranteed, but can be a great source of passive income if your investment does generate income on top of whatever capital gains you manage.
It can be difficult to work out which investment strategy has performed better historically because it's easy to pick a time-frame that suits your argument - both asset classes have experienced booms and busts.
For the sake of this article, we’ve decided to assess these two different types of assets on the performance over two decades.
A report from the ASX and Russell Investments released in June 2018 examined the returns of long term investments.
It found from the 20 years to December 2017, residential investment property saw better gross returns, as seen in the table below.
Australian shares averaged returns of 8.8% p.a. over the 20 years, while Australian residential property averaged 10.2% p.a. Of course, keep in mind this period encompassed the GFC and a historic boom in Australian property prices.
Australian shares returns v Residential Investment Property returns, with and without gearing: 20 years to December 2017
Source: Russell Investments, ASX.
Although historical analysis can be useful, it’s important to not fall into the trap of thinking that past performance is a barometer of future performance.
Professor of Finance at the University of Queensland Dr Shaun Bond told Savings.com.au it’s more important that investors consider the risk associated with each investment.
“It is important to remember that most economists expect that investment returns for both shares and real estate will be lower in the future than they have been over the last thirty-five years,” Dr Bond said.
Which is the better investment?
So we come to the ultimate showdown - what’s the better investment between property and shares?
Savings.com.au asked experts from both sides of the fence to argue the case for one or the other.
Why it’s better to invest in property than equity markets
Michael Sloan of Better Homes and Gardens Real Estate told http://Savings.com.au there are four main strengths of property investment:
“You get to use other people’s money. For every $1 you have saved, the bank will lend you $4, that leverage is what will make you wealthy.”
“The Government will give you some of your tax back if you buy an investment property. How much did you claim in tax deductions last year? Not much right, yet one new investment property ($500K) can give you $449,143 of tax deductions in the next 10 years.”
“The tenant will help buy the property for you, over $200,000 of rent in the first ten years for a four-bedroom house.”
“Once you buy that first property you will never need to use your money again. Over time you can build a portfolio of properties using the equity from your first.”
Mr Sloan also pointed to the fundamental need for shelter that humans need for survival and the massive population growth Australia was set to see over the coming years.
“The government is not going to build the properties we need,” he said.
“We have a growing population that requires hundreds of thousands of new homes built.
“The government wants you to build them, and they will give you massive tax breaks to make sure you do.
“Smart investors buy investment properties that give them the most tax breaks.”
When considering property investment compared to investing in shares, Mr Sloan said the leverage you can get from buying an investment property makes it the clear better option.
“If you have a $100,000 of cash or equity in your home you can buy a $400,000 investment property.
“Assuming you buy a quality property and stay away from student accommodation and the like, what is going to deliver you a better return long term? A $400,000 property or $100,000 of shares?”
Dr Bond said property investment could be a worthy investment strategy, provided the investor knows the magnitude of the task.
“Clearly a number of people in Australia have built significant wealth through investing directly in property,” he said.
“I consider buying property to be more like owning a business rather than being a passive investment. If you are prepared to invest significant time and energy in your investment than you can end up achieving good returns.
“Some investors have building or trade skills that allows them to create ‘sweat’ equity in a property through renovation or redevelopment. Others are very good at property management or identifying up and coming areas.
“Successful real estate investment is often about the business or entrepreneurial skills that you can apply to the investment as opposed to just sitting back and collecting the rent.”
Why shares are a better investment than property
Founder and CEO of online investment adviser Stockspot, Chris Brycki, told Savings.com.au that investing in shares has the advantages of lower upfront and ongoing costs.
“Low costs are important as all costs are subtracted from your gross return,” Mr Brycki said.
“Shares are easier to buy and sell and they generate higher income and returns. When investing in shares what’s important to remember is to diversify across different sectors of the economy and also invest overseas so all your eggs aren’t in one basket.”
Andrew Moore, CEO of investment app Spaceship agreed with Mr Brycki, telling Savings.com.au the greatest advantage to trading shares over property investment was that you can start small.
“Property investment usually requires a large amount of money to start with,” Mr Moore said.
“There was a time when accessing stocks and shares was similarly inaccessible for most people, but now you can start investing with very little.”
Mr Moore also pointed to the diversification and liquidity of share trading over property investment.
“Through certain apps and platforms, you can invest relatively small amounts across a large number of companies in different industries or geographies.
“Shares can generally be bought and sold in a matter of minutes. You wouldn’t be able to buy or sell a house in a day without a whole chain of bureaucracy!”
Dr Bond said that when considering investing in shares, inexperienced individuals shouldn’t actively trade shares.
“Instead, they should consider long-term investment through low-cost index funds.
“These funds offer the ability to diversify across a range of companies, industries and countries. Investing through low-cost index funds offers small investors the chance to gain exposure to world-class companies.
“Investors can start with small amounts of money and easily add to this over time.”
Savings.com.au’s two cents
So which is better?
The simple answer is it’s completely dependent on your situation and both are a valid and legitimate way to grow wealth.
For those that don’t have a lot of capital, the share market is a great way to get in with a small amount of money and earn some valuable investing experience.
You can access to your funds quickly if you need to and it’s easy to diversify across a number of sectors. However, it’s more volatile and you could see the worth of your portfolio drop dramatically in a matter of days.
Property investment requires a larger amount of capital and can take a long time to provide returns. It's often considered to be a safer investment than shares though and you can use equity to build your portfolio without additional capital.
Whatever you decide, carefully think about your financial position before investing in either, and consider talking to a professional financial adviser beforehand.
Photo by Hermes Rivera on Unsplash
Ready, Set, Buy!
Learn everything you need to know about buying property – from choosing the right property and home loan, to the purchasing process, tips to save money and more!
With bonus Q&A sheet and Crossword!