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Property versus shares

Anthony Fensom  |  21 Jul 2016Text size  Decrease  Increase  |  

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It is an age-old debate: property versus shares. In an uncertain environment, how can Australian investors pick a winner?

First, the good news for residential property investors. According to the "2016 Russell Investments/ASX Long-term Investing Report," residential property was the best performing asset class over the 10 year-period to 31 December 2015 with an average annual return of 8 per cent before tax and after fees, compared to the 5.5 per cent from Australian shares.

Global bonds (hedged) were runners-up to residential property at 7.3 per cent, while global shares (hedged) tied with Australian bonds at 6.2 per cent.

Meanwhile, Australian listed property and cash returned just 1.7 per cent and 3.1 per cent, respectively.

Over a 20-year period, Australian residential property performed even better, posting an average annual return of 10.5 per cent compared to the 8.7 per cent gain of domestic shares.

Local shares also had a poor fiscal 2016, with the S&P/ASX 200 Index dropping by 4.1 per cent to record its first loss in four years.

Total returns on Australian shares, as measured by the All Ordinaries Accumulation Index, were only 2 per cent, which compared to the 13.9 per cent rise for property and the 7.9 per cent gain for government bonds.

Property fans point to the relative stability of "bricks and mortar" investments, the potential for capital growth and rental returns along with the benefit of tax deductions, including negative gearing.

It is also possible to gain greater leverage from property compared to share investments.

However, the cons include the high entry and exit costs of property investment such as stamp duty, legal fees and real estate agent costs, the lack of diversification and vulnerability to rental vacancies or rises in interest rates.

Shares are also highly liquid compared to property, with settlement occurring in just two business days after a share transaction.

The process of buying and selling shares can cost as little as $20, while tax benefits include franking credits paid on dividends and capital gains tax discounts for shares held for longer than 12 months.

And while the top 200 index may have declined in fiscal 2016, investors in miners St Barbara (ASX: SBM) (up 418 per cent), Saracen Mineral (ASX: SAR) (up 235 per cent) and Regis Resources (ASX: RRL) (up 217 per cent) would certainly have been smiling, along with those invested in the mid and small-cap sectors, which posted double-digit gains overall.

Prices don't always rise

Like the Australian economy, the nation's property sector has recently enjoyed a record-breaking streak.

House prices increased by 175 per cent over the 17 years from 1990 to 2007, and despite the impact of the GFC, have since risen a further 60 per cent, leaving them 350 per cent higher than at the time of Australia's last recession.

However, critics point to the large falls in UK and US housing markets during the GFC as evidence that property prices do not always rise, while some Australian cities have also gone backwards in the past year.

Variant Perception's Jonathan Tepper has forecast a property price crash of up to 50 per cent, arguing that Australian housing is as overvalued as the United States was at the peak of its boom.

Notably, Demographia's latest annual survey showed the typical Australian house costs 5.6 times the median household income--second only to Hong Kong and a level considered "severely unaffordable".

The latest ABS data for the March quarter 2016 revealed housing markets were already slowing across Australia's major cities, with average residential dwelling prices dropping by 0.2 per cent.

For the year to March 2016, Melbourne edged out Sydney with a 9.8 per cent gain versus 9.7 per cent, but Sydney prices dropped in the March quarter and Melbourne's only increased by 0.8 per cent.

Elsewhere the picture was mixed, with Canberra showing a 4.6 per cent rise in the year to March 2016, Hobart up 4.2 per cent, Brisbane up 4.1 per cent and Adelaide 3.1 per cent higher.

Darwin prices actually dropped by 4.9 per cent, while Perth dipped by 4.5 per cent.

Researcher BIS Shrapnel expects the nation's housing market to move into oversupply in 2017 for the first time in more than a decade, with capital city rents already declining and fewer consumers believing now is a good time to buy property.

Analysts such as Capital Economics' Paul Dales expect property prices to start dropping once interest rates are increased, potentially in 2018.

For the share market, Morningstar's head of equities research, Peter Warnes, expects the S&P/ASX 200 Index to fluctuate within 4,900 and 5,500 points in fiscal 2017, barring a major boost to economic activity.

Risks include higher US interest rates, a downturn in China and further geopolitical shocks such as "Brexit" rocking markets.

So which is the winner: property or shares?

Given the mixed outlook, Australian investors might seek safety in buying both asset classes as part of a diversified portfolio.

After all, what goes up can also come back down.

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Anthony Fensom is a Morningstar contributor.

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