Property v shares – the age-old debate: Eliza Owen

­When it comes to investment, the property v shares debate has waged on over the years. But what is the honest unbiased answer? The question itself leaves the answer open to much interpretation, so I’ll do my best to present a balanced overview of the arguments.

The general consensus is that the housing market offers a more stable investment option due the constant demand of the market. Houses are one of the few assets that are a must-have. Everyone needs a house and the demand will continue to rise along with the population.

Investing in shares is often perceived as a riskier route, left to those who thoroughly understand the game, and those who like the gamble of holding shares during volatile periods on the market.

However, those perceptions aside, what are the cold hard facts surrounding this debate?

Security

From a young age we are led to believe that owning property is literally ‘as safe as houses’. This confidence in the market is one of the driving forces behind people’s faith in investing such large amounts of capital, with today’s properties worth in excess of hundreds of thousands of dollars.

This trust further extends into the lender’s jurisdiction, with bankers prepared to loan more money against property (90%), than against shares (50%), and at a lower rate of interest. However, as dwellings become more volatile, these levels of borrowing may be subject to review.

It is also important to note that, as an asset, property can very rarely be worth nothing, unlike a share, which can leave the investor with an asset with no value.

Transparency

It’s difficult to fabricate the quality of a property investment opportunity. Residences are a tangible asset that can be inspected and reviewed prior to purchase, with most risks identified during this pre-investment stage. This is in contrast to a share purchase where the investor is dependant upon the company directors offering integral feedback on the risks involved, and behaving accordingly in terms of legal and corporate regulations.

In today’s market, there is much more information available to hand in regards to a property’s history, market performance and characteristics.

Market value

The estimated total value of Australia’s residential portfolio is in excess of $5 trillion, whereas the total market capitalisation of the stock market is suggested to be in the order of $1.5 trillion.

Commitment

Property investment is a long-term commitment. Shares tend to provide higher returns, at less risk, within a shorter period of time, whereas houses and units provide higher return in the long run.

On another note, you can’t decide at any one time that you wish to dispose of the property and expect to make a quick buck. Sometimes it can take many months to sell, and to get the most out of your investment you must be prepared to wait until the right offer comes along.

Ambiguous

It’s not always easy to identify the market value of a property. This fluctuates consistently based on many factors including market conditions, employment rates, local amenities, crime, infrastructure and development – all interchangeable factors that affect the value of a property.

Upfront costs

To step onto the property ladder you have to commit to a huge initial capital investment. This investment will also be attributed to a single entity, ensuring you are locked in to the performance of that individual asset over time. Investment in shares, however, can be diversified, with the risk spread out across various markets and mediums.

From the above analysis, I think it’s fair to say that overall an investment in housing appears the be the lower risk solution, although I think that the important question is whether an investment in housing provides a better total return.

As the appealing Australian lifestyle has drawn more investment in our housing market, people now view dwellings more as portfolio assets than buildings to live in. As a result, Australian housing markets have seen higher volatility and lower rental returns. Between June 2005 and June 2014 alone, the average house in Sydney provided returns between -1.00% and 20%.

On the other hand, while many reports do indicate an investment in shares is the better performer, I believe these reports are based on time frames that benefit the shares market and do not take the risk factor into account.

A better quality analysis would seek to compare the two over a longer timeframe, taking many different investment periods into account and then consider the medium outcome. That analysis would take into account all income streams of the assets and allow for leverage and taxation.

Eliza Owen is a market analyst for Onthehouse.com.au.You can find out more at the Investor Centre at Onthehouse.com.au.

This story originally appeared on Property Observer.