It’s the age old question – property vs shares, which should I invest in? Australians have a love affair with property and if we’re comparing property vs shares on an emotional basis, then property is in a different league to shares. But if it came down to a return on investment, either could win on a points decision depending on the time frame being looked at. Both property and shares have their individual merits. The type of investment you wish to invest in will depend on:
- the amount of money you have to invest;
- whether you are prepared to borrow;
- your investment time frame;
- how actively involved you want to be with your investments;
- what investments you currently own and what you are comfortable with.
The Real Estate Institute of Australia estimates the average median Sydney property price to be just over $1m and other dwellings to be $671,994. The significant rise in housing prices may put a dent in people’s enthusiasm to buy an investment property in the short term, however we can’t deny that Australians have a great love for property. People like investing in property as it’s tangible and something they understand. However investing in property vs shares both involve risk.
One consideration is the fluctuation differences between property and shares. You can get the price of a share any minute of any day and they change all the time. Property tends to be valued at much longer time intervals so it appears prices move more gradually. This is one reason that people view shares as a higher risk than property. But if a real estate agent knocked on your front door every 5 minutes and gave you an up to the minute valuation of your house you might well view property and shares as similar in risk.
Whether you purchase an investment property or a parcel of shares will also depend on the amount of money you have to invest and whether you are prepared to borrow from the bank or purchase an investment property using SMSF borrowing. A deposit on a property doesn’t come easily and there are also entry costs, such as stamp duty, legal fees and loan establishment fees and property expenses such as repairs, renovation, rates, strata fees, lease management fees and possible tenant issues to consider.
On the flip side, a parcel of shares could be bought for as little as a few hundred dollars and can be built steadily over time. It is also possible to borrow the money to invest with the interest on the loan being paid either from personal income or through the dividends paid by the companies being invested in.
In recent years, the yield (income divided by market price) on residential property has fallen as prices have skyrocketed. According to SQM Research, the current gross yield on Sydney residential property is less than 3% p.a. Take out expenses and you are left with closer to 2% p.a., less than bank interest. But the attraction is the (potential) capital growth, which has been significant of late.
Both property and shares provide regular income. Many Australian shares also provide franking credits which is effectively a tax bonus. The yield on the All Ords is currently 4.4% p.a. When you add franking credits this is closer to 6%, more than double the residential property yield. So in the current market, shares provide a much better yield while capital growth on property has outperformed over the past 10 years (Source: 2016 ASX/Russell Investment Report).
Both shares and property are suitable long-term investments. It is important when investing that you feel comfortable with where you’re putting your money. In the ever-changing financial landscape, it is best to seek some professional advice if you are branching out to different investment areas or are unsure of your investment strategy.
If you would like to find out more about investment strategies or for further financial advice please feel free to give us a call on 02 9913 995. We are located in Narrabeen on the Northern Beaches of Sydney.
Disclaimer: This publication has been prepared for general information purposes only. It is not specific advice to any particular person. You should consult an authorised Align Financial adviser before making financial decisions.
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