SHARES? OR AUSTRALIAN PROPERTY?
There are many views and arguments supporting both shares and property.
What cannot be denied is the benefit of liquidity with shares.
Or the strength of property to enable gearing and harness the power of leverage.
With that in mind, we have looked at putting exactly the same amount of money into various stock markets, ten years ago, and then compared it to the return today, vs buying a property using the same amount as a deposit on a flat.
The results may surprise you. In each case, we have also used the exchange rate in 2006 and again in 2016 and calculated the returns.
Without boring you with all the calculations, we have simply taken the various stock indexes and used the Brisbane apartment index for the comparisons, and ignored dividends, rent, broker’s fees, transaction costs etc.
So, if you had placed HK$500,000 (AUD$84,006) into shares on 27 July 2006 using the Heng Seng and Dow Jones index, this is what you would have got back 10 years later....
Hang Seng HK$656,715 (AUD$113,138)
Dow Jones HK$831,963 (AUD$143,308)
If you had used the same HK$500k as a 20% deposit on a flat in Brisbane, you would have got back today HK$1,512,487 (AUD$605,182) after repaying your loan and assuming the rent was not cash flow positive and just covered the bank repayments.
Yes, this is about an 84% better return than the Dow Index, and some 322% better than the Hang Seng!
In just ten years.
SUMMARY IN % TERMS
RETURN ON INVESTMENT
(on cash outlaid in local currency) past 10 years
HANG SENG +31.34%
DOW JONES +66.39%
BRISBANE FLAT +620%
<PS: If you had invested in Singapore’s Straits Times Index you would have done even worse: STRAITS TIMES +17.14%>
That's one 10 year period, you can apply it to almost any period to do the comparison. There will be times, usually shorter than ten years, when the stock index would be more impressive, but over the longer term property more than favourably compares.
Now you may believe that " shares out perform property" so let's look into that a bit further.....
The long term debate comparing the returns on shares with the returns on property tends to vary depending on the time period mentioned above, and of course who is writing the article.
The truth of the matter is that it is very hard to compare these two markets.
There are many different variables to consider such as sales commissions, taxation, dividends and rental yields , interest rates, risk and holding costs to name a few.
The combinations are endless and it is entirely possible to make out a strong argument of one over the other depending on what data you input. So there is no 'right' or 'wrong' answer to this question!
What can be said is this . For most investors, they take a long term view of property, and a shorter term view of shares.
Based on the Russell/ASX Long-Term Investing Report for 2018, the 10-year after tax return (including costs) at the highest marginal tax rate to 31 December 2017 for Australian shares was only 2.6 per cent compared to property, which was 5.1 per cent.
In comparison, the 20-year after tax return at the highest marginal tax rate (including costs) to 31 December 2017 for Australian shares was 6.7 per cent compared to property, which was 7.6 per cent. So in both of the cases above, property has outperformed shares.
But most investors will use gearing for property, but not usually with shares because of the higher risk.
So assuming 2/3 to 1/3 gearing is involved, then if we property still fared significantly better than shares as the return is increased by three times.
(Property price $600, with $200 deposit and $400 loan. Increase in value of 5% (to $630) less loan $400 leaves $230 return on $200 investment, or 15%.)
Share investment $200 goes up by same amount (5%) value raises by 5% to $210, so in this example share would have to go up by three times the property increase for the same return.
Extremely simplified, but shows the theory clearly!