When it comes to investing their hard-earned cash, Australians have always been partial to bricks and mortar and consistently rising property prices have guaranteed a solid investment return. As an alternative investment strategy, the Australian share market has also delivered results for investors, with shares reaching a five-year high last month.
When it comes down to the crunch, however, where should you invest your money? Property or shares?
How do the two compare?
In a 2013 analysis by the Australian Securities Exchange (ASX) and Russell Investments, titled Long-term Investing Report, shares came out on top – outperforming residential investment property over both a 10-year and 20-year time period.
The analysis found that after accounting for taxation and costs, Australian shares returned 8.9 percent capital growth in the 10 years to December 2012, while residential investment property returned 6.5 percent. Over a 20-year time period, the gap between shares and property was almost non-existent, with shares returning 9.8 percent growth and property returning 9.5 percent.
‘In the long term, both asset classes – property and shares – perform similarly,’ said Steve Crawford, owner of Experience Wealth Advice and Victorian director of the Association of Financial Advisers.
Which option is right for you?
The first step to choosing the best investment option for you is to identify your goal, according to Crawford, and ask yourself questions such as: are you motivated by a financial or lifestyle goal? Do you want an asset that increases in value or provides an income, or does both? What is your timeframe?
‘If you want to grow your income in a shorter timeframe, property takes longer to provide a return,’ Crawford said. ‘If your goal is to slowly build an asset that provides you with extra income you don’t have to work for, shares win the battle every time.
‘If you are putting your money into shares, you should go into it with the view that you’re not going to touch it for five to 10 years to mitigate any volatility in the share market,’ he added.
If you don’t have a sizeable sum for a deposit on a property, the share market may be more accessible than the property market. You can start building a share portfolio with a relatively small sum – as little as $5000 or $10,000 can get you well on your way and deliver regular income in the form of dividends.
Buying property can also entail hefty stamp duty, which adds to the cost of entering the property market. Stamp duty rates vary in each state, but as an example a $600,000 property in NSW may incur $22,490 in stamp duty and in Northern Territory, the stamp duty the same value property would be $29,700.
The advantage of property over shares is that you can use the equity you build in property to borrow against it, according to Crawford.
‘Stamp duty can be prohibitive but the trade-off is you can borrow against property in the future. I’ve had clients who bought an investment property first, then used that equity to buy their forever home,’ he said.
In conclusion, Crawford said there is ‘no investment silver bullet’. Where you choose to invest your money comes down to your goals and circumstances. And a lot of research and shopping around.