Property vs shares: which is on top in 2019?
Slumping prices and election fears have given residential property investors plenty to worry about in 2019. Yet with the equity market also under pressure, picking between real estate and shares is far from a simple proposition.
Slumping prices and election fears have given residential property investors plenty to worry about in 2019. Yet with the equity market also under pressure, picking between real estate and shares is far from a simple proposition.
For property, the hits have kept on coming with horror headlines from mainstream media adding to the gloom.
“More than 800,000 homes could end up being worth less than what they were bought for,” screamed one headline from the usually sober Australian Financial Review.
Real estate analysts expect the average price of a home in Sydney to drop below $1 million within the next three months.
Domain property data released on Tuesday put the median value of a house in Australia's biggest city at $1,027,962—a drop of 3.1 per cent over the quarter and 11.5 per cent in the last year.
"If the pace of quarterly decline remains, prices are likely to dip below $1 million in the coming quarter," Domain researcher Nicola Powell said.
Sydney's average house price first broke through the $1 million barrier in mid-2015, with values peaking in mid-2017 and then tumbling 14.3 per cent to the present, according to Domain figures. Melbourne prices are down 10.7 per cent since their November 2017 peak, eclipsing their losses during the early 1990s recession.
“Prices look like they are continuing their grind down. We see little prospect of conditions improving over 2019,” warned investment bank Morgan Stanley. It has predicted a peak-to-trough decline after inflation of about 20 per cent.
Adding to the gloom, analysts SQM Research have predicted that planned changes to negative gearing and capital gains tax by the opposition Labor party could see house prices fall as much as 12 per cent over the next three years.
“What’s caused the property market to come down is the choking off of credit—and that’s not going to change overnight,” says Morningstar’s head of equities research, Peter Warnes.
“Banks have got to get back into the mood to start lending again, but now the regulator has a hairy chest after the Hayne royal commission, despite abrogating their responsibilities previously. So until you get housing credit growth to stop falling, prices have to keep going down”.
A report by EY argues that more than 60 per cent of Sydneysiders who bought properties in the past 25 years would have been better off renting instead and investing their money in shares.
According to the accounting group, in 62 per cent of like-for-like cases since 1994, property buyers should have invested the funds required for a 20 per cent deposit in a leveraged S&P/ASX 200 fund (with a margin loan at 50 per cent loan-to-value ratio) and rent a similar property in the same location.
However, timing also influences the results, particularly for buyers of properties in Sydney’s inner and middle rings.
“Broadly renters have come out ahead of owners around 1998 and 2003-04, whereas buyers have broadly come out ahead if they bought around 1994-95 or 2006-07, which meant you entered right before the big property boom,” said EY chief economist Jo Masters.
The report also ignores the intangible aspects of property buying, such as physical and emotional security, as well as the financial discipline imposed by having a mortgage and the potential for sharemarket losses.
The 2018 Russell Investments/ASX Long-term Investing Report showed that Australian residential property outperformed equities over both 10- and 20-year periods through to 31 December 2017.
In the 10 years to December 2017, residential investment property posted an 8 per cent gross return compared to the 4 per cent return for Australian shares. Global shares (hedged) offered the second-highest return at 7.2 per cent, followed by global fixed income (hedged) at 7.1 per cent.
Yet with property apparently now in the doldrums, is it time for investors to switch fully to equities instead?
The research by Russell Investments argues that switching investment strategy regularly, such as chasing last year’s winners, is a losing proposition. Instead, investors should diversify across multiple asset classes, relying on different return drivers.
As of 30 April, the S&P/ASX 200 index was at 6,359, up more than 14 per cent for the year, albeit lagging the U.S. S&P 500 index’s 17.25 per cent gain.
However, Morningstar’s Warnes suggests the debate between property and equities is far from settled.
“I suspect within five years, house prices will be back above 2017 levels as the supply-demand equation remains in favour of demand. Long term, we will have 40 million people in Australia, where are they all going to live? Property will come back again, and people who can hold on, will be OK,” he says.
“Don’t forget, both equities and property are risk assets. At this point in time, for risk assets the balance is slightly in favour of equities, but equities are at a level where property was 18 months ago.
“If you’re buying at today’s prices and holding for 10 years, you’re locking in a below-average return as prices today are too high. Instead, investors should be looking for no more than a 5 per cent return and protecting their capital”.