Property vs Shares: Comparing Investment Options in Australia
Written by Brad Laird
Investing is the key financial strategy for building wealth, and in Australia, property and shares are the most common choices (for good reason). This fuels an ongoing debate about whether to invest in property, shares, or a combination of both. Each option has its own benefits and risks, making it crucial to understand their differences before making an informed investment decision.
Shares: Diversification and Accessibility
One of the key benefits of investing in shares is diversification. By holding a mix of shares across different industries, investors can spread their risk and minimise the impact of any single company's downturn. This contrasts with property investment, where purchasing a single home concentrates risk in one asset. Additionally, shares offer a more accessible entry point, requiring significantly less capital than a hefty home deposit.
Australia’s stock market has historically provided a 9.8% annual return, while the US market has delivered around 11.7%. While shares can be volatile, investors who stay in the market for the long term, often see strong returns.
Risks of Shares
Business Risk: Individual companies can fail, leading to a total loss of capital. This risk can be mitigated through diversification.
Market Fluctuations: Stock markets can be volatile, and prices may drop significantly in the short term.
Margin Calls: If you borrow money to invest in shares (margin lending), you could be forced to sell your stocks at a loss if the market declines.
Property: The Traditional Australian Investment
Owning property has long been ingrained in Australian culture, with many seeing it as the ultimate financial goal. However, while property values have historically increased, it is not always the best investment choice.
Leverage: A Key Advantage
One major benefit of property investment is leverage. Banks are more willing to lend for property purchases, often allowing loan-to-value ratios (LVRs) of up to 95%, compared to 50-70% for shares. This means investors can control a large asset with a relatively small initial investment.
Over the last 30 years, Australian property has delivered an average annual return of 6.4%. While this is lower than the stock market’s historical returns, leverage amplifies gains (and losses) when property prices rise.
Costs and Responsibilities
High Entry and Exit Costs: Property transactions come with stamp duty, agent fees, legal costs, and maintenance expenses, making it costly to buy and sell.
Ongoing Expenses: Unlike shares, property comes with rates, insurance, repairs, and management fees.
Being a landlord: Managing tenants can be stressful, particularly when dealing with vacancies, property damage, or late rent payments.
Renting vs Buying: Is Renting a Waste of Money?
Many Australians believe that renting is throwing money away, but this is not entirely true. Renters pay for a roof over their head and avoid property maintenance responsibilities. Additionally, instead of locking capital into a mortgage, renters can invest the money they would have spent on a home into the stock market, potentially achieving higher returns.
Tax Advantages: Property vs Shares
Both property and shares are subject to capital gains tax (CGT) and qualify for a 50% discount if held for more than a year. Additionally, both can benefit from negative gearing. However, negative gearing is generally more advantageous for property due to the higher ownership costs associated with real estate.
Retirement Planning: Generating Income from Investments
As retirement approaches, the choice of investments becomes increasingly important.
Shares: Generally, offer higher income potential, particularly in Australia. Shares can also be sold in portions, providing flexibility in funding retirement.
Property: While property values may appreciate over time, rental yields are often low, and accessing cash can be challenging due to liquidity constraints (can’t sell a portion of your house). Additionally, managing tenants in retirement can be an unnecessary headache.
Key Considerations Before Investing
Cash Flow: Can you afford mortgage repayments if interest rates rise? Can you afford to be without a tenant?
Risk Appetite: Are you comfortable with the volatility of the share market, or do you prefer tangible assets?
Leverage: Property allows higher leverage, which can amplify gains but also increases risk.
Long-Term Commitment: Both shares and property are long-term investments, but property is significantly harder to exit quickly.
Which is Right for You?
Ultimately, the choice between property and shares depends on personal preference, risk tolerance, and financial goals. For those who prioritise flexibility, and lower transaction costs, shares may be the better choice. However, if you value leverage, and tangible assets, property could be the way to.
If you want help deciding on your next investment option, come see a financial adviser at Salt Financial Group.