Shares or Property in Australia: Which Is The Best Investment?

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Students want to know the better investment options, shares or property in Australia.

 

Investing is a key part of making your money grow successfully. Many people who want their money to increase consider real estate or shares.

 

Both investment options have benefits and drawbacks, and one can outperform the other at any time, so it is important to consider both options carefully.
 

In this blog, you will learn about the difference between share and property investing in Australia to help you figure out the best place to keep your savings.

 

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1. Are Equities Better Than Property Investments?

 

Here is a comparison of "equities (shares) vs. property” to help you determine the most appropriate investment option:

 

 

Pros of Property Investment Over Equity (Shares):

 

  • Investing in property is better than equity markets as you use other people's money (bank mortgage). Leverage is one significant factor that makes property investment a clear winner. With a capital of $100,000 of cash, you can buy shares worth $100,000 or an investment property worth $400,000 (through a bank mortgage). As an estimate, for each $1 you save, the bank lends you $4. This way, the use of leverage makes you wealthy.

 

  • Furthermore, the Government allows you to claim a particular portion of your tax on investment property purchases. Savvy investors buy investment-based real estate that provides them with the most tax breaks. If you buy a new investment property worth $500K, you can take advantage of tax deductions worth $449,143 in the coming decade.

 

  • If you are earning rental income on an existing property, that will also help you buy the property. For instance, saving $200,000 of rental income within ten years can help you buy a four-bedroom house."

 

  • Furthermore, housing is the basic need for human survival. Australia has a growing population needs hundreds of thousands of new homes built. So, the demand for housing will continue to stay over the coming years. However, there is no such type of certainty in the case of equity investments.

 

  • Property investments give direct control to investors over the asset. On the contrary, stock investors have limited control over company management and their decisions that can affect their investment performance.

 

  • Based on the recent Long-Term ASX Investing Report, the 10-year after-tax return for Australian shares was only 2.6% compared to a 5.1 % return on property investment. 

 

Based on the 20-year after-tax return for Australian shares was 6.7% compared to a 7.6% return on property investment. So, property outperformed shares in both scenarios.

 

 

 

Cons of Property Investment Over Equities:

 

  • There is a catch in property investment you can only use the money you invest in property purchases if you sell the property, which will differ from the goal of many property investors. So, property investment is profitable only when you can hold onto it for the long term to get the desired results.

  • Though you don't get a mortgage/leverage from a bank to buy stocks, you can access your money by selling your stocks anytime. This ease of accessing your investment is a plus point for stock investors. 

  • Location matters a lot when buying an investment property. You must select a quality property that will grow in a good suburb with limited supply and robust demand. A wrong property selection can deprive you of achieving good gains. 

  • You must invest substantial time and effort to manage your investment, including painting, renovation, or redevelopment regularly. However, you can address these challenges by hiring a property manager to manage your property.

 

 

Other Challenges Include:

 

  • High entry and transaction costs like real estate agent fees, stamp duty charges, etc., that can eat your returns

  • The risk of property staying unattended

  • Not able to find tenants, and therefore, no rental income makes it challenging when you rely on it to make loan repayments

  • Difficulty in selling a property if the location lacks growth potential.

 

However, you can manage most property purchase risks with careful planning and the right approach.

 

 

2. Is It Worth Buying An Investment Property In Australia?

 

Is property the best investment? There is also no one-size-fits-all” when determining a "good investment." The right investment instrument depends on your financial needs, circumstances, and preferences.

 

Suppose you value tangible assets (that you can touch, control, and customize). In that case, you can dedicate time to managing your investments and tolerate lesser liquidity actively. A property investment could be for you.

 

Property investment is generally less choppy than stock investment. However, the returns you get vary based on property type, location, and price point.

 

Property investments have more upfront capital requirements, so you should consider your financial situation and goals before considering this investment.

 

 

 

3. Are Stocks More Risky Than Real Estate?

 

All investment options that generate decent return carries some form of risk. It holds for stock and property investment, too. The below factors will help you determine which one has more risks:

 

 

Volatile

 

There is no denying that stock markets are more volatile than property markets. The high volatility gives rise to rapid share price fluctuations that can lead to quick gains or losses.

 

At the same time, the property market is less volatile. It takes several years for the property price to appreciate. The gains could be slow, but they are consistent.

 

This makes stock investments riskier than property investments.

 

 

Sensitive To National and Global Economic Conditions 

 

Furthermore, stock market returns are driven by several factors that make it a risky investment.

 

Market sentiment, geopolitical events, interest rates, company-specific news, and economic indicators can all result in sudden and considerable upward or downward movements in share prices.

 

This might offer increased chances for investors, but it also comes with heightened risks.

 

If you look at property investment, the real estate market is also influenced by supply and demand risks, geopolitical risks, economic conditions, etc., that can lead to a drop and rise in property prices.

 

 

Level of Control

 

Moreover, as companies are directly linked to stock performance, investors have less control over their share investment than property investors who own and fully control their property.

 

Stock investors must rely on the company's management decisions for their investment performance, growth, and returns.

 

However, the high level of control gives you the added responsibility to take care of your property, including periodic management, renovation, and repair. You may choose to do it yourself or hire a fee-based property manager.

 

 

 

Leverage and Margin Call

 

Stock brokers offer leverage/margin to traders/investors that enables them to place larger trades to make hefty gains.

 

However, the same leverage that once seemed to generate heavy profit can turn into losses if the business goes against its prediction.

 

Investing on margin” adds extra risk to an investor’s portfolio if their loan-to-value ratio falls below an agreed level due to declining share prices. In this case, the investor must add more funds to their margin account or sell some existing assets.

 

Failing to do so, the broker may forcibly sell their investments in a falling market, which can cause them losses on their investment.

 

 

4. Is Property Riskier Than Shares?

 

Investment in real estate also involves unique challenges.

 

However, it depends on your risk appetite and investment goals, whether it is riskier than stocks or vice versa.

 

In most cases, property investment involves using mortgages that act as leverage. It can magnify returns and also enhance risks.

 

The debt on property investments causes immense financial stress during market downturns or when interest rates hike.

 

 

5. What Is The Average Return On Property Investment In Australia?

 

Real estate is a robust financial avenue, offering considerable potential for long-term capital appreciation. Let's delve into the estimated returns from real estate investments across various time horizons:

 

Over nearly 150 years, Australian housing investments yielded an average annual return of 6.37%, while equities posted a slightly higher return of 7.81% during the same extensive period.

 

Taking a closer look at data since 1950, the real estate sector exhibited a solid average annual return of 8.29%, surpassing equities, which recorded a return of 7.57% over the same timeframe.


Zooming in on more recent data since 1980, Australian housing investments maintained a respectable annual return of 7.16%, while equities outperformed with an average annual return of 8.78%.

 

 

6. Is There A Correlation Between Stocks And Real Estate?

 

Stock and property markets have a direct link. When the stock market is in an uptrend, the property market is the best place to reintroduce profits, which leads to a rise in property prices.

 

With investors' bank balances growing, investors often put their extra money into real estate markets without hesitation. The increase in stock prices boosts the overall value of housing properties. 
 

Likewise, when the stock market is going down, it also affects the property markets similarly. However, since real estate tends to lose value much more gradually than it gains, people are more cautious about selling their properties during tough times.

 

Both markets encourage investors to take part in long-term acknowledgment of values.

 

 

 

7. Is It Safe To Invest In Real Estate During Inflation?

 

With inflation nearly a 40-year high, investors are hunting for safe havens to park their hard-earned savings.

 

Real estate is considered a good investment instrument because it can hedge against inflation and has little correlation with other asset classes like stocks and bonds.

 

Investors take advantage of affordable mortgage interest rates and increase rent prices to compensate for rising costs due to inflation.

 

This way, real-estate investment helps investors benefit from high rental income and property-price appreciation over the long term.

 

 

8. What Is The Correlation Between REITs And The Stock Market?

 

Real Estate Investment Trusts (REITs) are baskets of properties that trade on prominent exchanges in the public markets.

 

They are subjected to similar conditions that can cause rise and fall in stock prices. 

 

REIT shares have market value, and investors can sell them instantly on the exchange like traditional non-REIT shares.

 

REITs are correlated to stocks and are considered equity investments. They are volatile like stocks and prone to declining prices when stocks do. With the economic recovery and stock market comeback, REITs also revive.

 

 

9. Do REITs Beat Inflation?

 

Real estate investment trusts (REITs) own and operate lucrative real estate.

 

Based on historical returns, they have beaten the stock market by almost nine times in inflation-adjusted total returns.

 

Despite interest rates and inflation, REITs are considered an excellent long-term investment. This happens because rental income and property prices also rise in proportion to inflation and interest rate hikes.

 

REITs adjust their prices when inflation is high. Some rental agreements even tie annual rent increases to inflation rates. This way, REITs serve as a protection against inflation.

 

 

 

10. Frequently Asked Questions (FAQs)

 

 

Does Warren Buffett Invest in Real Estate?

 

Warren Buffett has built enormous wealth by investing in the right businesses. However, his strategy doesn't comprise real estate in physical or electronic form.

 

The main reason that Buffett doesn't consider properties as a good investment is that he doesn't see many income-generating properties on the market.

 

The lack of money-making potential makes him reluctant to invest in real estate.
 

 

Are REITs Better Than Stocks for Inflation?

 

The safe, generous, and growing dividend income REITs deliver over years and decades makes them a great asset to own in almost all economic and inflationary environments.

 

Compared to stocks, REITs have been seen to outperform stocks in economic up cycles. They suffer less in recessions and perform well in times of inflation. This happens because real estate prices tend to rise with inflation.

 

With increasing inflation, interest rates also rise. REITs usually “hold up pretty well in a rising rate environment,” Though REITs use piles of borrowed money to invest in new properties, the current loans are not linked to overall inflation.

 

Always seek the help of a professional financial advisor before making any investment decision. Investing carries risk. The above are just some general options for educational purposes. All these options come with risk. This is not financial advice.

 

 

What Is The Average Share Portfolio Size in Australia?

 

There’s no fixed portfolio size for all stock market investors. However, most investors tend to own 10 to 30 stocks.

 

New investors may prefer holding ten stocks, while experienced ones may maintain a more extensive portfolio of 30 or more.

 

 

 

Why Don't More People Invest in REITs?

 

It can happen due to certain drawbacks of REITs, including their sensitivity to the demand for other high-yield assets.

 

When rates of interest hike, treasury securities become attractive. It causes investors to move their funds away from REITs that, in turn, reduce their share prices.

 

Additionally, REITs must pay property taxes equivalent to 25% of total operating expenses. If the Government plans to raise property taxes to compensate for their budget deficits, it would substantially lower cash flows to investors.

 

Besides these, investors have to pay a higher rate of tax on REIT dividends, which is usually higher than the tax rates at which most dividends are currently taxed. Due to this, investors earn less profit on their investments.

 

 

Why Stocks Are Better Than Property?

 

Stocks and property are the two primary investment avenues. Often, investors need clarification about which one to invest in.

 

If you're trying to figure out whether stocks or real estate are a better choice, here are some strong reasons why investing in stocks has advantages over buying investment properties:

 

 

Capital Requirements

 

You need a large amount of money to buy investment properties. However, you can buy stocks for as low as $1. The most significant advantage to investing in shares over property is that you can start small.

 

 

Low-Cost Diversification

 

You can diversify your stock portfolio across various companies at relatively less effort and a small price. Thus, stock investments are a great way to get in with small upfront capital, diversify, and earn valuable investing experience.

 

 

 

Costs and Charges

 

Stocks usually have lower ongoing costs (brokerage fee and transaction charges) than property investment, where you incur hefty charges, including higher stamp duty charges, property management fees (if hiring a property manager), painting and renovation charges, etc.

 

 

Investment Goals

 

Stock investments are ideal if you need funds to meet your short-term goals or cash emergencies.

 

However, putting a substantial amount of money into properties could leave you stranded when you require immediate cash. This is a disadvantage for investors who lack alternative sources (like family, friends, or savings) to depend on during financial emergencies.

 

 

Ease of Access To Your Investment

 

You can sell shares and access the funds anytime to meet emergencies. However, if you invest your capital in properties, your funds get blocked for the long term unless you sell that property.

 

Moreover, you can buy and sell shares quickly in minutes. On the other hand, you have to go through a whole chain of bureaucracy to buy or sell real estate. This is another significant advantage of stock investment over property investment.

 

 

Capital Growth Potential

 

Compared to property markets, stock markets tend to be more unpredictable. The increased fluctuation in stock prices can lead to quicker earnings than property investment, which demands a larger initial investment and a longer timeframe to produce returns.

 

Always seek the help of a professional financial advisor before making any investment decision. Investing carries risk. The above are just some general options for educational purposes. All these options come with risk. This is not financial advice.

 

 

 

Should You Buy an Apartment or Invest in Stocks?

 

There is no clear-cut answer as to which one will be the right investment option. It depends on:

 

  • What type of investment do you prefer? Investors who like owning a tangible/physical asset that gives them complete control should go for a property investment.  

  • How much capital do you have? While you can invest in shares with a small amount, you need significant money to invest and diversify across properties.  

  • What is your investment horizon? Property investment could suit you if you don't need funds for at least 8-10 years. The property sector is less volatile and takes several years to see price appreciation. 

  • What kind of skills and experience do you have? Do you have trading and investing skills or the skill to find and manage properties, negotiate with tenants, and be comfortable going through the cumbersome process of searching and buying properties?

  • Do you need funds in the near term? If yes, then stock investment is the appropriate option.

  • Do you have sources that can help you when faced with cash emergencies? If not, then stock investment is the right way to go.

  • How much time can you devote to your investment? Stock investments are ideal if you can only invest a little time to make and manage your investment. However, you will require a lot of effort and time to search for suitable properties in the right areas and complete all the legal paperwork involved in buying and selling properties. 

  • Can you pay higher ongoing costs on your investment? Compared to stock investments, you incur more expenses in buying and maintaining investment properties, such as property agent fees, stamp duty charges, periodic maintenance charges, and not to mention renovation charges that cost you a lot in the case of old properties. 

 

 

The above questions will clarify what investment option is ideal for you. Regardless of your investment choice, know that factors like local supply and demand dynamics, government policies, and economic conditions impact stocks and properties.

 

Always consider your current financial condition, risk appetite, and desired returns so you can make informed decisions that best align with your financial objectives.

 

 

11. Conclusion

 

An investment option with the best return on investment (ROI) is sometimes hard to find. Property and stock investment have distinctive advantages and challenges, making it difficult for investors to choose between them.

 

As an investor, you must weigh the risks and rewards of both investment options based on your age, financial situations and goals, risk appetite and tolerance, and investment time horizon.

 

Also, compare them on leverage, interest rates, taxation, risk, and holding costs. Lastly, whichever option you choose, diversify your portfolio across different asset classes to get the best returns.

 

If you still need a share trading account, consider eToro, which is used by many investors in Australia and worldwide. You can create an eToro trading account HERE.

 

eToro Service ARSN 637 489 466 promoted by eToro AUS Capital Limited ACN 612 791 803 AFSL 491139. Capital at risk. See PDS and TMD. Zero commission does not apply to short or leveraged positions. Zero commission means that no broker fee has been charged when opening or closing the position. Limited stock exchanges only.

 

 

 

The advice and information on OzStudies.com is in general nature and should not be seen as a replacement for independent financial advice. We strongly encourage readers to consult with financial experts regarding their own financial decisions and investments.


Please note that the information presented on OzStudies.com is solely for educational purposes. Every individual's financial situation is unique, and the products and services we mention may not suit everyone. We do not provide financial advice, advisory, or brokerage services nor endorse buying or selling specific stocks or securities. It's essential to know that information might have changed since publication and past performance does not guarantee future results.

 

 

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