Property v shares, the age-old debate: LJ Hooker's Mathew Tiller

EXPERT OBSERVATION

Australians have spent the last month eyeing their share portfolios as the volatility of Wall Street crept into the ASX.

Over many decades, equities have been a proven performer for Australians. But just as a single day can have you planning a kitchen renovation, inherent risks can mean losses just as easily transpire; it’s part and parcel of the modern, global economy. As an example, in early February, about $70 billion was wiped from the All Ordinaries – the top 500 companies listed on the Australian Securities Exchange - in the space of three days.

Ask anyone what their goal out of an investment is and the response is unanimous: make as much money as possible.

Amongst the suite of investment classes – which continue to diversify through the profile of options like cryptocurrencies – real estate continues to be a cornerstone. As opposed to other options, it’s less exposed to daily or weekly fluctuations.

As an investment class, real estate has a tremendous profile, simply because the overwhelming percentage of people have had some form of relationship with property: most people have either been sellers, buyers or tenants at some point their lives. It’s this exposure that allows people to be more comfortable with the process and research involved, especially with the amount of information at our fingertips.

So how does real estate stack up?

There’s no such thing as a foolproof get-rich scheme. Any investment – irrespective of class – should be treated as a long-term proposition. So, while equities markets have taken a battering in the last few weeks, it’s more appropriate to view them in a long-term perspective.

Twenty years ago, the All Ords Index was 2894. In mid-February, the Index was around 6147, representing an average gain over time of 112%. Companies on the All Ords are, by their nature, solid, long-term performers that avoid fluctuations. While most investors will include some members of the All Ords in their wealth management strategies, they’ll supplement it with ‘higher risk’ performers which can accelerate returns.

But let’s examine residential real estate over the same period. In December 1997, the median house price across Australia was $139,000 (you can find some car spaces in the city fringes of Sydney and Melbourne being purchased for similar prices, today).

At the end of last year, the median national house price was $535,000, representing an increase of 285% over two decades – well above the performance of equities.

Look at the big picture

But results need to be viewed at face value with numerous variables involved in both. For instance, borrowing for shares is usually something only highly experienced investors engage in, while most real estate investors will borrow for their investment(s). So, commonly, share market gains can be seen in their entirety for most investors, while capital gains in property are offset by mortgage debts.

Also, real estate investors look for a combination of capital gains and yield in their investments. And if a property can be positively geared, the investor is placed in a great position.

But, it’s the safety of real estate that allows it to really stand out from other investment classes. As the below graph shows, the national median house price has only ventured into negative territory three times in the past 20 years. In contrast, equities have made negative 12-month gains on nine occasions.

So, as an investment class, history has shown that real estate offers steady growth and less fluctuations in value. 

Mathew Tiller is head of research at LJ Hooker.