Shares versus property: myth versus reality

The ‘Shares versus property’ conundrum has created polarised opinions. From your Cessnock publican to a Greek taxi driver in Melbourne, everyone it seems has a view. Sadly the topic has become one of those battle royale face-offs like:

  • Red Rooster v KFC

  • Derek Zoolander v Hansel

  • The Reds v The Warratahs

  • Kyle Sandilands v human decency

 

Unfortunately the heat of the battle has created a few myths so it’s important to dispel a few of them for FFT readers.

 

Myth 1: “Property always outperforms shares”

Reality: There can be times when Australian residential property has outperformed shares and vice versa. But if you go all the way back to the 1920s the returns between the two are broadly similar and this relationship hasn’t changed since then. This is nicely shown in the This is nicely shown in the chart below produced in a recent article by Dr Shane Oliver from AMP Capital.

 

Myth 2: “Property always goes up unlike shares”

Reality: Residential property markets can crash like any other market – just ask anyone living in Spain, the UK, the US and the Republic of Ireland during the global financial crisis. So why the unshakable faith in bricks and mortar?

 

Firstly, the Australian property market has not recently been through a major property market correction at a time when other countries have suffered. This may cause some to incorrectly believe the assumption that property somehow resembles Chuck Norris.

 

Secondly, housing has a number of features making it more psychologically appealing over shares. With a home you can see it, live in it, improve it, paint it and raise your kids in it. Our emotional connection with bricks and mortar may result in overconfidence regarding future returns. If you love something enough it’s hard to believe it’s fallible, especially the family home that has brought so many great memories.

 

Myth 3: “Australian property is overheated and due to crash”

Reality: There are many “experts” who, like Nostredamus, have predicted a sudden calamity in everything from Australian property, the supply of oil and the Chinese economy. The fact remains that no one can tell you with 100% accuracy when a crash will happen since markets are extremely complex by their very nature. Anybody who says they can predict a crash in shares or property is simply guessing. So when you see apocalyptic stories predicting Australia will become like an episode of the Walking Dead, it’s best to go into scepticism mode and turn on your BS radar!

 

Myth 4: “Shares or property – it’s one or the other”

Reality: Property and shares both have a place in an investment portfolio. The two complement each other much like Ali and Noah in the Notebook since they are ‘unlike’ or have different characteristics. Residential property is illiquid – meaning it can’t be turned into cash quickly – and has a relatively low volatility of returns, meaning low risk. In contrast, shares are highly liquid and are more volatile than property. There will be times when one will perform very differently to the other. The Australian sharemarket, for example has performed lowly over the past year thanks to the slowing economy and lower export growth. In contrast, residential property in Sydney and Melbourne has provided strong returns largely due to the lack of supply. For investors there are diversification benefits from choosing both. Diversification, which means ‘don’t put your eggs in one basket’ is a proven way to ride out bad economic times now and in the future.

 

So, what are your plans – will you go Shares or Property?

 

Geoff.

 

Disclaimer: The information contained in this article is of a general nature, and it does not constitute legal, taxation or personal financial advice. In providing this information, I have not taken into account your investment

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