Invest
Advantages and risks of investing in shares over property
Aussies love property. It has been the one thing that has framed our identity and aspirations for as long as I can remember. And why not? It’s everyone’s dream to have a property investment portfolio. But is the narrative as good as it sounds?
Advantages and risks of investing in shares over property
Aussies love property. It has been the one thing that has framed our identity and aspirations for as long as I can remember. And why not? It’s everyone’s dream to have a property investment portfolio. But is the narrative as good as it sounds?
Shares and property are both assets and can make you money through a rise in the price of the assets, known as a capital increase. Shares receive income from dividends, cash payments from the companies you invest in, while property investments receive income from the tenants’ rental payments.
One of the most comprehensive studies undertaken from the Federal Reserve Bank of San Francisco (The Rate of Return on Everything) found that since 1870, shares had delivered an 7.81 per cent annual return and property 6.37 per cent. Since 1980, the returns were slightly higher with shares at 8.78 per cent and property 7.16 per cent pa (Source – Westpac: Safe as Houses? 150 years of returns revealed, 11 January 2018).
What matters more than the return is the risks associated with these investments. We can all become complacent during the good years, so it is always prudent to assess your investment situation for the worst case or the what-if scenario.
It is only in times of extreme stress, as the world is currently experiencing with the one in a hundred year event, the coronavirus pandemic, do the real pros and cons emerge.
Let’s look deeper into the pros and cons and why liquidity matters.
- Liquidity rules the roost: Shares beat property hands down. The amount that needs to be invested is the standout advantage that shares have over property investment. A share investment can be as small as $500 and added to monthly, quarterly or yearly. Shares can be bought and sold with relative ease, and the costs are not onerous. Property by comparison is a very substantial investment, involving a large capital amount and a large proportion normally funded by interest-bearing debt. Buying and selling a property is not easy at the best of times, and it is also costly (stamp duty, agents and advertising fees).
- High maintenance: Like the top IT girl or boy, property, unlike shares, needs to be maintained for wear and tear. It requires insurance, good tenants and a managing agent. Shares are held in a share registry.
- Volatility is not risk: Shares can be volatile as in the prices move up and down, but good quality shares with strong businesses, like Woolworths and Coles in the current environment, have robust earnings, cash flows and offer excellent long-term growth potential, including dividend income. Property is often perceived as a lower-risk asset, because you do not see the day-to-day movements in value and it’s bricks and mortar, but in reality, this is far from the truth. Property investments involve large capital sums and debt. Debt always has risks if the cash flow (rental payments) to pay the debt dries up. Property is very exposed during recessions and periods of growing unemployment, as we are witnessing from the coronavirus impact on the economy.
- Shares outperform: Shares are a good investment at any age; however, they are extremely beneficial the younger you are. Time allows shares to appreciate through the economic cycles. By investing regularly over time in high-quality shares, with a strong balance sheet, you can grow your savings wisely and, as the facts show, make more money than investing in property.
- Beware the tax support: The property investment market is supported by a favourable tax regime, negative gearing. Any advantageous tax provisions potentially can be changed and although not a serious threat in the near term, investment markets should be unencumbered by tax support. Buying shares based on high-franked dividends also pose a risk.
- High debt and immigration: The performance of shares is not dependent upon high levels of debt or immigration levels. Strong property prices over the last decade has substantially eroded affordability for owner-occupiers and investors, meaning larger deposits and more debt. Shares are more affordable.
Although none of us like to consider the risks of investing, prudent investors who are patient recognise that for all the short-term noise and scary headlines, investing in good quality shares will not only make you more money, they are safer from a liquidity perspective and worst-case scenarios if cash needs to be raised.
Danielle Ecuyer is an investor and author.
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