Latest NewsProperty -v- SharesThursday, 09 March 2017

The choice over whether to invest in shares or in property can be argued either way - and there are profits in both.

Forget Julia, Kevin and Tony - the face-off that really matters is how shares and property stack up against each other. Who doesn't want to know which is the better investment?

But ask a financial adviser and you almost certainly won't like the answer.

You'll be told to answer it yourself, since it depends on how much risk you are prepared to take for how long and what you're comfortable with.

Is that a cop-out or what?

Guess we'll just have to look at the figures.

The rule of thumb is you can expect a property's value to double every 10 years.

That's borne out by a study by Russell Investments, which shows that during the past decade, property returned an average 10.4 per cent a year.

In fact, you would have doubled your return in seven years. But this includes income from rents, so a doubling in prices in 10 years sounds about right.

During the past 20 years property returned a slightly lower 9.8 per cent a year, still well within the ballpark.

So, how did shares go during the past 10 years?

Not nearly as well. In the 10 years to December 2009, the sharemarket returned 8.4 per cent a year, Russell says.

This had dropped to 7 per cent in calculations by Chant West just six months later.

Considering boring old bonds managed 6.4 per cent a year at no risk, so long as you hold them till they mature, you'd have to wonder whether the sharemarket's heart-stopping thrills of a record rally and spills of the tech wreck and the biggest crash ever were really worth an extra 0.6 per cent a year.

The Russell study, incidentally, allows for all the expenses of investing in either property or shares, such as brokerage, stamp duty, maintenance and levies.

But go back 20 years and property and shares are neck-and-neck, separated by an almost indiscernible 0.1 per cent a year.

Once you take tax and borrowings or gearing into account, the difference is much bigger - and not quite what you'd expect.

It turns out that shares, despite several crashes along the way, did better during the past 20 years than property.

What's more, the lower your tax rate, the better gearing into shares works.

In fact, the higher you go up the food chain, the less gearing works. Bet you didn't see that one coming.

On the highest tax rate, for example, a geared share portfolio returned 7.8 per cent annually over the past 20 years after tax but hit 9.9 per cent on the lowest.

The same goes for property. The after-tax return on the bottom tax rate of 8.8 per cent drops to 7.2 per cent at the top.

The reason isn't hard to find. Dividends from blue-chip shares are franked and so come with a 30 per cent tax rebate.

Note it's a rebate and not an offset, which means if your tax rate is 15 per cent, you get the other 15 per cent back.

If it's zero, you get back the full 30 per cent of the tax the company has paid on each share.

Then there's capital gains tax when you sell.

A lower rate on a large amount makes all the difference.

Still, just as Fords and Holdens have their fanatics, so do property and shares.

It should be said that property is up against some shaky statistics from the start.

It's hard enough comparing the same property over time because you don't know what changes have been made, if, indeed, it ever goes on the market.

And the median price can hide a multitude of discrepancies.

There's also a distortion caused by the treatment of dividends.

Because they can be reinvested as new shares, which is exactly what the benchmark accumulation index assumes, there's the benefit of compounding.

The income from reinvested rent is either ignored or, in Russell's case, has some interest assigned to it.

Crediting interest only partly fixes the problem, since a reinvested dividend will pay more income and eventually grow.

Anyway, share and property investors are both more likely to use the income to pay some of the loan off. Still, an advantage of the sharemarket is that you can buy and sell stock in dribs and drabs. With property, it's all or nothing.

So, how about all those deductions you can claim on an investment property?

Sure, there are lots of them but that's because you have to spend a lot.

The only tax breaks with no strings attached are depreciation - which you get because the value is falling, hardly a slam dunk for owning a property - and the 2.5 per cent or 4 per cent capital allowance, depending on when it was built. Against that, there are a lot of expenses.

When you buy a stock, that's it. Well, unless there's a rights issue, in which case you can choose whether to go in it or not.

Admittedly if you don't, your holding will be worth less.

But with property, you can't avoid maintenance and repairs or periods you might not have a tenant (though to be fair, stocks can go through periods of unprofitability, too).

Then again, maybe unavoidable expenses such as council rates even up the statistical playing field.

Also, to improve its value, a property may require adding other rooms or a renovation. Spending more money on something to get more value doesn't appeal to everybody.

But there's no doubting some of the strengths of property.

Prices are nowhere near as volatile as those of the sharemarket's. Or, at least, they don't appear to be.

It might be a different story if houses were traded as often as your typical stock.

Property is also an investment you can touch. You're in control.

With shares, you have to trust the management and board to be honest, do the right thing by all shareholders rather than just the biggest and come up with the most profitable strategy for the company.

It's also easier and, in a way, less hair-raising to borrow for property than shares.

The fact that buying a property is a huge outlay has its good and bad sides.

By borrowing more, you have a bigger investment at stake. This gearing will amplify any growth. Or, to put it another way, you're more likely to dip your toe in further on a property than a share portfolio.

Even so, putting everything into one asset isn't good investing and gearing will exacerbate any losses.

At least with the sharemarket you can select different stocks and your money isn't tied so inextricably to one investment.

The main advantage of the sharemarket is that it's so easy to get in and out, not to mention that you can start small.

But the main - indeed, overwhelming for many - downside of shares is that your stock can go belly-up and you lose the lot.

At least a property will never end up being completely worthless.

Then again, any share portfolio for the long-term should be mostly blue chips, such as BHP Billiton.

If BHP went belly-up, let's face it, Australia wouldn't be far behind.

While 20 years of evidence is indisputable, a five or even 10-year period isn't so clear-cut.

Russell's study is done annually and while property beat shares in the latest 10-year period, that hasn't been the case for all of them.

During the past five years, for instance, shares would have lagged badly.

So what about the next five to 10 years?

Many economists argue that residential property is overvalued and the sharemarket undervalued. Maybe so but the property market isn't homogeneous, while it's just as certain that there are stocks out there that are overvalued.

Either way, it's going to take a long time for either to start producing the heady returns of before the GFC.

So, the annual income you get will be critical, more than usual.

With a chronic housing shortage and the fact that new construction is unlikely to pick up until next year, the rise in rents is likely to outstrip that of dividends for a few years.

And a crucial consideration for the sharemarket is whether future governments keep dividend franking, which the Henry tax review left open.

Nor can you underestimate psychology. It will be etched into memories for a long time that property was a safe haven in the GFC, losing only modest ground in some areas while the sharemarket was collapsing.

Which just goes to show the advisers are right. It all boils down to what you're comfortable with.

　

Economic forecaster BIS Shrapnel expects property prices to rise 6 per cent annually on average over the next five years, despite an expected 1.5 per cent rise in interest rates.

Will houses or units do better? Probably units because rents are rising, they're cheaper than houses and appeal to both first home buyers and downsizing baby boomers. Choosing a high-growth area is essential, as is closeness to the city, transport, schools, hospitals and coast. Sydney, where prices have lagged and there's a chronic shortage, seems to have the brightest prospects.

　

FACE THE FEATURES.....

[PROPERTY]

* Little volatility

* Control

* Easier to gear

* Lumpy

* Illiquid

* High entry and exit costs

* Continuing expenses

　

[SHARES]

* Liquid

* Small bites possible

* No maintenance

* Gives international exposure

* Dividend franking

* Highly volatile

* Risky