Direct Property vs Shares

February 2nd, 2012

This debate is as old as the hills and will no-doubt continue forever, which is the better investment – Property or Shares. Australians are well known for their love affair with property, the dream of the quarter acre plot has been built into our psyche as a nation. It would also be fair to say that that as a demographic the medical profession definitely favours real estate in their wealth creation. But does property actually do better for us over the long term.

As most medical professionals will pay tax at the higher marginal rates we will look at after tax returns based on a marginal tax rate of 46.5%, and further as many of the true believers in the share market will argue the ongoing cost of property erodes the real return, we will look at returns after costs. The figures below are sourced from Russell Investments / ASX Long Term Investing Report 2010 from an after tax (46.5%) and after costs perspective:

Shares Property
10 Year 6.3% 7.9%
20 Year 8.8% 7.2%

Looking for greater depth, research by AMP Capital Investors going back to the 1920’s shows an average return from each asset class of around 11.5%. It would appear the volatility of the share market is balanced by the lack of liquidity in the property market.

It comes down to a personal choice, many would argue that the emotional state of the investor can greatly interfere with a share market investment. As human beings we have a very consistent track record of remaining invested during a decline, selling out at the bottom and then missing the recovery before we get back into the markets. This cycle ultimately means that very few individual investors achieve the long term return of the share market.

When direct property is concerned the investor has a very different mindset, most people who buy property will tell you that ‘they’ll never sell their investment property’, and that’s exactly what happens, they keep it for a lifetime and ultimately reap the rewards.

Here and now the returns above include the recent financial crisis and significant decline in share market value. The current Price / Earnings ratio of the ASX is sitting below long term average and therefore suggests the share market as an asset class is undervalued. Where on the other hand there is plenty of talk that the Australian property market may be experiencing a potential bubble at the moment. According to 2009 data from the OECD, our ratio of house prices to incomes is 35% above long term average, and the ratio of house prices to rents is 58% above long term average.

So what does it all mean ?

The share market and direct property are two core asset classes and significant investment capital flows between them, often when one is up the other is down. The key aspect for the investor to remember is that both are growth asset classes and require an appropriate commitment in term of time. The liquidity in the share market will always mean this is a more volatile investment, and as such those with less resolve may find the property market a more comfortable experience.

For more information on Investment options, speak to one of our Medical Wealth Strategists at MEDIQ.