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Which will make you richer, investing in the sharemarket or a property? I thought I’d never ask.

If you go by history, the sharemarket. Even then there’s not much in it, especially over very long periods, which is surprising considering the sharemarket leaves property for dead when it comes to tax breaks.

Hmm, that might surprise you even more. Negative gearing isn’t just the province of property, though it’s probably better at it, which isn’t necessarily a compliment, and the best break of all applies to any investment. That’s the 50 per cent discount on capital gains tax when sold after a year.

Anyway there’s a twist, but then you knew there would be.

The sharemarket’s big advantage is the no-questions-asked 30 per cent tax credit on franked dividends, which compounds over time if you reinvest them in the same or some other stock.

But what about all those deductions for expenses and the free kick of depreciation allowances? Well, there’s a reason they’re deductions: they cost you. And that includes depreciation. It might not be a cash outlay, but it will be eventually when repairs or replacements are needed.

A true tax break is a gift, not partial compensation for an expense.

So over the past 10 years, which included the GFC, shares returned an average 9.2 per cent – including dividends – trouncing property’s 6.1 per cent including rents, according to Russell Investments. After tax the gap was even wider.

But over periods of 20 years it can go either way. The definitive word – or I should say picture – is in the chart below going back to 1926 compiled by AMP Capital ‘s chief economist, Shane Oliver. Shares beat property by 0.4 per cent a year, though perhaps your patience doesn’t stretch to 88 years.

In which case it might be better if I confine myself to the next 10 years. Just as you should take statistics for the past 10 years with a grain of salt, I wouldn’t be putting much store on forecasts for the next 10, especially mine.

But there’s one sure thing to be said about the starting point.

The sharemarket is nowhere near its record of eight years ago, whereas property prices have beaten theirs.

So on the face of it the risk is property prices flattening out or maybe falling, especially as affordability is already challenging, while share prices have room to rise, admittedly with the usual fits and starts. Perhaps more fits than starts.

While rents are rising by less than inflation, share dividends are beating it. You can see this best with yields, which are the returns based on what you pay.

They’re rising on dividends – did I mention these often come with a 30 per cent tax break? – and falling on investment properties because rents have flattened out while values, and so what you pay, have soared.

Also sluggish wage growth and rising unemployment are, to be blunt, good for profits, recession aside. But they’re indisputably bad for property.

Another thing. The boom in construction which incidentally helped keep Australia out of a recession as commodity prices slumped will lift the supply of housing. That will put a price cap on some areas, and could push down rents in others.

True, a rate cut would help property by reducing the cost of the mortgage, but I suspect it would help shares even more by pulling money out of bank savings and fixed interest.

I know you’re going to say there are other considerations in choosing between shares and property. Fair enough. It’s a mistake to look at a return without considering the risk.

Shares are more volatile, though they also give you easier access to your money. You can hardly sell a bedroom to raise some cash.

Property values don’t slump precipitously the way a stock can. Nor can they ever be wiped out altogether, because land will always be worth something.

Besides, vendors only sell in a slump if they really have to. In bad times most home owners just sit pat. They’ll do anything but sell.

As it is CBA, the biggest lender, says almost three-quarters of its borrowers are, on average, seven years ahead in their repayments.

And so, what was that about a twist?

Well, it’s a bit underhand on the part of property, but the fact is it’s easier, safer and cheaper to have a big mortgage than the same-sized margin loan. Buying a property will be a much bigger outlay, which means you’ve got more at stake.

And the more you can invest, the bigger your potential windfall.


Posted by David Potts – Money Manager (Fairfax) on 14th April, 2015