ASX Education: Property or Shares
PROPERTY VERSUS SHARES
As discussed above the core advantage of property over shares is that the banks will more readily lend into the property market and investors will more readily borrow. It’s accepted that you leverage into property. The borrowing rates are lower and you can get a higher LVR than you can with shares. That’s basically the difference. In other words the key advantage of property is that you can put up $100,000, borrow $900,000 and when the property market goes up 10% you double your money. But when the stock market goes up 10% and you are not geared you make $10,000. In other words the main advantage of the property market over shares is that it more acceptably, and at lower interest rates, enhances the power of leverage.
The other great advantages of property over shares include:
- The fact that the Australian property market has gone up. It is a bit basic to say but it is an undeniable fact that the property market has provided Australians with steady gains for decades and they have become used to that. To the joy of property developers it has become an Australian assumption that ‘property always goes up’ and if it doesn’t, wait.
- Stability. Hindsight suggests that the property market is more stable with low volatility and only irregular isolated rather than systemic disasters. It can of course change but it hasn’t.
- Safety. The property market is perceived as safer than shares and the experience of the GFC absolutely confirms that. Whilst shares fell 54.5%, Australian property owners were basically, except for a few pockets, undisturbed. Property is perceived as a safer asset class than shares.
- Adding value. People can add value to property. They find it very hard to add value to shares.
- Collateral Benefits. Property delivers enormous non-financial benefits if you live in it. You can’t live in shares.
- Forced saving. People are driven to be disciplined by the gearing. They are forced to budget and save and be financially responsible when in debt. They pay down the debt and so build equity more reliably. This is not the culture in shares.
- Protected. The government and the banks do everything they can to ensure a stable property market which is core to confidence, economic stability and growth and key to the investment risk. On the other hand it is well accepted that there is little they can do to support the equity market so when it falls they simply let it go, it is not ‘government backed’. Property is. The whole nation’s interests are deeply rooted in the stability and success of the property market.
- Tax breaks. Negative gearing is a remarkable bonus that advantages the investor over the other tax payers. You can get it in shares as well of course but only if you borrow. Your principal residence in Australia is also capital gains tax free. This is a massive advantage for younger Australians relative to shares and anyone not taking advantage of that and buying shares or an investment property instead hasn’t done the numbers.
Basically leveraged property investment is a great investment if all the assumptions are right, if history continues to repeat itself, if property always goes up and if there is no ‘Tsunami event’ that re-prices the whole property market and allows my daughter to buy even half a standard block near her parents, which at current prices, she most certainly can’t. So what is the attraction of shares?
I’ll tell you.
- Risk is in the culture, it is understood, expected and it is managed. Most property investors are unprepared for risk, they have to assume a fall in price will never happen and God forbid if it ever does.
- Shares have liquidity, low entry costs, can be bought and sold in bits, you can take a big or small exposure and exit on a click.
- Their yields include franking.
- They can also offer exposure to massive returns rarely available in property.
- They can be short duration or long duration, not just long duration.
- Execution is instant.
- They are suited to automatic exit systems.
- There is no stamp duty.
- There are thousands of products to choose from.
- International investment is easy.
- Tsunami events can be avoided.
- You don’t have to fix the toilet if it goes wrong.
- No-one can burn your shares down.
- And if you’re old enough there’s no capital gains tax.
- The big one - no tax on your principal residence.
I like my principal residence, I won’t pay tax on that, I live in it and I can add value to it. But that’s enough. Borrowing more money to buy an investment property that makes no return unless the property market goes up is much more risky to me, there are too many assumptions and not enough liquidity. If my kids lived in it that might be different. It delivers value. But purely as an investment? I’ll stick to shares, I don’t have to have ‘faith’ in the market and I don’t have to borrow. It’s also what I do and we should all stick to what we do best.OTHER ARTICLES ON PROPERTY This one is about 89.2% of investment loans being interest only. If things are so tight you are only covering the interest with your income then property is nothing more than bet on rising prices…other than that it yields nothing, is riddled with unexpected costs and stress and quite honestly, equities look a really rather relaxing and higher yielding alternative: This one is about how the property industry is doing exactly the same as the share market industry… presenting positive long term returns in hindsight to dumb investors down from the specific risks of their asset class, to get them into the comfort zone so they will buy. This one is about how the Property industry and the Share market spruikers use an Index to give the impression of a perpetual and safe bull market. But it’s just a marketing lie. A REALITY CHECK FOR DIRECT PROPERTY INVESTORS If you have just bought and investment property don't watch these - This in The Age Money section last year - Click on the images: Then this: