Should you invest in property or shares?

Property and shares are the two most common ways of building wealth in Australia. But which one is better for you?

Shares and real estate have both generated reliable income and capital returns for Australians over the long-term. However, whether to invest in property, shares (or both) often leads to heated debate.

The 67% of Australians who own the house they live in are usually passionate believers that property is the best investment – but what’s commonly believed isn’t necessarily true.

Property and shares are rarely out of the news, with weekly predictions about Australian property bubbles and busts fuelling speculation and creating confusion for the majority of investors.

Against this tide of information overload, it is important to remember there are advantages and risks associated with both property and share ownership.

Property or shares - which one is best for you

Source: Corelogic, Housing Market and Economic Update March 2016

The Australian housing market

Historically there has been a cultural belief in Australia that home ownership leads to an improvement in living standards. Owning your own home is seen as a symbol of success and security, which leads people to think it is the best investment for the long-term.

Since 1961, home ownership has been relatively stable at around 70%, with a decline in recent years to 67% due to stretched affordability. Home ownership tends to increase with age, alongside general increases in wealth.

However, analysis shows a rise in the proportion of renters, as buying a home becomes less affordable in all capital cities.

Even without the recent price rises, there are significant risks associated with taking on a large mortgage. These include interest rate risk and lack of investment diversification.

Residential property prices in Australia Dec 2020

Source: RBA

Share ownership in Australia

Australia has one of the world’s highest share ownership rates, with around 35% of adults owning shares outside of their superannuation.

Owning shares doesn’t typically have the same level of personal attachment when compared to property, as the part-ownership of a business is less tangible than a physical house.

However shares have generated reliable income and returns for Australians over the long-run.

Investing in ETFs instead of individual shares

In the past five years, Australians investing in shares have increasingly turned to diversified products such as Exchange Traded Funds (ETFs).

WATCH: Alec Renehan shares his top tips for deciding what to invest in:

EFTs reduce the risk of investing in single shares and provide access to international markets. EFTs are considered a relatively low-risk investment and provide an easy entry point into the sharemarket.

You can find out more about current EFT trends here.

Investing in shares or property: what to consider

There are many factors to consider before deciding what is the best investment for you. Here are some of them.

Look at what you can afford and test different interest rate scenarios before making a major investment decision.
What is your attitude to share market movements? Would you have the discipline to stay invested even during periods of market volatility?
How stable is your income? Would you be able to continue paying a mortgage if something changed to you or your partner’s work situation?
How much of your decision is impacted by tax? Tax law changes regarding property (negative gearing) and shares (franking credits and capital gains tax) could occur at any point in time.
Consider your lifestyle, whether or not you have dependents and the kind of area that would be best to live in. Buying a property in an area with access to desired facilities such as public transport and schools may not always be immediately affordable.
Can you commit the required time to maintain a property?
Personal values and situations affect your decisions about opportunity costs and risk appetite for investing decisions. Social pressure can push individuals into making choices that are not best suited for them, even though these choices may have worked out well for others.
Rather than buying property to live-in, some people buy property as an investment to rent out. This brings another whole other set of potential advantages and disadvantages. Two of the most common are negative gearing and landlord costs.
Think about whether you should buy or rent.

Property vs shares

Investing in either property or shares has advantages and disadvantages. Below are some factors to consider before making a decision to invest in either.

CONSIDERATION	PROPERTY	SHARES
General	Pros: – Peace of mind and stable place of residence -Flexibility to renovate. Cons: – Lack of liquidity and unable to quickly change mind after the initial commitment.	Pros: – Easily bought and sold. – Regular income from dividends. Cons: – Not a physical asset. – Generally more volatile in the short-term.
Diversification	Pros: – Lack of correlation with other asset classes and good protection against inflation. Cons: – Poor diversification and highly concentrated in a single asset.	Pros: – Easy to gain exposure to the entire index of thousands of companies to reduce risk. Cons: – The entire market can also have periods of weak performance.
Leverage risk	Pros: – Able to borrow more and leverage returns which can be great during times of low interest rates. Cons: – Higher repayments if interest rates rise. – Leverage magnifies losses so you can lose more than you invested.	Pros: – No leverage means you can’t lose more than you invested. – Interest rates typically have less impact on share prices. Cons: – No benefits of higher leverage during periods of high growth.
Taxes and transaction costs	Pros: – Potential for negative gearing benefits.Cons: – Relatively high transaction costs associated with buying, selling and property maintenance.	Pros: – Potential for franked dividend benefits. – Transaction costs and fees can be low. – Involves very little ongoing effort after an initial investment. Cons: – Capital gains tax when shares are sold.